Business and the Law [7 ed.] 9780455241265, 0455241260
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Citation preview
BUSINESS AND THE LAW ANDREW TERRY DES GIUGNI
SEVENTH EDITION
LAWBOOK CO. 2019
Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 19 Harris Street, Pyrmont, NSW 2009 ISBN: 9780455241623
© 2019 Thomson Reuters (Professional) Australia Limited
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
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. All legislative material herein is reproduced by permission but does not purport to be the official or authorised version. It is subject to Commonwealth of Australia copyright. The Copyright Act 1968 permits certain reproduction and publication of Commonwealth legislation. In particular, s 182A of the Act enables a complete copy to be made by or on behalf of a particular person. For reproduction or publication beyond that permitted by the Act, permission should be sought in writing. Requests should be submitted online at www.ag.gov.au/cca, faxed to (02) 6250 5989 or mailed to Commonwealth Copyright Administration, Attorney-General’s Department, Robert Garran Offices, National Circuit, Barton ACT 2600. Product Developer: Vickie Ma Edited and typeset by Newgen KnowledgeWorks 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
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:01:21.
PREFACE Twenty-five years ago the Preface to the first edition of Business, Society and the Law, as this book was then titled, noted that: The law is not simply peripheral to commerce. The transactions and relationships that constitute commerce are embedded in the law. The entire fabric of commerce is woven from a complex legal regime, statutory and judge made, which regulates all commercial activity and in relation to which the legality and enforceability of all commercial activity must ultimately be assessed.
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
This proposition is even more valid today in the light of a legal and regulatory regime which is increasingly pervasive and increasingly complex and increasingly significant. It is the hope of the authors that this text will lead to a more productive relationship between business students and this regulatory regime. We believe that the study of law need not intimidate students but rather that it should attract them. Its subject matter, reflecting as it does on all aspects of life, traverses the range from the gravely serious to the highly entertaining. While the law is not an easy pursuit it should interest and enthuse. This is our hope for this book. It perhaps reflects the increasing complexity of contemporary business that the six previous editions of Business and the Law had, as a result of restructures, mergers, acquisitions and copyright assignments, a new publisher for each edition. I am delighted that continuity has finally prevailed and that this seventh edition is again published by Thomson Reuters, Australia’s premier legal publisher. I am grateful to Vickie Ma who has had the task of managing the project to completion and whose grace and style in the face of obfuscations and excuses for deadlines not being met, and whose wise counsel at all stages of the project, is acknowledged and appreciated and to Nick Riley for his support and encouragement. It reflects the virtual world we live in that I have not met my Indian based editor, Raghavendra Kaup, but my thanks to him also for converting the manuscript into house style. This edition again includes contributions from colleagues in the Discipline of Business Law in The University of Sydney Business School who in the last edition enthusiastically embraced the challenge of breathing new life into an established text and for this edition have conscientiously revised and developed the chapters they are responsible for. I am grateful for their commitment and support and contribution. I am disappointed that the Business School ranks textbook chapters so low in its rankings of scholarship and am particularly grateful that the contributors have seen a bigger picture. My thanks also to Vinty Lim for his research and secretarial assistance. I also acknowledge the contributions of contributors to earlier editions who have all added value to the original text written by Des Giugni and me. Des has stepped back from the last two editions but his influence continues to resonate and his style continues to enliven so many of the pages. My personal debt to him is inestimable. ANDREW TERRY December 2018
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:01:37.
v
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:01:37.
TABLE OF CONTENTS Prefacev Contributorsix Table of Cases Table of Statutes
xi xxxix
Part 1: THE AUSTRALIAN LEGAL SYSTEM Chapter 1: The Law, the Legal System and the Constitution Chapter 2: The Courts and Common Law
3 75
Chapter 3: The Parliament and Statute Law
101
Chapter 4: The Executive and Law-making by Administrative Agencies
129
Chapter 5: Commercial Dispute Resolution
155
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Part 2: GENERAL PRINCIPLES OF BUSINESS LAW Chapter 6: Contracts: Concepts of Agreement
181
Chapter 7: Contracts in Business
301
Chapter 8: Torts: Concepts of Liability
401
Chapter 9: Property and Securities Law: Concepts of Ownership
481
Chapter 10: Crime: Concepts of Control
541
Part 3: BUSINESS ORGANISATION AND OPERATION Chapter 11: Alternative Business Structures
569
Chapter 12: The Modern Corporation
591
Chapter 13: Relationships in Business: Distributors, Agents, Employees, Independent Contractors
609
Chapter 14: Franchising 639 Chapter 15: Privacy 671 Chapter 16: International Business
695
Chapter 17: Business Failure
725
Part 4: BUSINESS, CONSUMERS AND FAIR TRADING Chapter 18: The Australian Consumer Law
747
Chapter 19: Misleading or Deceptive Conduct
803
Chapter 20: Unconscionable Conduct and Unfair Contract Terms
873
Chapter 21: Advertising and Sales Promotion
913
Chapter 22: Supply of Goods and Services
957
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:01:52.
vii
Business and the Law
Part 5: BUSINESS AND COMPETITIVE TRADING Chapter 23: Competition Law
1009
Chapter 24: Intellectual Property
1143
Part 6: BUSINESS AND THE LAW Chapter 25: Business Regulation, Risk and Compliance
1243
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Index1261
viii
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:01:52.
CONTRIBUTORS Susan Carter is an adjunct lecturer in Business Law in The University of Sydney Business School teaching business law, competition and consumer law, and IP law. She has wide experience in legal practice having worked both in large commercial firms and as in-house counsel. Cary Di Lernia is a lecturer in Business Law in The University of Sydney Business School teaching corporations law and business regulation law. He has recently been awarded his PhD for his thesis on corporate reporting and disclosure and has widely published in the areas of corporate regulation and franchising. Ross Hodgson is a solicitor in private practice and an adjunct lecturer in the Discipline of Business Law in The University of Sydney Business School teaching business law and corporations law. Joseph Huan is a solicitor and sessional tutor in Business Law in The University of Sydney Business School with publications in the areas of distribution and nano technology. Patty Kamvounias is a senior lecturer in Business Law in The University of Sydney Business School. Her research interests include higher education and the law and the application, scope and enforcement of consumer protection law and competition law in Australia.
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Simone Lockhart is a corporate lawyer, specialising in international business, with extensive experience in legal practice having worked in a leading commercial firm and as in-house counsel. She is a sessional lecturer in Business Law in The University of Sydney Business School teaching business law. Juliette Overland is an associate professor in Business Law in The University of Sydney Business School teaching courses in company law and corporate crime. She has extensive experience as a corporate lawyer, having worked in top-tier law firms. Juliette has published widely on topics relating to corporate law, particularly in relation to insider trading and securities regulation. Trang Quang is a sessional lecturer in Business Law in The University of Sydney Business School teaching business and corporations law courses. Graham Raffell is a sessional lecturer in Business Law in The University of Sydney Business School teaching business law. He has had a long career in private practice in commercial litigation, both as a solicitor and a barrister, specialising in insolvency matters. Andrew Terry is a professor of Business Regulation in the Discipline of Business Law in The University of Sydney Business School teaching business law, business regulation and franchising courses. He is Emeritus Professor of UNSW and Honorary Dean of Beijing Normal University’s Franchise Management School and has been inducted into the Australian Franchising Hall of Fame. Anna Ward is a lawyer with international experience, specialising in media, copyright and arts law and a sessional lecturer in Business Law in The University of Sydney Business School. Contributors to the 5th edition: Michael Adams; Janet Austin; Jenny Buchan; Anne Durie; Bruce Gordon; Wayne Gumley; Jason Harris; John McLaren; David Melz; Anne O’Rourke; Xanthe Paltridge; Greg Pearson; Dale Pinto and Tracey Sweeney.
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:11.
ix
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TABLE OF CASES
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A A Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616; 1 WLR 1308 ...................................................................................................... [6.1960], [7.1100], [20.20] ABC Developmental Learning Centres Pty Ltd v Wallace [2006] VSC 171 ............................. [12.120] Abercombie & Fitch Company v Hunting World, Incorporated 537 F 2 ................................. [24.470] Aberdeen Railway v Blaikie Bros [1843] All ER Rep 249 ........................................................... [12.180] ACCC v 1Cellnet LLC [2005] FCA 856 .......................................................................................... [18.740] ACCC v Abel Rent-a-Car Pty Ltd [1999] FCA 314 ........................................................................ [7.660] ACCC v Acquire Learning & Careers Pty Ltd [2017] FCA 602 .................................. [18.650], [20.230] ACCC v AGL Sales Pty Ltd [2013] FCA 1030 ............................................................................... [18.650] ACCC v AirAsia Berhad Company [2012] FCA 1413 ................................................................. [21.580] ACCC v Allergy Pathway [2011] FCA 74 ..................................................................................... [19.910] ACCC v Allphones Retail Pty Ltd (No 2) [2009] FCA 17 ........................................................... [20.200] ACCC v Alstom Australia Limited (unreported, MR 78/01, 6 April 2001) ............................. [23.730] ACCC v Apple Pty Ltd (No 4) [2018] FCA 953; [2012] FCA 646 ................................ [18.650], [21.140] ACCC v Australia and New Zealand Banking Group Limited [2016] FCA 1516 ................... [23.720] ACCC v Australian Egg Corporation Ltd [2017] FCAFC 152 ................................................. [23.1040] ACCC v Australian Safeway Stores Pty Ltd [1997] FCA 450 ....................................................... [25.90] ACCC v Baxter Healthcare Pty Ltd [2007] HCA 38 .................................................................... [23.150] ACCC v Black & White Cabs Pty Ltd [2010] FCA 1399 ............................................................ [23.1380] ACCC v Boral Ltd [1999] FCA 1318; [2001] FCA 30 .................................................................... [23.300] ACCC v Bytecard Pty Limited [2008] VCAT 482 ........................................................................ [20.460] ACCC v Capalabo Pty Ltd [2004] ATPR 41-976 .......................................................................... [20.270] ACCC v CG Berbatis Holdings Pty Ltd [2003] HCA 18 .............................. [20.110], [20.330], [20.380] ACCC v Chen [2003] FCA 897 ........................................................................................... [7.870], [24.240] ACCC v Clinica Internationale Pty Ltd (No 2) [2016] FCA 62 .................................................. [18.650] ACCC v Coles Supermarkets Australia Pty Limited [2014] FCA 634 ............................................................... [19.400], [19.580], [19.590], [19.690], [21.170] ACCC v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405; [2015] FCA 330 .............................................................................. [18.650], [20.360], [20.370], [21.170] ACCC v Cotton On Kids Pty Ltd [2012] FCA 1428 ..................................................................... [18.650] ACCC v Craftmatic Pty Ltd [2009] FCA 972 ................................................................................ [20.240] ACCC v Domain Name Corp Pty Ltd [2018] FCA 1269 ............................................................. [18.650] ACCC v Dukemaster Pty Ltd [2009] FCA 682 ............................................................ [19.1150], [20.340] ACCC v Energy Australia Pty Ltd [2014] FCA 336; [2015] FCA 274 ........................................ [18.650] ACCC v Energy Watch Pty Ltd [2012] FCA 749 .......................................................................... [18.650] ACCC v Flight Centre Travel Group Ltd [2016] HCA 49 ............................................ [23.220], [23.920] ACCC v Ford Motor Company of Australia Limited [2018] FCA 703 ..................................... [18.650] ACCC v Get Qualified Australia Pty Ltd (in liquidation) (No 3) [2017] FCA 1018 ................ [18.650] ACCC v Glendale Chemical Products Pty Ltd [1998] FCA 180 ................. [22.690], [22.720], [22.750] ACCC v H J Heinz Company Australia Limited (No 2) [2018] FCA 1286 ............................... [18.650] ACCC v Halkalia Pty Ltd [2012] FCA 534 .................................................................................... [18.750] ACCC v Harvey Norman Holdings Ltd [2011] FCA 1407 ......................................................... [18.650] ACCC v Hewlett-Packard Australia Pty Ltd [2013] FCA 653 .................................................... [18.650]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
xi
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Business and the Law
ACCC v Hillside (Australia New Media) Pty Ltd trading as Bet365 [2015] FCA 1007 ....................................................................................................................................... [21.210] ACCC v Hillside (Australia New Media) Pty Ltd trading as Bet365 (No 2) [2016] FCA 698 ......................................................................................................................................... [18.650] ACCC v Hugo Boss Australia Pty Ltd [1996] FCA 799 ............................................................ [23.1600] ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224 ................................................................ [20.480] ACCC v Jurlique International Pty Ltd [2007] FCA 79 ............................................................. [23.1470] ACCC v Keshow [2005] FCA 558 ................................................................................................... [20.250] ACCC v Leahy Petroleum Pty Ltd [2007] ATPR 42-162; FCA 794 ............................................ [23.830] ACCC v Lifestyle Photographers Pty Ltd [2016] FCA 1538 ....................................................... [18.650] ACCC v Lux Distributors Pty Ltd [2013] FCAFC 90 ................................................... [20.210], [20.280] ACCC v Maritime Union of Australia [2001] FCA 1549 ........................................................... [23.1130] ACCC v McCaskey [2000] FCA 1037 ............................................................................................. [21.420] ACCC v Meriton Property Services Pty Ltd (No 2) [2018] FCA 1125 ............................................................................................................ [18.650], [19.870] ACCC v Neighbourhood Energy Pty Ltd [2012] FCA 1357 ....................................................... [18.650] ACCC v Nissan Motor Co (Australia) Pty Ltd [1998] FCA 1048; [1998] ATPR 41-660 .................................................................................................................. [19.920], [21.620] ACCC v OmniBlend Australia Pty Ltd [2015] FCA 871 ........................................................... [23.1510] ACCC v Optus Internet Pty Limited [2018] FCA 777 ................................................................. [18.650] ACCC v Origin Energy Electricity Limited [2015] FCA 278 ....................................... [18.650], [21.540] ACCC v P & N Pty Ltd [2014] FCA 6 ............................................................................................ [19.880] ACCC v Rana [2008] FCA 374 ........................................................................................................ [18.390] ACCC v Reckitt Benckiser (Australia) Pty Ltd (No 7) [2016] FCA 424 .................................... [21.180] ACCC v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181 ........................................... [18.650] ACCC v RL Adams Pty Ltd [2015] FCA 1016 .............................................................................. [21.190] ACCC v Samton Holdings Pty Ltd [2002] FCAFC 4 .................................................... [20.110], [20.320] ACCC v Scoopon Pty Ltd [2014] FCA 820 ..................................................................... [18.650], [18.730] ACCC v Seal-A-Fridge Pty Ltd [2010] FCA 525 ........................................................... [20.210], [20.350] ACCC v Servcorp Limited [2018] FCA 1044 ................................................................................ [20.490] ACCC v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365 ........................................ [20.300] ACCC v Skippy Australia Pty Ltd [2006] FCA 1343 ................................................................... [18.590] ACCC v Snowdale Holdings Pty Ltd (No 2) [2017] FCA 834 .................................................... [21.190] ACCC v Target Australia Pty Ltd [2001] FCA 1326 ..................................................................... [19.740] ACCC v Telstra Corporation Limited [2007] FCA 1904; [2018] FCA 571 .............................................................................................. [18.650], [19.510], [19.550] ACCC v Thermomix in Australia Pty Limited [2018] FCA 556 .................................. [18.650], [22.810] ACCC v TPG Internet Pty Ltd (No 2) [2012] FCA 629 ................................................................ [18.650] ACCC v TPG Internet Pty Ltd [2013] HCA 54 .............................................................. [19.490], [21.220] ACCC v Unique International Colleges [2017] FCA 727 ............................................................ [20.290] ACCC v Valve Corporation (No 7) [2016] FCA 1553 .................................................................. [18.650] ACCC v Virgin Mobile Australia Pty Ltd [2002] FCA 1548 ....................................................... [18.730] ACCC v Visa Inc [2015] FCA 1020 ............................................................................................... [23.1310] ACCC v Visy Industries Holdings Pty Limited (No 3) [2007] FCA 1617 ....................................................................... [23.660], [23.780], [23.930], [23.1000], [25.120] ACCC v Woolworths Limited [2016] FCA 44; [2017] FCA 1472 ................................. [18.650], [20.370] ACCC v Worldplay Services Pty Ltd [2004] FCA 1138 ................................................................. [7.680] ACCC v Yazaki Corporation [2018] FACFA 73 ............................................................................ [23.710] ACCC v Yellow Page Marketing BV (No 2) [2011] FCA 352 ...................................................... [18.650] xii
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Table of Cases
Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Pty Ltd [1993] FCA 265 ............................................................................................................................. [6.2620] ACN 151 368 124 v Pro-Pac Packaging (Aust) Pty Ltd [2017] NSWSC 913 ............................... [7.430] Acros Ltd E A Ronaasen & Son [1993] AC 470 ............................................................................ [22.630] Adam v Ward [1917] AC 309 .......................................................................................................... [8.1410] Adams v Champion, 294 US 231 ....................................................................................................... [9.80] Adams v ETA Foods Ltd [1987] FCA 402 ..................................................................................... [18.610] Adamson v New South Wales Rugby League Ltd [1991] FCA 550 .......................................... [7.1080] Adelaide Steamship Co Ltd v The King [1912] HCA 58 ............................................................ [23.110] Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Insurance Cases 60-813 ................................................................................................................................. [7.1310] Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] HCA 22 ..................................... [11.80] AE Goodwin Ltd v AG Healing Ltd (1979) 7 ACLR 481 .............................................................. [7.960] Air New Zealand v ACCC [2017] HCA 21 ................................................................................... [23.100] Alameddine v Glenworth Valley Horse Riding Pty Ltd [2015] NSWCA 219 ........................... [8.510] Albion Insurance Co Ltd v GIG of NSW (1969) 121 CLR 342 ................................................... [7.1380] Aldi Stores Ltd Partnership v Frito-Lay Trading Company GmbH [2001] FCA 1874 ........... [24.580] Aldrich v Cooper (1803) 32 ER 402 .................................................................................................. [7.960] Alex Kay Pty Ltd v General Motors Acceptance Corp & Hartford Fire Insurance Co [1963] VR 458 ............................................................................................................................... [6.2470] Allcard v Skinner (1887) 36 Ch D 145 ............................................................................. [6.1880], [6.1910] Allied Mills Ltd v Gwydir Valley Oilseeds Pty Ltd [1978] 2 NSWLR 26 ................................... [9.680] Aluminium Industries BV v Romalpa Aluminium Ltd [1976] 2 All ER 552 ............................. [9.700] Amalgamated Society of Engineers v The Adelaide Steamship Co Ltd [1920] HCA 54 .............................................................................................................................. [1.1190] Andrews v Styrap (1872) 26 LT 704 ................................................................................................. [2.150] Annand & Thompson Pty Ltd v Trade Practices Commission [1979] FCA 36; [1979] FCA 62 ................................................................................................................ [19.100], [19.560] Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 ........................ [24.1420] Aotearoa International Ltd v Scancarriers A/S [1985] 1 NZLR 513 ........................................... [6.990] Apco Service Stations Pty Ltd v ACCC [2005] FCAFC 161 ........................................ [23.820], [23.830] Application of Nashua Australia Pty Ltd (1975) 1 TPCD 168 ................................................. [23.1300] Application of Southern Cross Beverages Pty Ltd [1981] ATPR 40-200 ................................. [23.1300] Application of Streets Ice Cream Pty Ltd [1975] ATPR (Com) 8609 ....................................... [23.1220] Argy v Blunts and Lane Cove Real Estate [1990] FCA 51 ........................... [7.230], [19.220], [19.1170] Arizona Employers’ Liability Cases 250 US Wot 433 (1919) ...................................................... [21.300] Armory v Delamirie (1722) 93 ER 664 ............................................................................................. [9.590] Arnotts Ltd v TPC [1990] ATPR 41-061 ......................................................................................... [19.590] Ashby v Tolhurst [1937] 2 KB 242 ....................................................................................... [9.910], [9.990] Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 ................ [22.350], [22.370], [22.440] Ashton v Pratt [2015] NSWCA 12 ..................................................................................... [6.850], [6.1460] ASIC v Adler, Williams and Fodera (2002) 42 ACSR 80 ............................................................. [12.190] ASIC v Forge (2003) 133 FCR 487 .................................................................................................. [17.240] ASIC v Plymin [2003] VSC 123 ....................................................................................................... [12.190] ASIC v Vines, Robertson and Fox [2005] NSWSC 738 ................................................................ [12.190] ASIC v Vizard [2005] FCA 1037 ..................................................................................................... [12.190] Aspar Autobarn Co-operative Society Ltd v Dovola Pty Ltd [1986] ATPR 40-727 ................ [24.200] Associated Alloys Pty Ltd v Metropolitan Engineering & Fabrications Pty Ltd [2000] HCA 25 ................................................................................................................... [9.720], [9.730]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
xiii
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Business and the Law
Associated Newspapers Ltd v Bancks [1951] HCA 24 ............................................................... [6.2840] Astley v Austrust Ltd [1999] HCA 6 ....................................................................... [6.3080], [8.50], [8.60] Atlantic Works v Brady 107 US 192 ............................................................................................. [24.1360] Attorney-General of Australia v The Queen; Ex parte the Boilermakers’ Society of Australia (1957) 95 CLR 529 ....................................................................................... [1.700], [1.710] Attorney-General v Prince Ernest Augustus of Hanover [1957] AC 436 ................................... [3.280] Attorney-General v The Adelaide Steamship Co Ltd (1912) 15 CLR 65 ..................... [1.990], [23.110] Attorney-General v The Adelaide Steamship Co Ltd [1912] HCA 58); (1913) 18 CLR 30 ......................................................................................................................... [1.990], [23.110] Attorney-General (NSW) v Trethowan (1931) 44 CLR 394; [1932] AC 526 ................................ [1.790] Attorney-General (New South Wales) v World Best Holdings Ltd, In [2005] NSWCA 261 ...................................................................................................................... [20.220] Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 ......................... [7.270], [20.50] The Australasian Meat Industry Employees’ Union v Mudginberri Station Pty Ltd [1986] HCA 46 ............................................................................................................................ [23.1140] Australian Agricultural Co v Federated Engine-Drivers Firemen’s Association of Australia [1913] HCA 41 ............................................................................................................... [2.170] Australian Bridal Centre Pty Ltd v Dawes Corp Pty Ltd [1991] ATPR 41-072 ......................... [7.160] Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd [2001] HCA 63 ................................................................................................................................ [15.70] Australian Capital Television Pty Ltd & New South Wales v Commonwealth [1992] HCA 45 ................................................................................................... [1.620], [1.1150], [2.240] Australian Casualty Co Limited v Frederico [1986] HCA 32 .................................................... [7.1150] Australian Communications Network Pty Ltd v ACCC [2006] FCAFC 221 ........................... [21.480] Australian Communist Party v Commonwealth [1951] HCA 5 ..................................... [1.860], [1.950] Australian Guarantee Corporation Ltd v Jennings [1981] ATPR 40-210 .................................. [19.510] Australian Health & Nutrition Association Ltd v Irrewarra Estate Pty Ltd [2012] FCA 592 ............................................................................................................................. [24.570] Australian Knitting Mills Ltd v Grant [1933] HCA 35 ................................................... [8.290], [22.240] Australian Ocean Line Pty Ltd v West Australian Newspapers Ltd (1983) ATPR 40-349; [1985] FCA 37 ...................................................................................................... [19.290] Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700 ............. [9.330], [9.340] Australian Timber Workers Union v Monaro Sawmills Pty Ltd, Re [1980] FCA 43 .............. [13.390] Australian Woollen Mills [1954] HCA 20 at 33 .............................................................................. [6.170] Automasters Australia Pty Ltd v Bruness Pty Ltd [2002] WASC 286 ....................................... [20.310] Auty v National Coal Board [1975] 1 WLR 784 ........................................................................... [17.500] AWA Ltd v Daniels t/a Deloitte Haskins & Sells (1992) 7 ACSR 759 ....................................... [12.170] B Bacchus Marsh Concentrated Milk Co Ltd (in Liquidation) v Joseph Nathan and Co Ltd [1919] HCA 18 ........................................................................................................................ [7.1110] Badenach v Calvert [2016] HCA 18 ............................................................................................... [8.1170] Baker v The Queen [2004] HCA 45 .................................................................................................. [1.730] Baldwin v Icon Energy Ltd [2015] QSC 12 ..................................................................................... [7.350] Balfour v Balfour [1919] 2 KB 571 .................................................................................................... [6.880] Balmain New Ferry Co v Robertson [1906] HCA 83 .................................... [6.2430], [6.2440], [6.2450] Baltic Shipping Co v Dillon (1993) 111 ALR 289 .......................................................................... [6.3030] xiv
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
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Table of Cases
Banca Nazionale del Lavoro SPA v Playboy Club London Limited [2018] UKSC 43 ............................................................................................................................ [8.1000] Bank of England v Vagliano Bros [1891] AC 107 ......................................................................... [7.1600] Bank of NSW v Commonwealth [1948] HCA 7 ........................................................................... [1.1250] Banque Brussels Lambert SA v Australian National Industries Limited (1989) 21 NSWLR 502 .............................................................................................................. [7.150], [19.1110] Bar-Mordecai v Hillston [2004] NSWCA 65 ................................................................................. [6.1940] Barclay v Penberthy [2012] HCA 40 ................................................................................................ [8.950] Barlow v Neville Jeffress Advertising Pty Ltd [1995] ATPR 41-376 ........................................... [7.1110] Barton v Armstrong [1976] AC 104 ................................................................................................ [6.1860] Bateman v Slatyer [1987] FCA 58 ................................................................ [14.470], [19.1100], [19.1150] Bates v Hewitt (1867) LR 2 QB 595 ................................................................................................ [7.1280] Bath v Alston Holding Pty Ltd [1988] HCA 27 .............................................................................. [2.140] Bauer Media Pty Ltd v Wilson (No 2) [2018] VSCA 154 ............................................................. [8.1320] Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9 .......................................................................................................................... [13.150] Baumgartner v Baumgartner [1987] HCA 59 ................................................................................. [9.230] Becker and Minister for Immigration and Ethnic Affairs, Re (1977) 1 ALD 158 ....................... [4.330] Belgrave Nominees Pty Ltd v Barlin-Scott Air Conditioning Pty Ltd [1984] VR 947 .............. [9.350] Bell v Lever Brothers Ltd [1932] AC 161 ........................................................ [6.1630], [6.1650], [6.1790] Bembridge v Just Spectacles Pty Ltd [2006] WASC 185 .............................................................. [19.660] Beneficial Finance Corporation Ltd v Karavas [1991] ASC 56-002 ........................................... [20.590] Bermingham v Corrective Services Commission of New South Wales (1988) 15 NSWLR 292 ............................................................................................................................... [3.320] Bernstein (Baron) v Skyviews Ltd [1978] 1 QB 479 ....................................................................... [9.320] Bertram v Clemons [1955] LMD 94 ............................................................................................. [23.1510] Betfair Pty Ltd v Western Australia [2008] HCA 11 ..................................................... [1.1040], [1.1050] Bevillesta Pty Ltd v Liberty International Insurance Company [2009] NSWCA 169 ............... [8.560] BG Transport Services v Marston Motor Co Ltd [1970] 1 Lloyd’s Rep 371 ............................... [9.990] BGC Partners Inc [2018] APO 27 .................................................................................................. [24.1310] Big O Tire Dealers Inc v The Goodyear Tire & Rubber Company, an Ohio Corporation 408 F Supp 1219, 1243 (DC Cir 1976) ................................................................. [24.470] Bisset v Wilkinson [1927] AC 177 ................................................................................................... [6.1580] Black v Black [2008] FamCAFC 7 ..................................................................................................... [6.860] Bleyer v Neville Jeffries Advertising Pty Ltd (unreported, Court of Appeal, New South Wales, 15 December 1987) ................................................................................................. [7.940] Blomley v Ryan [1956] HCA 81 ........................................................................................................ [20.80] Blue v Ashley [2017] EWHC 1298 .................................................................................................... [6.940] Blyth v Birmingham Waterworks Co (1856) 11 Ex 781 ................................................................. [8.570] Bobux Marketing Ltd v Raynor Marketing Ltd [2001] NZCA 348 ........................................... [14.290] Bodum v DKSH Australia Pty Ltd [2011] FCAFC 98 .................................................................. [19.990] Bolam v Friern Barnet Hospital Management Committee [1957] 2 All ER 118 ........................ [8.720] Bolton v Stone [1951] AC 850 ........................................................................................................... [8.610] Bond Brewing Holdings Ltd v NAB (1990) 8 ACLC 330 ............................................................ [17.450] Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd [1982] HCA 53 .............................. [6.770] Boral Besser Masonry Ltd v ACCC [2003] HCA 5 .................................... [23.300], [23.390], [23.1690], [23.1750], [23.1800] Boyce Motor Lines Inc v United States, 342 US 337 (1952) .......................................................... [3.280] Boylis v Bishop of London [1913] 1 Ch 127 .................................................................................... [7.210]
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Business and the Law
BP Plc v Woolworths Limited [2004] FCA 1362 ............................................................ [24.390], [24.470] BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 ................... [7.400] Brambles Holdings Limited v Bathurst City Council [2001] NSWCA 61 ....................... [6.150], [7.20] Brambles Security Services Ltd v Bi-Lo Pty Ltd [1992] Aust Tort Reports 61, 260 ................... [9.990] Brandy v Human Rights and Equal Opportunity Commission [1995] HCA 10 .......... [1.700], [1.710] Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833 ........................................ [6.150] Bridges v Hawkesworth (1851) 21 LJ (QB) 75 ................................................................................ [9.590] Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd [2018] VSC 246 ................... [19.1240] British Steel Corporation v Cleveland Bridge & Engineering Co Ltd [1984] 1 All ER 504 .................................................................................................................................... [7.310] Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 ........................................................ [6.590] Brookfield Multiplex Ltd v Owners-Strata Plan No 61288 [2014] HCA 36 ................ [8.950], [8.1210] Brown v Jam Factory Proprietary Limited [1981] FCA 35; 53 FLR 340 ......... [19.20], [19.40], [19.500] Brown v Jam Factory Pty Ltd, Re [1981] FCA 35 ......................................................................... [19.420] BRS (Contracts) Ltd v Colney Motor Engineering Co Ltd (The Times, 27 November 1958) .................................................................................................. [9.990] Bryan v Maloney [1995] HCA 17 ......................................... [2.160], [8.950], [8.1190], [8.1200], [8.1210] BS Brown & Sons v Craiks Ltd [1970] 1 WLR 752 ....................................................................... [19.290] Bunnings Group Limited v Laminex Group Ltd [2006] FCA 682 ............................................... [22.80] Burger King Corporation v Hungry Jack’s Pty Limited [2001] NSWCA 187 ........... [6.2240], [6.2260] Burnie Port Authority v General Jones Pty Ltd [1994] HCA 13 .................................................. [8.550] Burns v Corbett [2018] HCA 15 ........................................................................................................ [2.420] Burns v Man Automotive (Aust) Pty Ltd (1986) 161 CLR 653 ................................................... [6.2950] Bustfree Pty v Llewelyn [2013] QCA 103 ...................................................................................... [6.1880] Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60 ........................................................... [19.1200] Byrne v Australian Airlines Ltd [1995] HCA 24 ............................................................................ [7.400] Byrne v Van Tienhoven (1880) LR 5 CPD 344 ................................................................................ [6.400] C Cadbury Schweppes Pty Ltd v Darrell Lea Chocolate Shops Pty Ltd (No 8) [2008] FCA 470 ........................................................................................................................... [19.1040] Cadbury Schweppes Pty Ltd v Pub Squash Co Pty Ltd (1981) 55 ALJR 333 ........... [8.1220], [24.130] Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstadt” [1976] HCA 65 ............ [8.950], [8.1090], [8.1100], [8.1150] Cameron v Holt [1980] HCA 5 ....................................................................................................... [10.230] Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41 ............................. [5.220], [5.230] Campomar Sociedad Ltd v Nike International Ltd [2000] HCA 12 ......................................... [24.590] Canny Gabriel Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] HCA 22 ............................................................................................................... [11.120], [11.220] Canterella Bros v Andreason [2005] NSWSC 1157 ...................................................................... [6.2220] Caparo Industries plc v Dickman [1990] 1 All ER 568 ................................................................ [8.1050] Cargill Inc v Monfort of Colorado Inc 479 US 104 (1986) ........................................ [23.1750], [23.1800] Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 .................... [6.90], [6.240], [6.360], [6.370], [6.420], [6.660], [6.960], [6.970], [6.990], [18.100], [21.20], [22.790] Carpet Call Pty Ltd v Chan [1987] ATPR (Digest) 46-025 ............................................. [22.70], [22.400] Carsales.Com Limited v One Way Traffic Limited [2015] VSC 367 .......................................... [19.770] Carter v Boehm (1766) 97 ER 1162 ................................................................................................. [7.1250] xvi
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
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Table of Cases
Cartledge v Topling [1943] AC 772 ................................................................................................ [6.2480] Casey’s Patents, Re [1892] 1 Ch 104 ............................................................................................... [6.1070] Cassell & Co Ltd v Broome [1972] AC 1027 ................................................................................... [1.120] Cassidy v Ministry of Health [1951] 2 KB 343 ................................................................................. [2.60] Cassidy v Saatchi & Saatchi Australia Pty Ltd [2004] FCAFC 34 ............................................. [19.920] Castioni, In Re [1891] 1 QB 149 ........................................................................................................ [3.410] Castlemaine Tooheys Ltd v South Australia [1990] HCA 1 ......................................................... [2.140] Castlemaine Tooheys Ltd v Williams & Hodgson Transport Pty Ltd [1986] HCA 72 ......... [23.1390] Cattle v Stockton Waterworks (1875) LR 10 QB 453 ................................................................... [8.1100] Causer v Browne [1952] VLR 1 ...................................................................................................... [6.2390] Cellulose Products Pty Ltd v Truda (1970) 92 WN (NSW) 561 ................................................... [7.960] Central London Property Trust v High Trees House Ltd [1947] KB 130 ................................................................................................ [6.1200], [6.1220], [6.1230], [6.1250], [7.180] Centurion Industries Ltd v Industrial Progress Corporation Pty Ltd [1998] WASC 117 .......................................................................................................................... [22.420] CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36 .................................. [7.1230] Champtaloup v Thomas [1976] 2 NSWLR 264 .............................................................................. [2.350] Chan v Calvert [2009] NSWSC 1335 .............................................................................................. [15.100] Chan v Sellwood; Chan v Calvert [2009] NSWSC 1335 ............................................................. [15.100] Chandra v Perpetual Trustees Victoria Ltd [2007] NSWSC 694 ................................................ [8.1150] Chapman Bros v Verco Bros & Co Ltd [1933] HCA 23 ................................................................. [9.950] Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87 ....................................................................... [6.1020] Charles of the Ritz Distributor Corp v FTC 143 F (2d) 676 (1944) ............................................ [19.990] Charles v Federal Commissioner of Taxation [1954] HCA 16 ..................................................... [9.270] Chattis Nominees Pty Ltd v Norman Ross Homeworks Pty Ltd (Receiver Appointed) (in liq) (1992) 28 NSWLR 338 ................................................................................. [9.710] Checker Taxicab Co Ltd v Stone [1930] NZLR 169 ...................................................................... [11.100] Chelliah v NSW Police [2018] NSWSC 557 .................................................................................... [9.800] Chiarabaglio v Westpac Banking Corp [1989] FCA 266 ............................................................. [8.1070] Chokolingo v Attorney-General [1981] 1 WLR 106 ....................................................................... [3.260] Church of Scientology v Woodward [1982] HCA 78 ..................................................................... [4.340] Citizens’ Life Assurance Co Ltd v Brown [1904] AC 423 ........................................................... [12.100] City Equitable Fire Insurance Co Ltd [1925] Ch 407 ................................................................... [12.170] City of London v Wood (1701) 88 ER 1592; 12 Mod 669 .............................................. [1.740], [23.1630] Clayton v Adams (1976) 6 TR 604 .................................................................................................. [6.1330] Clifford Davis Management Ltd v WEA Records [1975] 1 All ER 237 ..................................... [7.1100] Club Flotilla (Pacific Palms) Ltd v Isherwood (1987) 12 ACLR 387 ......................................... [12.150] Clyde Engineering Co Ltd v Cowburn (1926) 37 CLR 466; [1926] HCA 6 .................... [1.890], [1.900] Co-operators Insurance Association v Kearney [1965] SCR 106 ............................................... [13.450] Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 ........................................ [7.320] Coca-Cola Company v Vitasoy International Holdings Limited [2017] ATMO 77 ................ [24.460] Coco v AN Clark (Engineers) Ltd [1969] RPC 41 ...................................................................... [24.1400] Coco v The Queen (1994) 179 CLR 427; [1994] HCA 15 ................................................... [1.780], [4.220] Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24 ................................................... [6.2010], [6.2770], [7.400], [7.420] Cole v Whitfield [1988] HCA 18 ........................................................................ [1.1030], [1.1040], [2.140] Colgate-Palmolive Pty Ltd v Rexona Pty Ltd [1981] FCA 146 ................... [19.170], [19.470], [19.850] Collings v HF Stevenson (Aust) Pty Ltd [1991] ATPR 41-104 ................................................... [20.260]
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Business and the Law
Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd [1987] ATPR 40-782 .................. [19.1240] Comcare v PVYW [2013] HCA 41 .................................................................................................. [13.540] Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; [1983] HCA 14 .............................................. [7.1000], [20.60], [20.70], [20.80], [20.550] Commercial Union v Beard [1999] NSWCA 422 .......................................................... [7.1260], [7.1280] Commissioner of Patents v Microcell Pty Ltd [1959] HCA 71 ................................................. [24.1280] Commissioner of State Revenue v Mortgage Force Australia Pty Ltd [2009] WASCA 24 ......................................................................................................................... [13.450] Commissioners for Special Purposes ofthe Income Tax v Pemsel [1891] AC 531 .................. [7.1350] Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83 .............................................................................................................................. [7.1420] Commonwealth Bank v Eise & Friedrich (1991) 6 ACSR 1 ........................................................ [17.390] Commonwealth DPP v Nippon Yusen Kabushiki Kaisha [2017] FCA 876 .............................. [23.770] Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54 ................................ [6.2990] Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd [1981] HCA 43 ................................................................................................................ [7.1750] The Commonwealth v Australian Capital Territory [2013] HCA 55 ........... [1.900], [1.910], [19.1070] Commonwealth v Tasmania [1983] HCA 21 .................................................................................. [1.930] Communications Workers of America v Western Electric 860 F 2d 1137 (1st Cir 1988) .............................................................................................................................. [23.1400] Community Nutrition Inst v Block 749 F 2d 50 ........................................................................... [22.780] Con-Stan Industries of Australia Pty v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14 ......................................................................................................................... [1.100] Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17; (1990) 169 CLR 594 ..................................................................... [18.200], [19.220], [19.230], [19.1060] Construction Enterprises Pty Ltd v Lafarge Plasterboard Pty Ltd [2002] NTSC 21 .............................................................................................................. [13.330] Continental TV Inc v GTE Sylvania Inc 433 US 36 (1977) ........................................................ [23.1250] Coogee Esplanade Surf Motel Pty Ltd v Commonwealth of Australia (1976) 50 ALR 363 .......................................................................................................................... [7.300] Cooke v New River Company (1888) 38 Ch 56 ............................................................................... [2.90] Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation [1981] HCA 26 ............. [3.310] Cooper v Stuart (1889) 14 App Cas 286 .......................................................................................... [1.280] Coordinated Corporate Services Ltd v National Video Inc (1984) 82 CPR (2d) 251 .............. [14.190] Cope Allman (Marrickville) Ltd v Farrow (1984) 3 IPR 567 .................................................... [24.1430] Corocraft Ltd v Pan American Airways Inc [1968] 3 WLR 714 ................................................... [3.250] Corporate Affairs Commission v Bradley (1974) 1 NSWLR 391 ............................................... [24.190] Couldery v Bartrum (1881) 19 Ch D 394 ....................................................................................... [6.1180] Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 ........................... [6.2600], [6.2630] Country Road Clothing Pty Ltd v Nagee Nominees Pty Ltd [1991] FCA 101 ........................ [19.770] Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd [1975] HCA 49 ....................................................................................................................... [13.120] Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40 ............................................................................................................................... [6.1870] Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd & Anor [2016] HCA 26 .............................................................................................................................. [6.2170] CSR Limited v Resource Capital Australia Pty Limited [2003] FCA 279 ................................. [24.280] Cummings v Sands [2001] NSWSC 7 .............................................................................................. [13.80] Cundy v Lindsay (1878) 3 App Cas 459 ......................................................................... [6.1700], [6.1730] xviii
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Table of Cases
Currie v Misa (1875) LR 10 Exch 153 ............................................................................................... [6.960] Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805 ....................................................... [6.2380] Cut-Price Deli Pty Ltd v Jacques [1994] ATPR (Digest) 46-128 ............................................... [19.1160]
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D D & C Builders Ltd v Rees [1966] 2 QB 617 .................................................................................. [6.1190] Daebo Shipping Co Ltd v The Ship Go Star [2012] FCAFC 156 ................................................ [8.1470] Dalkeith Investments Pty Ltd, Re (1984) 9 ACLR 247 ................................................................ [17.330] Dallas Buyers Club LLC v iiNet Limited [2015] FCA 317 ........................................................ [24.1010] Dallas Buyers Club LLC v iiNet Limited (No 4) [2015] FCA 838 ............................................ [24.1010] Dallinger v Halcha Holdings Pty Ltd (1995) 60 FCR 594 ........................................................... [17.520] Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd [1982] FCA 178 ....... [23.210], [23.350] Daniels v AWA Ltd (1995) 37 NSWLR 438 ................................................................................... [12.170] Darby, Re; Ex parte Brougham [1911] 1 KB 95 ............................................................................. [12.100] D’Arcy v Myriad Genetics Inc [2014] FCAFC 115; [2015] HCA 35 ......................................... [24.1300] Darlington Futures Pty Ltd v Delco [1986] HCA 82 ................................................................... [6.2460] David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48 ....... [6.1650], [6.3180] Davies v Powell (1737) 125 ER 1048 ................................................................................................ [1.150] Davis Contractors v Fareham UDC [1956] AC 696 ..................................................................... [6.2780] Davis v Pearce Parking Station Pty Ltd [1954] HCA 44 ............................................................. [6.2490] Davy v Leeds Corporation [1964] 1 WLR 1218 .............................................................................. [3.300] Dawson v World Travel Headquarters Pty Ltd [1980] ATPR 40-187 ........................................ [21.440] Deatons Pty Ltd v Flew [1949] HCA 60 .......................................................................................... [8.150] Deep Vein Thrombosis and Air Travel Group Litigation, Re [2006] 1 All ER (Comm) 313 ..................................................................................................................... [3.250] Delnorth Pty Ltd v Dura-Post (Aust) Pty Ltd [2008] FCA 1225 .............................................. [24.1280] Dencio v Zivanovic (1991) 105 FLR 117 .......................................................................................... [6.440] Derry v Peek (1889) 14 App Cas 337 .................................................................................. [2.30], [8.1270] Desktop Marketing Systems Pty Ltd v Telstra Corp Ltd [2002] FCAFC 112 ........................... [24.940] Diamond Press Australia Pty Ltd [2001] NSWSC 313 ................................................................ [17.530] Dick Bentley Productions v Harold Smith Motors Ltd [1965] 1 WLR 623 ............................... [6.2050] Dick Smith Investments Pty Ltd v Roger John Ramsay [2014] ATMO 16 ............................... [24.640] Dickinson v Dodds (1876) 2 Ch D 463 ............................................................................................ [6.410] Die Hard Pty Ltd [1995] ATMO 26 ................................................................................................ [24.430] Dignan v Australian Steamships Pty Ltd [1931] HCA 9 .............................................................. [4.250] Dillon v Baltic Shipping Company (1989) 21 NSWLR 617 ......................................... [19.510], [22.520] Director of Consumer Affairs Victoria v Craig Langley Pty Ltd & Matrix Pilates and Yoga Pty Ltd [2008] VCAT 482, [2008] VCAT 484 ............................................ [20.410], [20.430] Director of Consumer Affairs Victoria v Dimmeys Stores Pty Ltd [2013] FCA 618; [2013] FCA 1371 ............................................... [18.350], [18.650], [18.680], [18.750] Director of Consumer Affairs Victoria v Domain Register Pty Ltd [2017] FCA 1603 ........................................................................................................................... [19.570] Director of Consumer Affairs Victoria v Manningham Property Group Pty Ltd [2017] FCA 1448 ............................................................................................................. [18.740] Doe v Yahoo!7 Pty Ltd [2013] QDC 181 ........................................................................................ [15.100] Donoghue v Stevenson [1932] AC 562 ......................... [2.90], [2.100], [2.130], [8.180], [8.220], [8.230], [8.240], [8.260], [8.290], [8.350], [8.480], [8.980], [8.1090], [8.1140], [8.1150], [8.1190], [18.100]
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Business and the Law
D’Orta-Ekenaike v Victoria Legal Aid [2005] HCA 12) ................................................................ [8.450] Dow Jones & Company Inc v Gutnick [2002] HCA 56 ............................................................... [8.1360] Dowell v Tower Corporation [1991] ANZ Conv R 177 ............................................................... [6.1260] Dowling v Dalgety Australia Ltd [1992] FCA 35; [1992] FCA 27 ............. [23.290], [23.350], [23.1670] Downsview Nominees Ltd v First City Corp Ltd (1992) 11 ACLC 3101 ................................. [17.440] DPP v Chresta [2005] NSWSC 233 ................................................................................................... [3.250] Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 ..................................... [4.330] Duchess of Argyll v Duke of Argyll [1965] 1 All ER 611 .......................................................... [24.1420] Dudley v Dudley (1705) 24 ER 118 .................................................................................................... [2.30] Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 .................... [7.510] Dunlop v Selfridge [1915] AC 847 ................................................................................................... [6.960] Dunton v Dunton (1892) 18 VLR 114 ............................................................................... [6.980], [6.1050] Duport Steels Ltd v Sirs [1980] ICR 161 .......................................................................................... [1.470] Duracell Australia Ltd v Union Carbide Australia Ltd [1988] FCA 380 .................................. [19.790] Durant v Greiner (1990) 21 NSWLR 119 ....................................................................................... [19.270] Dye v Commonwealth [2010] FCA 720 ......................................................................................... [15.100]
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E Eastern Express Pty Ltd v General Newspapers Pty Ltd [1991] FCA 321; (1992) ATPR 41-167 ..................................................... [23.410], [23.1030], [23.1740], [23.1750], [23.1790], [23.1800] ebay International AG v Creative Festival Entertainment Pty Ltd (2006) Aust Cont Rep 90-243; [2006] FCA 1768 ............................................ [6.2420], [7.690], [7.790] Edgington v Fitzmaurice (1885) 29 Ch D 459; (1989) 2 Ch D 459 ............................... [6.1590], [6.1620] Elder Smith Goldsborough Mort v McBride [1976] 2 NSWLR 631 ........................................... [22.440] Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332 .............................. [7.230] Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 .............................. [7.420] Eliason v Henshaw (1819) 4 Wheaton 225 ...................................................................................... [6.580] Emmens v Pottle (1885) 16 QBD 354 ............................................................................................. [20.430] Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) | 14 NSWLR 523 ............................................................................................................................... [6.640] Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50 ................................................................................................................... [12.100] Equuscorp Pty Ltd v Haxton [2012] HCA 7 ................................................................................. [6.1380] Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8 .......... [6.830], [6.840], [13.430] Erven Warnink BV v J Townend & Sons (Hull) Ltd [1979] AC 731 ........................... [8.1240], [8.1250] Esanda Finance Corporation Limited v Peat Marwick Hungerfords [1997] HCA 19; [1997] HCA 8 ................................................................................................... [8.260], [8.1040] Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) (1997) 188 CLR 241 .................................................................................................................................. [8.1150] Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL Australia [2005] VSCA 228 ............................................................................................................................ [7.540] Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 ................................................................................................ [7.1040], [7.1050], [7.1130] Evans v Evans (1790) Hag Con 35 ................................................................................................... [2.420] Evans v State of New South Wales [2008] FCAFC 130 ................................................................. [4.210] Ex parte McLean [1930] HCA 12 ...................................................................................................... [1.900] “EZ” and “EY” [2015] AICmr 23 .................................................................................................... [15.420] xx
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Table of Cases
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
F Fabre v Lui [2015] NSWCA 157 ........................................................................................................ [8.560] Faccenda Chicken Ltd v Fowler [1986] 1 All ER 617 ................................................................. [24.1450] Famel Pty Ltd v Burswood Management Ltd [1989] FCA 204 ................................................ [19.1120] Farquhar v Bottom [1980] 2 NSWLR 380 ...................................................................................... [8.1340] Felthouse v Bindley (1862) 142 ER 1037 .......................................................................................... [6.610] Fender v St John-Mildmay [1938] AC 1 ........................................................................................ [6.1460] Festival Stores v Mikasa (NSW) Pty Ltd [1971] 18 FLR 260 .................................... [23.1520], [23.1570] Fido Dido Inc v Venture Stores (Retailers) Pty Ltd [1988] ATPR 40-912 ................................ [24.1610] Financings Ltd v Stimson [1962] 3 All ER 386 ............................................................................... [6.470] Fire Nymph Products Ltd v Jalco Products (WA) Pty Ltd [1983] ATPR 40-353 .................... [19.1080] Firm of Solicitors, A, Re [1995] TLR 263 ....................................................................................... [7.1120] Fisher v Bell [1961] 1 QB 394 ............................................................................................................ [6.260] Fitness First v Chong [2008] NSWSC 800 ..................................................................................... [20.400] Fitzgerald v Masters [1956] HCA 53 .............................................................................................. [7.1150] Fitzgerald v Muldoon [1976] 2 NZLR 615 ...................................................................................... [1.770] Fleming Bros (Monaro Agencies) Pty Ltd v Smith [1983] ATPR 40-389 ................................... [7.1110] Fletcher v Nextra Australia Pty Ltd [2015] FCAFC 52 ................................................................ [19.300] Foakes v Beer (1884) 9 App Cas 605 .............................................................................................. [6.1170] Foodco UK LLP v Henry Boot Developments Ltd [2010] EWHC 358 ..................................... [8.1260] Foran v Wight [1989] HCA 51 ........................................................................................................ [6.1280] Fragomeni v Fogliani (1968) 42 ALJR 263 ..................................................................................... [6.1740] Fraser v NRMA Holdings Ltd (1995) 55 FCR 452 ..................................................................... [19.1210] Fred Chappell Ltd v National Car Parks Ltd (The Times, 22 May 1987) ................................... [9.990] Freeman & Lockyer v Buckhurst Park Properties Ltd [1964] 2 QB 480 .................... [13.120], [13.180] The Freeman Cosmetic Corporation v Jenula Trial Pty Ltd [1993] FCA 505 ......................... [19.1030] Frost v Warner [2002] HCA 1 ............................................................................................................ [8.380] Frucor Beverages Pty Ltd v The CocaCola Company [2018] FCA 993 ..................................... [24.380] Full Federal Court in ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 .......................................................................................................................... [8.1060] G Gaffikin Marine Pty Ltd v Princes Street Marina Pty Ltd [1995] ATPR (Digest) 46-149 .................................................................................................................... [7.240] Gallie v Lee [1971] AC 1004 ............................................................................................................ [6.1670] Garcia v National Australia Bank Ltd [1998] HCA 48 ................................................. [6.1930], [7.1000] Gardam v George Wills & Co Ltd [1988] FCA 194 .................................................................... [19.1190] Gardiner v Fairfax (1942) 42 SR (NSW) 171 ................................................................................. [8.1340] Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903 ...................... [6.2240] Gary Aircraft Corp, Re 698F 2d 775 (1983) ................................................................................... [17.310] Gas and Fuel Corporation of Victoria v Wood Hall Ltd [1978] VR 385 ..................................... [4.390] Gate Gourmet Australia Pty Ltd (in liquidation) v Gate Gourmet Holding AG [2004] NSWSC 149 ......................................................................................................................... [7.150] Gates v City Mutual life Insurance Society Ltd (1986) ATPR 40-666 ........................................ [6.2880] Gee v Burger [2009] NSWSC 149 ................................................................................................... [15.100] Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd (1995) 7 BPR 14 ............................................................................................................................... [7.70], [7.120]
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xxi
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Business and the Law
General Newspapers Pty Ltd v Australian and Overseas Telecommunications Corp Ltd [1993] FCA 5 ............................................................................................... [23.290], [23.1810] General Newspapers Pty Ltd v Telstra (formerly Australian & Overseas Telecommunications Co Ltd) [1993] FCA 473 .......................................................... [7.240], [23.1810] Genex Corporation Pty Ltd v Bocove Pty Ltd, unreported, Supreme Court of New South Wales (13 May 1987) ............................................................................................. [19.1140] Gharibian v Propix Pty Ltd (t/as Jamberoo Recreational Park) [2007] ATPR 42-171 ............ [22.480] Gifford v Strang Patrick Stevedoring Pty Ltd (2003) 198 ALR 100 ............................................. [8.940] Gilford Motors Ltd v Horne [1933] Ch 935 .................................................................................. [12.100] Gillette Australia Pty Ltd v Energiser Australia Pty Ltd [2002] FCAFC 223 ........................... [19.800] Gillingham Bus Disaster Fund, Re [1958] Ch 300 .......................................................................... [9.220] Glasbrook Bros Ltd v Glamorgan County Council [1925] AC 270 ........................................... [6.1090] Glasgow Corporation v Muir [1943] AC 448 .................................................................... [8.560], [8.580] GlaxoSmithKline Australia Pty Ltd v Reckitt Benckiser (Australia) Pty Limited (No 2) [2018] FCA 1 ..................................................................................................................... [19.810] Glendale Chemical Products Pty Ltd v ACCC [1998] FCA 1571 ................................ [22.690], [22.720] Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd [1984] FCA 180 ............................................................................................ [19.290], [19.330], [19.1150] Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396 ............. [6.2170] Goldman Sachs JB Were Services Pty Ltd v Nickolich [2007] FCAFC 120 ................................ [7.390] Goodman Fielder Consumer Foods Ltd (formerly Meadow Lea Foods Ltd) v Cospak International Pty Ltd [2004] NSWSC 704 ..................................... [6.2190], [6.2480], [7.370] Goodman v Sayers (1820) 2 Jac & W 249 ...................................................................................... [6.2870] Google Inc v ACCC [2013] HCA 1 ................................................................................................. [19.900] GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631 ...... [7.100] Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540 ................................................... [22.330] Grainger & Sons v Gough [1896] AC 325 ....................................................................................... [6.220] Gray v Pearson (1857) 6 HLC 61 ...................................................................................................... [3.280] Great Lakes Forwarding Corp v Pennsylvania R Co 100 A 2d 612 (1953) ................................... [8.60] Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (The Great Peace) [2003] QB 679 ............................................................................................................................... [6.1830] Greco v Bendigo Machinery Pty Ltd [1985] ATPR 40-521 ........................................................ [19.1150] Green v Bestobell Industries Ltd [1982] WAR 1 .......................................................................... [12.180] Green v Broadcasting Corporation of New Zealand (1989) AIPC 90-950 ................................ [24.900] Greenwood v Council of the Municipality of Waverley (1928) 28 SR (NSW) 219 .................... [9.990] Greenwood v St Martins Bank [1933] AC 51 ................................................................................ [7.1750] Grosse v Purvis [2003] QDC 151 ...................................................................................................... [15.80] Gul v Creed [2010] VSC 185 .............................................................................................................. [3.250] Gutnick v Dow Jones & Co Inc (2002) 194 ALR 433 ...................................................................... [7.890] Guy v Crown Melbourne Limited (No 2) [2018] FCA 36 ........................................................... [19.380] Gynch v Polish Club Ltd [2015] HCA 23 ...................................................................................... [6.1420] H Hadley v Baxendale (1854) 156 ER 145 .......................................................... [6.2900], [6.2910], [6.2990] Hai Quan Global Smash Repairs v Ledabow Pty Ltd [2004] FCA 1224 ................................. [19.1220] Halton Pty Ltd v Stewart Bros Drilling Contractors Pty Ltd [1992] ATPR 41-158 ................... [7.240] Hamersley Iron Pty Ltd v National Competition Council [1999] ATPR 41-705 ...................... [23.560] Hamlyn v Mark Foy’s Pty Ltd [1982] ATPR 40-316 .................................................................... [22.830] xxii
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
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Table of Cases
Harriton v Stephens [2006] HCA 15; [2006] HCA 17 ......................................... [8.230], [8.350], [8.360] Hartley v Ponsonby (1857) 119 ER 1471 ........................................................................................ [6.1130] Hartnell v Sharp Corporation [1975] ATPR 40-003 ....................................................................... [21.20] Harvela Investments Ltd v Royal Trust Co of Canada Ltd [1986] AC 207 ................................ [6.310] Harvey v Facey [1893] AC 552 ......................................................................................................... [6.340] Hatcher v Black [1954] CLY 2289 ..................................................................................................... [8.760] Hatzimanolis v ANI Corporation Ltd [1992] HCA 21 ................................................................ [13.540] Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782 ...................................................................................................................... [17.450] Hawkins v Clayton [1988] HCA 15 ................................................................................................. [8.950] HCF Australia Ltd v Switzerland Health Fund Pty Ltd [1988] ATPR 40-846 ......................... [19.770] He Kaw Teh v The Queen [1985] HCA 43 .................................................................................... [10.240] Healing (Sales) Pty Ltd v Inglis Electrix Pty Ltd (1968) 121 CLR 584 ...................................... [22.210] The Heating Centre Pty Ltd v TPC [1986] FCA 73 .................................................................... [23.1480] Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 ..................................................................................... [6.1630], [8.230], [8.870], [8.950], [8.970], [8.980], [8.1000], [8.1090], [8.1260] Helicruise Air Services Pty Ltd v Rotorway Australia Pty Ltd [1996] FCA 308 ............................................................................................................... [23.230] Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235 ....... [6.760], [7.90], [7.100], [7.120] Henderson v Pioneer Homes Pty Ltd [1980] ATPR 40-168; ATPR 40-159 .................................................................................................. [19.100], [19.730], [21.140] Henderson v Preston (1888) 4 rl R 632 .......................................................................................... [8.1240] Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd [1988] FCA 40 .............................................................................................. [19.110], [19.330], [19.1210] Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31 ........................ [22.240], [22.300] Henthorn v Fraser [1892] 2 Ch 27 .................................................................................................... [6.700] Henville v Walker [2001] HCA 52 .................................................................................................. [18.700] Hewson v Sydney Stock Exchange Ltd (1967) 87 WN (NSW) 422 ........................................... [13.270] Heydon’s case (1584) 76 ER 637 ....................................................................................................... [3.280] Hill v Van Erp (1997) 188 CLR 159 ................................................................................................. [8.1150] Hill v Van Erp [1997] HCA 9; HCA 17 ............................................................. [6.2610], [8.950], [8.1170] Hillas & Co Ltd v Arcos Ltd [1932] All ER Rep 494 ............................. [6.790], [7.30], [7.420], [7.1780] Hinks v Fleet (The Times, 7 October 1986) ..................................................................................... [9.990] HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159 ............ [10.470], [12.110] Hobbs v Petersham Transport Co Pty Ltd [1971] HCA 26 .............................................. [9.860], [9.950] Hobbs v Winchester Corporation (1910) 2 KB 471 ...................................................................... [10.220] Hogan v Pacific Dunlop Ltd [1988] FCA 361 ............................................................................. [24.1600] Hollis v Vabu Pty Ltd [2001] HCA 44 ............................................................................... [8.160], [13.420] Holwell Securities Ltd v Hughes [1974] WLR 155 ........................................................................ [6.690] HomeSec Finance Express Pty Ltd v Richardson [2012] NSWSC 1375 .................................... [20.580] Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 ............................................................................................................... [6.2800], [6.2860] Hong Kong Fit Shipping Co Ltd v Kawasaki [1962] 1 All ER 474 ................................. [6.750], [7.460] Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd [1978] HCA 11 .................................................... [19.360], [19.640], [19.930], [19.980], [24.460], [24.660] Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64 ................................................................................................. [6.2210], [7.550], [12.180]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
xxiii
Business and the Law
Household Fire & Carriage Accident Insurance Co (Ltd) v Grant (1879) LR 4 Ex D 216 ................................................................................................................................. [6.670] Howe v Teefy (1927) 27 (NSW) 301 ............................................................................................... [6.2930] Hoyts Pty Ltd v Spencer (1919) 27 CLR 133 ................................................................................. [6.2130] Huddart Parker & Co Pty Ltd v Moorehead [1909] HCA 34, [1909] HCA 36 ............ [1.990], [23.110] Huggins (1730) 2 Stra 883 ............................................................................................................... [10.480] Humberstone v Northern Timber Mills (1949) 79 CLR 389; [1949] HCA 49 ............ [13.370], [13.450] Hyde v Wrench (1840) 49 ER 132 ........................................................................................ [6.480], [6.540]
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I IceTV Pty Ltd v Nine Network Australia Pty Ltd [2009] HCA 14 ............................................ [24.940] IDC v Cooley [1972] 2 All ER 162 .................................................................................................. [12.180] Ingram v Little [1961] 1 QB 31 ......................................................................................... [6.1720], [6.1730] Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyds Rep 611 .................................. [6.2150] Insurance Co v Dutcher 95 US 269 (1877) ....................................................................................... [6.710] Insurance Commission v Joyce [1948] HCA 17 ............................................................................. [8.860] Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988] 1 All ER 348 ............ [6.2390] Intermatch Sweden Aktiebolag v Dick Smith Investments Pty Ltd [2003] ATMO 18 ........... [24.510] International Harvester Company of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co [1958] HCA 16 .............................................................................................. [13.20], [13.50] International News Service v Associated Press 248 US 215 (1918) ........................................... [24.130] Invercargill City Council v Hamlin [1996] 1 All ER 756 ............................................................. [1.1100] Invicta Plastic Ltd v Clare [1976] Crim LR 131 ............................................................................ [10.410] Ipstar Australia Pty Ltd v APS Satellite Pty Ltd [2018] NSWCA 15 ......................................... [20.220] Isbester v Knox City Council [2015] HCA 20 ................................................................................. [4.390] J J & C Reid Pty v Abau Holdings Pty Ltd (1988) NSW Conveyancing Reports 55416 ........... [6.1150] J Bollinger v Costa Brava Wine Co Ltd [1959] 3 All ER 800 ....................................................... [8.1220] J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] WLR 1078 ........................... [6.2100] J J Savage & Sons Pty Ltd v Blakney [1970] HCA 6 ..................................................................... [6.2120] J Spurling Ltd v Bradshaw [1956] 1 WLR 461 .............................................................................. [6.2390] Jacques v Cut-Price Deli Pty Ltd [1993] FCA 88 ........................................................................ [19.1160] Jaensch v Coffey [1984] HCA 52 ......................................................................................... [2.100], [8.280] James v Cowan [1930] HCA 48 ...................................................................................................... [1.1010] Jane Doe v Australian Broadcasting Corporation [2007] VCC 281 .............................. [8.1500], [15.90] Janson v Driefontein Consolidated Mines Ltd [1902] AC 484 ................................................... [6.1450] Jarra Creek Central Packing Shed Pty Ltd v Amcor Ltd [2011] FCA 671 ................................. [23.930] Jarvis v Swan Tours Ltd [1973] 2 QB 233 ...................................................................................... [18.100] JC Williamson Ltd v Luckey & Mulholland [1931] HCA 15 ...................................................... [6.3110] Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 .............................................................. [6.1290] Jeffrey v London County Council (1954) 52 LGR 521 ................................................................... [8.670] The Jewellery Group Pty Ltd v ACCC [2013] FCAFC 144 ......................................................... [21.630] Jingalong Pty Ltd v Todd [2015] NSWCA 7 ................................................................................... [7.140] John R Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd [1993] FCA 295 .......................................................................................................... [19.1180], [19.1190] Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] Aust Torts Reports 81-692 ........................................................................................................ [8.1090], [8.1120] xxiv
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
Table of Cases
Johnson v Browning (1704) HOLT KB 3 ....................................................................................... [8.1330] Johnson v Buttress [1936] HCA 41 ................................................................................................. [6.1900] Jones v Bartlett [2000] HCA 56 ......................................................................................................... [8.490] Jones v Randall (1774) 98 ER 954 ................................................................................................... [7.1320] Jones v Vernons Pools Ltd [1938] 2 All ER 626 .............................................................................. [6.930] Joslyn v Berryman [2003] HCA 34 ...................................................................................... [8.590], [8.840]
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K K B Docker, Re (1938) 10 ABC 198 ................................................................................................. [17.160] Kable v Director of Public Prosecutions (NSW) [1996] HCA 24 ........ [1.710], [1.720], [1.730], [1.780] Kabushiki Kaisha Sony Computer Entertainment v Stevens [2003] FCAFC 157 ...................................................................................................................... [24.1050] Kakavas v Crown Ltd [2007] VSC 526 .......................................................................................... [8.1130] Kakavas v Crown Melbourne Ltd [2013] HCA 25 ....................................................................... [20.100] Keech v Sandford (1726) 25 ER 223 ................................................................................................. [9.170] Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd [1989] FCA 46 ......................................................................................................................................... [19.1260] Kendirjian v Lepore [2017] HCA 13 ................................................................................................ [8.450] Kenman Kandy Australia Pty Ltd v Registrar of Trade Marks [2002] FCAFC 273 .............................................................................................................. [24.480], [24.760] Kennedy v De Trafford [1897] AC 180 ............................................................................................ [13.20] Ketterer v Amour & Co 200 F 322 (1912) ........................................................................................ [22.10] Kimberley NZI Finance Ltd v Torero Pty Ltd [1989] FCA 280 ................................................ [19.1220] The King and The Minister for Customs v Australasian Films and Another [1921] HCA 11 .............................................................................................................................. [10.480] Kingswell v The Queen [1985] HCA 72 ........................................................................................ [10.350] Kleinwort Benson Ltd v Malaysian Mining Corp [1988] 1 All ER 785 ....................................... [7.150] Knight v Earl of Plymouth (1747) Dick 120 .................................................................................... [9.110] Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61 .................. [6.3200] Koowarta v Bjelke-Petersen (1982) 153 CLR 168 ........................................................................... [1.930] Ku-ring-gai Co-operative Building Society (No 12) Ltd, Re [1978] FCA 50 .......................... [23.1230] Ku v Song [2007] FCA 1189 ................................................................................................ [7.420], [12.200] Kuntstreetwear Pty Ltd, Re [2007] ATMO 34 ............................................................................... [24.430] Kurth v McGavin [2007] 3 NZLR 614 ............................................................................................ [6.1340] Kuzmanovski v New South Wales Lotteries Corporation [2010] FCA 876 ............................... [6.170] L La Forrest v Ford [2001] QCA 455 ...................................................................................... [7.620], [7.740] Ladbroke (Football) Ltd v William Hill (Football) Ltd [1964] 1 WLR 273 ............................... [24.920] Laing O’Rourke v Transport Infrastructure [2007] NSWSC 732 ................................................. [7.330] Lam v Ausintel Investments Australia Pty Ltd [1990] ATPR 40-990 ......................... [7.230], [19.1150] Lane Cove Council v Michael Davies & Associates [2012] NSWSC 727 ................................ [19.1240] Lange v Australian Broadcasting Corporation [1997] HCA 25 .................................... [1.640], [8.1440] Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6 ........................................ [3.250] Laws v GWS Machinery (2007) 209 FLR 53 .................................................................................. [22.320] Le Lievre v Gould [1893] 1 QB 491 .................................................................................................. [8.230] Leading Edge Investments Pty Ltd v Te Kanawa (2007) Aust Cont Reps 90-250 ................... [6.3200]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
xxv
Business and the Law
Leaf v International Galleries [1950] 2 KB 86 ............................................................................... [6.1620] Leather Cloth Co v American Leather Cloth Co (1865) 11 H L Cas 523 ................................... [8.1220] Lee v Lee’s Air Farming Ltd [1961] AC 12 ..................................................................................... [12.90] Lee v Wilson [1934] HCA 60 ........................................................................................................... [8.1350] Legione v Hateley [1983] HCA 11 ................................................................. [6.1240], [6.1260], [16.1270] Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 ................... [10.470], [12.110] Leon Laidley Pty Ltd v The Transport Workers’ Union of Australia [1980] FCA 15 ............ [23.1120] L’Estrange v Graucob [1934] 2 KB 394 ........................................................................... [6.2360], [6.2370] Levi Strauss & Co v Wingate Marketing Pty Ltd [1993] FCA 325 ............................................. [24.560] Lewis v Averay [1972] 1 QB 198 ........................................................................ [6.1710], [6.1720], [9.770] Lewis v Daily Telegraph Ltd [1963] 1 QB 340 .............................................................................. [19.390] Lezam Pty Ltd v Seabridge Pty Ltd [1992] FCA 206 ................................................................. [19.1250] Lifesavers (A Asia) Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431 ......................................... [6.2630] Lifestyle Appliances Ltd v Autel TV Services Ltd (2005) 8 NZBLC 99-588 ............................... [7.130] Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555 .................................................. [13.560] Liverpool Catholic Club v Moor [2014] NSWCA 394 ................................................................... [8.500] Lloyd’s Bank Ltd v Bundy [1974] 3 WLR 501 .................................................................................. [2.30] London Joint Stock Bank Ltd v Macmillan [1918] AC 777 ......................................................... [7.1750] Louth v Diprose [1992] HCA 61 ...................................................................................... [20.130], [20.140] Lumley v Wagner (1852) 1 DeG M & G 604 ................................................................................. [6.3130] Lyon v Daily Telegraph [1943] KB 746 .......................................................................................... [8.1420]
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M Mabo v Queensland (No 2) [1992] HCA 23 ............................. [1.110], [1.290], [1.300], [1.310], [1.320], [1.1090], [1.1150], [2.240], [2.250] Macaura v Northern Insurance Co Ltd [1925] AC 619 .................................................. [7.1210], [12.90] Mackay v Douglas (1872) LR 14 Eq 106 .......................................................................................... [11.60] Mackintosh v Johnson [2013] VSCA 10 ......................................................................................... [20.140] MacPherson v Buick Motor Co 217 NY 382 (1916) ...................................................................... [19.390] Macquarie Bank Ltd v Google [2008] FCA 1417 .......................................................................... [24.290] Maggbury Pty Ltd v Hafele Australia Pty Ltd (2002) ATPR 41-854 (HCA) .......................... [24.1420] Magor & St Mellons Rural District Council v Newport Corporation [1950] 2 All ER 1226; [1952] AC 189 ........................................................................................................ [3.260] Mahmoud & Ispahani, Re [1921] 2 KB 716 .................................................................... [6.1390], [6.1470] Makita (Australia) Pty Ltd v Black & Decker (Australasia) Pty Ltd [1990] FCA 236 ............. [19.780] Malone v Metropolitan Police Commissioner [1979] 2 WLR 700 ................................................. [3.50] Mammone v RACV Insurance Pty Ltd [1976] VR 617 ................................................................ [7.1320] Manchester & Milford Railway Co, Re (1880) 14 Ch D 645 ....................................................... [17.420] Manchester Liners v Rea Ltd [1922] 2 AC 74 ............................................................................... [22.440] Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23 ............................................... [6.3150] March v Stramere (E & MH) Pty Ltd [1991] HCA 12; [1991] HCA 1 ....................................................................................... [8.760], [8.770], [8.830], [18.700] Marine Insurance Co of Alexandria v Tucker, 7 US 357 ............................................................... [9.400] Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd [1987] FCA 282; [1987] FCA 450 ........................................................................ [23.290], [23.1340], [23.1670], [23.1780] Marks & Spencer plc v One in a Million Ltd [1998] FSR 265 ...................................... [24.250], [24.300] Marsh v Baxter [2014] WASC 187 .................................................................................................. [8.1140] Marsh v Baxter [2015] WASCA 169 .................................................................. [8.950], [8.1130], [8.1490] xxvi
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
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Table of Cases
Marshall v Colonial Bank of Australia [1904] HCA 31 ............................................................... [7.1750] Master Education Services Pty Limited v Ketchell [2008] HCA 38 ........................... [6.1410], [14.420] Masters v Cameron [1954] HCA 72 ....................................................................... [6.750], [6.810], [7.80], [7.90], [7.120], [7.140] Matthew Short & Associates Pty Ltd v Riviera Marine (International) Pty Ltd [2001] NSWCA 281 .................................................................. [9.880], [9.990] Matthews v Baxter (1873) LR 8 Exch 132 ...................................................................................... [6.1330] May & Butcher Ltd v The King [1934] 2 KB 17 ..................................................... [6.770], [6.820], [7.50] Maynard v Mosely (1676) 36 ER 1009 ........................................................................................... [20.530] Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 .................................................................... [7.1250] Maynes v Casey [2011] NSWCA 156 ............................................................................................. [15.100] McCaughey v Commr of Stamp Duties (NSW) (1945) 46 SR (NSW) 192 .................................... [9.40] McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125 ........................................................... [6.2180] McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 ................................................................. [7.940] McDonald’s Corporation v Bellamy [2004] ATMO 26 ................................................................ [24.520] McDowell v Oyer 21 Pa Sup 417 at 423 (1853) ............................................................................... [2.150] MCI Communications Corp v American Telephone and Telegraph Co 708 F 2d 1081 (1983) .................................................................................................................... [23.540] McKeand v Thomas [2006] NSWSC 1028 ....................................................................................... [6.910] McKinnon v Secretary, Department of Treasury [2006] HCA 45 ................................................. [4.310] McLaughlin v City Bank of Sydney [1912] HCA 16 .................................................................... [6.1330] McRae v Commonwealth Disposals Commission [1951] HCA 79 ............................ [6.1810], [6.2980] McWilliam’s Wines Pty Ltd v McDonalds System of Australia Pty Ltd [1980] FCA 159 .............................................................................................................. [19.610], [24.530] Meat & Livestock Australia Limited v Cargill, Inc [2018] FCA 51 .......................................... [24.1300] Medtel Pty Limited v Courtney [2003] FCAFC 151 ..................................................... [22.290], [22.700] Meehan v Jones [1982] HCA 52 ............................................................................................. [6.740], [7.80] Meinhard v Salmon 249 NY 458 (1928) ......................................................................................... [11.200] Melway Publishing Pty Ltd v Robert Hicks Pty Ltd [2001] HCA 13 ...................................... [23.1820] Mendelsohn v Normand Ltd [1969] 3 WLR 139 .......................................................................... [6.2390] Merry v Green (1841) 151 ER 916 ..................................................................................................... [9.590] Metricon Homes Pty Ltd v Barrett Property Group Pty Ltd [2008] FCAFC 46 ...................... [24.980] Midland Great Western Railway of Ireland v Johnson (1858) 6 HLC 798 ............................... [6.1640] Miles v Clarke [1953] 1 All ER 779 ................................................................................................. [12.190] Milirrpum v Nabalco Pty Ltd (1971) 17 FLR 141 ........................................................................... [1.280] Millar v Taylor (1749) 4 Burr 2303, 98 ER 201 ............................................................................ [24.1160] Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31 .............................................................................................................................. [19.450] Miller v Fionas Clothes Horse of Centrepoint Pty Ltd [1989] ATPR 50-515 ............................ [22.520] Miller v TCN Channel Nine Pty Ltd [1986] HCA 60 .................................................................. [1.1020] Miller v Tipling (1918) 43 OLR 97 .................................................................................................... [9.420] Mills v Mills (1938) 60 CLR 150 ...................................................................................................... [12.180] Minister for Immigration and Ethnic Affairs v Teoh [1995] HCA 20 ........................... [1.960], [19.970] Mitchell v Mosley [1914] 1 Ch 438 ................................................................................................... [9.320] MLC v Evatt (1968) 122 CLR 556; [1968] HCA 74 ........................................................... [8.990], [8.1050] Modbury Triangle Shopping Centre Pty Ltd v Anzil [2000] HCA 61 ............................ [8.300], [8.320] Mogul Steamship Co Ltd v McGregor, Gow & Co (1888) 21 QBD 544 .................................. [23.1860] Montgomery v Thompson [1891] AC 217 .................................................................................... [8.1220] Moorabool Shire Council v Taitapanui [2004] VSC 239 ................................................. [8.940], [8.1140]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
xxvii
Business and the Law
“Moorcock”, The [1886-90] All ER 530 .......................................................................................... [6.2200] Moore & Co and Landauer & Co, In Re [1921] 2 KB 519 ........................................................... [6.2670] Moorgate Tobacco Co Ltd v Philip Morris Ltd (1984) 156 CLR 414; [1984] HCA 73 ............................................................................................................. [24.130], [24.1410] Morgan v Jones (1773) Lofft 160 ..................................................................................................... [6.2460] Moroccan Oil Israel Ltd v Aldi Foods Pty Ltd [2017] FCA 823 ................................ [19.1010], [21.160] Morphett Arms Hotel Pty Ltd v TPC [1980] FCA 62 .................................................................. [23.810] Moss v Lowe Hunt & Partners Pty Ltd [2010] FCA 1181 ........................................................... [19.670] Mount Isa Mines Ltd v Pusey [1970] HCA 60 .................................................................................. [1.30] Mousell Brothers Ltd v London and North-Western Railway Co (1917) 2 KB 836 ................ [10.480] Murphy v Abi-Saab (1995) 37 NSWLR 280 ...................................................................................... [2.90] Murphy v Steeplechase Amusement Co 250 NY 479 (1929) ........................................................ [8.800] Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 ................................................................................................................. [6.770], [7.20] Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 ................................................. [6.1100], [6.1120] Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556 .................................... [8.950]
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N Nagle v Feildon [1966] 2 QB 633 .................................................................................................... [6.1450] Narhex Australia Pty Ltd v Sunspot Products Ltd [1990] FCA 232 .......................................... [19.480] National Australia Bank Ltd v Blacker [2000] FCA 681 ................................................................ [9.360] National Crime Authority v Margaret Elizabeth Flack [1998] FCA 932 ..................................... [9.600] National Provincial Bank Ltd v Ainsworth [1965] AC 1175 .......................................................... [9.50] National Research Development Corporation v Commissioner of Patents [1959] HCA 67 ............................................................................................................................ [24.1300] National Trustees Executors Agency Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373 ............................................................................................... [11.270] Natra Pty Ltd v Markhill Investments Pty Ltd [2005] FCA 552 ................................................ [6.2000] Navitaire Inc v Easy Jet Airline Co Ltd [2004] EWHC 1725 (Ch) ............................................ [24.1080] Needlework Warehouse Pty Ltd v Chansonette Pty Ltd [2006] FCA 1185 ................................ [7.290] Neilson v Hempston Holdings Pty Ltd [1986] FCA 100 ............................................... [7.230], [19.350] Network Ten Pty Ltd v TCN Channel Nine Pty Ltd [2004] HCA 14 ...................................... [24.1040] New South Wales v The Commonwealth [1990] HCA 2; [2006] HCA 52 ..................................................................................................... [1.980], [8.730], [12.10] New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd [1975] AC 154 ................................................................................................................................. [6.650] News Limited v Australian Rugby Football League Limited & Ors [1996] FCA 1256 ............................................................................................................................. [2.440] News Ltd v South Sydney District Rugby League Football Club [2003] HCA 45 .................... [1.160] Nguyen v Nguyen [1990] HCA 9 ..................................................................................................... [2.110] Nicolene Ltd v Simmonds [1953] 1 QB 543 .................................................................................... [6.800] Nissho Iwai Australia Ltd v Malaysian International Shipping Corp Berhad [1989] HCA 32 .............................................................................................................................. [6.2510] Nocton v Lord Ashburton (1914) AC 932 ......................................................................................... [2.30] Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535 ......................... [7.1040], [7.1050], [7.1110] North Australian Territory Co Ltd, The, Re (1891) 61 L J Eq 129 .............................................. [19.910] North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705 ..................... [6.1880] xxviii
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
Table of Cases
Northstate Carpet Mills Pty Ltd v BR Industries Pty Ltd [2006] NSWSC 1057 ........................ [6.650] Nothman v Bomet London Borough Council [1978] 1 WLR 220 ................................................ [1.220] NRMA v Parker (1986) 11 ACLR 1 ................................................................................................ [12.150] NSW v Commonwealth [2006] HCA 52 .......................................................................... [1.990], [1.1000] NSW v Lepore [2003] HCA 4 ............................................................................................... [8.130], [8.550] Nutrientwater Pty Ltd v Baco Pty Ltd [2010] FCA 2 ................................................................ [24.1620]
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O O’Brien v Smolonogov [1983] FCA 305 ......................................................................................... [19.220] Obrljin v Beard [2010] NSWCA 93 ................................................................................................... [8.490] O’Connell v The Queen (1844) 11 Cl & F 155 ................................................................................. [8.390] O’Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3 ................................................ [6.3050] Olley v Marlborough Court [1949] 1 KB 532 ................................................................................ [6.2400] OneSteel Manufacturing Pty Ltd (admin apptd), Re [2017] NSWSC 21 .................................. [9.1180] Orion Pet Products Pty Ltd v Royal Society for the Prevention of Cruelty to Animals (Vic) [2002] FCA 860 ................................................ [8.1340], [8.1460], [19.200], [19.280] Orix Australia Corporation Ltd v Moody Kiddel & Partners Pty Ltd [2006] NSWCA 257 ........................................................................................................ [13.320] Ormonoid Roofing & Asphalts Limited v Bitumenoids Ltd [1930] 31 SR (NSW) 347 ......... [24.1440] Orton v Melman [1981] ATPR 40-250 ............................................................................................ [7.1070] Osborne v The Commonwealth [1911] HCA 19 .......................................................................... [1.1250] Oscar Chess Ltd v Williams [1957] 1 All ER 325 .......................................................................... [6.2040] Osmond v Public Service Board NSW Court of Appeal (1984, unreported) ............................. [4.390] Ostime v AMP Society [1960] AC 459 ............................................................................................. [2.210] O’Toole v Charles David Pty Ltd [1990] HCA 44 ............................................................... [1.130], [2.80] Outboard Marine Australia Pty Ltd v Hecar Investments (No 6) Pty Ltd [1982] FCA 265 ............................................................................................................................. [23.210] Overlook v Foxtel [2002] NSWSC 17 ................................................................................ [6.2250], [7.540] Overlook v Foxtel (2002) Aust Contract Reports 90-143 ............................................................ [6.2240] Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd [1961] AC 388 .................. [8.800] Overseas Tankship (UK) v Miller SS Co [1967] 1 AC 617 ............................................................. [8.810] P Pacific Dunlop Ltd v Hogan [1989] FCA 185; [1989] FCA 188 ................................. [19.340], [19.1050], [19.1040], [24.1600] Pacific Hotels Pty Ltd v Asian Pacific International Ltd [1986] FCA 297 ................................. [19.560] Pacific Motor Auctions Pty Ltd v Motor Credits (Hire Finance) Ltd [1965] AC 867 ................................................................................................................................. [9.790] Pacific National (ACT) Ltd v Queensland Rail [2006] FCA 91 ................................................ [23.1670] Paciocco v ANZ Banking Group Ltd [2015] FCAFC 50 ............................................... [20.360], [20.390] Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50 ................................................................................. [7.510], [7.520], [7.540], [20.220] Packer v Packer [1953] 2 All ER 127 ................................................................................................ [2.150] Panayiotou v Sony Music Entertainment (UK) Ltd [1994] EMLR 229 ..................................... [7.1090] Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 .............................................................................................................. [12.150], [13.170] Papathanasopoulos v Vacopoulos [2007] NSWSC 502 ................................................................. [9.980] Pappas v Sake Pty Ltd (1983) ATPR 40-411 ................................................................................ [19.1060]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
xxix
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Business and the Law
Pappas v Soulac Pty Ltd [1983] FCA 3 ............................................................................... [7.210], [7.250] Paris v Stepney Borough Council [1951] AC 367 ........................................................................... [8.630] Parish v World Series Cricket [1977] ATPR 40-039 ...................................................................... [19.530] Park v Koh [2007] NSWSC 12 ......................................................................................................... [19.300] Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44 .................................................................................... [8.1250], [19.10], [19.70], [19.80], [19.170], [19.320], [19.430], [19.560], [19.620], [19.930], [19.1260] Parker v McKenna (1874) LR 10 Ch App 96 .................................................................. [13.260], [13.270] Parker v SE Railway (1877) 2 CPD 416 ......................................................................................... [6.2390] Parmiter v Coupland [1840] 151 ER 340 ........................................................................ [8.1330], [8.1340] Partridge v Crittenden [1968] 2 All ER 421 .................................................................................... [6.240] Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] FCA 397 .................................................................................................................. [1.30], [1.1320] Paul Dainty Corp Pty Lid v National Tennis Centre Trust [1990]; FCA 163 ATPR 41-029 .............................................................................................................. [23.1400], [23.1420] Payne v Cave (1789) 100 ER 502 ....................................................................................................... [6.290] Payne v McDonald [1908] HCA 40 ................................................................................................ [6.1480] Pearce v Brooks [1861] All ER Rep 102 ......................................................................................... [6.1460] Peldan v Anderson [2006] HCA 48 .................................................................................................. [9.410] Pengelly v Bell Punch Co Ltd [1964] 1 WLR 1055 ......................................................................... [3.300] Perre v Apand Pty Ltd [1999] HCA 36 ................................................................ [8.360], [8.370], [8.950], [8.1110], [8.1140], [8.1150] Perri v Coolangatta Investments Pty Ltd [1982] HCA 29 ............................................................. [6.730] Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1 .............................................................. [12.180] Petelin v Cullen [1975] HCA 24 ..................................................................................................... [6.1680] Petera Pty Ltd v EAJ Pty Ltd [1985] FCA 277 .............................................................................. [19.110] Peters (WA) Ltd v Petersville Ltd [2001] HCA 45 ....................................................................... [7.1130] Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 .............................................................................................................................. [6.270] Phelps v Western Mining Corp Ltd [1978] ATPR 40-077 ............................................................ [19.150] Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 ................................ [6.2450], [22.510] PI-Design AG [2018] ADO 2 ........................................................................................................... [24.730] Pinnel’s case (1602) 77 ER 237 ............................................................................. [6.80], [6.1180], [6.1200] Pioneer Studios Pty Ltd v Hills [2015] NSWCA 222 ................................................................... [13.540] Plimer v Roberts [1997] FCA 1361 ................................................................................................. [19.240] Poseidon Ltd v Adelaide Petroleum NL [1991] FCA 663 ............................................................. [7.240] Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd [2005] FCAFC 131 ........................ [19.1260] Powell v Lee (1908) 99 LT 284 ........................................................................................................... [6.630] Prager v Blatspiel, Stamp & Heacock Ltd [1924] 1 KB 566 ........................................................ [20.150] Presidential Security Services of Australia Pty Ltd v Clinton Joseph Brilley [2008] NSWCA 204 ...................................................................................................................... [10.480] Pretorius v Venture Stores (Retailers) Pty Ltd [1992] FCA 46 .................................................... [18.610] Prevost v Gratz [1896] 19 US (6 Wheat) 481 ................................................................................. [8.1270] Prince Alfred College Incorporated v ADC [2016] HCA 37 ......................................................... [8.170] Printing and Numerical Registering Co v Sampson (1875) LR 19 Eq 462 ................................. [20.10] Privacy Commissioner v Telstra Corporation Ltd [2017] FCAFC 4 ......................................... [15.100] Production Printing (Aust) Pty Ltd (in liq), Re [2017] NSWSC 505 .......................................... [9.1180] xxx
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
Table of Cases
Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28 ............................... [8.450] Proudman v Dayman [1941] HCA 28 ............................................................. [10.210], [10.220], [10.230] Pyrenees Shire Council v Day [1998] HCA 3 ................................................................................. [8.340] Q QIW Retailers v Davids Holdings Pty Ltd [1993] FCA 204 ....................................................... [23.290] Queensland Co-operative Milling Association Ltd, Re [1976] ATPR 40-012 ................................................................................ [23.250], [23.330], [23.470], [23.2010] Queensland Stations Pty Ltd v Federal Commissioner of Taxation [1945] HCA 13 .............................................................................................................................. [13.450] Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6; (1989) 167 CLR 177 .............................................. [23.70], [23.220], [23.230], [23.250], [23.540], [23.1610], [23.1620], [23.1640], [23.1670], [23.1790], [23.1820]
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R R v Barbouttis (1995) 37 NSWLR 256 ............................................................................................ [10.440] R v Byrnes and Hopwood [1995] HCA 1 ...................................................................................... [12.190] R v Clarke [1927] HCA 47 .................................................................................................... [6.560], [6.960] R v Dudley and Stephens (1884) 14 QBD 273 ................................................................................ [1.200] R v El Azzi [2001] NSWCCA 397 ................................................................................................... [10.440] R v Falzon [2018] HCA 29 ................................................................................................................. [2.170] R v Federal Court of Australia; Ex parte WA National Football League [1979] HCA 6 ........ [19.200] R v Gilham (unreported, NSW Supreme Court, April 1995) ..................................................... [10.300] R v Howe (1987) 2 WLR 568 ........................................................................................................... [10.410] R v Kirby, Ex parte the Boilermakers’ Society of Australia [1956] HCA 10 .... [1.570], [1.690], [2.420] R v Loughnan [1981] VR 443 ............................................................................................................ [1.200] R v Smith [1975] AC 476 .................................................................................................................. [10.420] R v Toohey; Ex parte Meneling Station Pty Ltd [1982] HCA 69 .................................................... [9.50] RACV Insurance Pty Ltd v Unisys Australia Ltd [2001] VSC 300; [2001] VSC 503 .............................................................................................. [5.150], [7.1300], [19.1110] Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd [1982] FCA 206; [1983] FCA 140 .. [23.350], [23.950] Rafferty v Madgwicks [2012] FCAFC 37 ....................................................................... [14.380], [14.390] Raffles v Wichelhaus (1842) 159 ER 375 ........................................................................................ [6.1770] Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251 ..................................................... [14.190] Ransley v Black & Decker (t/as Asia Pty Ltd) (1997) 3 TPR 138 ............................................... [22.830] Rasell v Cavalier Marketing (Aust) Pty Ltd [1991] 2 Qd R 323 .................................. [22.250], [22.340] Read v J Lyons & Co [1947] AC 156 ............................................................................................... [20.440] Reader’s Digest Services Pty Ltd v Lamb [1982] HCA 4 ............................................................ [8.1330] Reardon-Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 .................................................. [6.2140] Reardon v Morley Ford Pty Ltd [1981] ATPR 40-205 .................................................................. [18.200] Reddway v Banham [1896] AC 199 ................................................................................ [8.1250], [23.760] Reese Bros Plastics Ltd v Hamon-Sobelco Australia Pty Ltd (1988) 14 BCL 91 ........................ [7.360] Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 ........................................................................ [12.180] Remedios v Kentucky Homes Pty Ltd [1987] ATPR 40-799 ....................................................... [19.920] Remington & Sons v Samara Bay Co (1886) 140 Mass 494 .......................................................... [12.70]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
xxxi
Business and the Law
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 ............................................................................................................................. [6.2230] Rentokil Pty Ltd v Lee [1996] ATPR 41-451 .................................................................................. [7.1080] Reynolds v Katoomba RSC All Services Club Ltd [2004] NSWCA 234 ..................................... [8.370] Richards v The Commercial Bank of Australia (1971) 18 FLR 95 .............................................. [9.1200] Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 ............................................................ [6.3060] Roads and Traffic Authority of NSW v Dederer [2007] HCA 42 ................................................. [8.670] Roadshow Films Pty Ltd v iiNet Ltd [2012] HCA 16 ................................................................ [24.1010] Roadshow Films Pty Ltd v Telstra Corporations Ltd [2016] FCA 1503 ................................. [24.1020] Roe v Wade (1973) 410 US 133 .......................................................................................................... [7.470] Rogers v Whitaker [1992] HCA 58 ...................................................................................... [8.730], [8.740] Romeo v Conservation Commission of the Northern Territory [1998] HCA 5 ......................... [8.650] Ron Hodgson (Holdings) Pty Ltd v Westco Motors (Distributors) Pty Ltd [1980] FCA 2; [1980] FCA 3 ..................................................................................... [23.1480], [23.1530] Roscorla v Thomas (1842) 3 QB 234 ............................................................................................... [6.1070] Routledge v Grant (1828) 4 Bing 653 ............................................................................................... [6.390] Rowland v Divall [1923] All ER Rep 270; [1923] 2 KB 500 .......... [6.3170], [22.180], [22.190], [22.250] Rozanes v Bowen (1928) 32 U L Rep 98 ........................................................................................ [7.1280] Ruddock v Taylor [2003] NSWCA 262 ............................................................................................ [8.760] Rural Traders Co-operative (WA) Ltd, Re [1979] ATPR 40-110 ................................................. [23.480] Russo v Buck [2006] SASC 380 ....................................................................................................... [13.220] Ruxley Electronics Ltd v Forsyth [1995] 3 WLR 118 ................................................................... [6.3010] Ryan v Great Lakes Council [1999] ATPR 46-191; [1999] FCA 177 ............ [22.330], [22.370], [22.390] Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
S S Davis & Co Ltd, Re [1945] Ch 402 ................................................................................................ [9.850] Saad v Chubb Security Australia Pty Ltd [2012] NSWSC 1183 ................................................. [15.100] Salomon v Salomon & Co Ltd [1897] AC 22 ................................................... [11.310], [11.330], [12.90] Samaha v Corbett Court Pty Ltd [2006] NSWSC 1441 ................................................................. [7.250] Samsung Electronics Australia Pty Limited v LG Electronics Australia Pty Limited [2015] FCA 227 ............................................................................................................................. [19.490] Samuel v Jarrah Timber and Wood Paving Corp Ltd [1904] AC 323 ........................ [9.1080], [9.1200] San Sebastian Pty Ltd v Minister Administering the Environment Planning & Assessment Act 1979 [1986] HCA 68 ........................................................................................ [8.1030] Sanchez-Sidiropoulos v Canavan [2015] NSWSC 1139 ................................................................ [8.680] Sandell v Porter [1966] HCA 28 ....................................................................................................... [17.40] Sanders v Snell [1998] HCA 64 ....................................................................................................... [8.1480] Sands v State of South Australia [2013] SASC 44 ........................................................................ [15.100] Sarina v The Council of the Shire of Wollondilly [1980] FCA 138 ............................................ [17.130] Scammell and Nephew Ltd v HC and JG Ouston [1941] AC 251 .......... [6.780], [6.810], [7.40], [7.60] Scott v Davis [2000] HCA 52 ............................................................................................................. [8.550] Scott v Sampson (1882) 8 QBD 491 ................................................................................................ [8.1280] Seafolly Pty Ltd v Madden [2012] FCA 1346 ............................................................................... [19.450] Seaford Court Estates Ltd v Asher [1949] 2 KB 481 ...................................................................... [3.240] SEC v Chenery Corp 318 US 80 (1943) at 86 ................................................................................. [11.240] Secretary of Department of Health v Harvey (1990) 21 ALD 393 ............................................... [3.350] Seddon v North Eastern Co Ltd [1905] 1 Ch 326 ......................................................................... [6.1610] Sedleigh-Denfield v O’Callagan [1940] AC 880 ........................................................................... [8.1490] xxxii
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
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Table of Cases
Seidler v Schallhofer [1982] 2 NSWLR 80 ..................................................................................... [6.1460] Seven Network (Operations) Ltd v Endemol Australia Pty Ltd [2015] FCA 800 ................... [24.900] 7-11 Stores Pty Ltd, Re [1994] ATPR 41-357 .................................................................................. [23.430] Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) [1981] HCA 59 ................................................................................................. [8.950], [8.1010], [8.1020] Shadwell v Shadwell (1860) 142 ER 62 .......................................................................................... [6.1140] Shahid v the Australasian College of Dermatologists [2007] FCA 693 .................................... [19.310] Sharman v Kunert (1985) 1 NSWLR 225 ....................................................................................... [20.550] Sharp v Parramatta City Council [2015] NSWCA 260 .................................................................. [8.520] Sheddon v Goodrich (1803) 8 Ves Jr 481 ......................................................................................... [8.470] Shelanu Inc v Print Three Franchising Corporation (2003) 64 OR (3d) 533 .............................. [7.550] Shell Co of Australia Ltd v Esso Standard Oil (Aust) Ltd (1963) 109 CLR 407 ....................... [24.540] Shogun Finance Ltd v Hudson [2004] 1 AC 919 .......................................................................... [6.1730] Short v The City Bank (1912) 12 SR (NSW) 186 ........................................................................... [8.1470] Shostakovich v Twentieth Century Fox Film Corp (1948) 80 NYS 2d 575 ............................... [24.860] Siddons Pty Ltd v The Stanley Works Pty Ltd [1991] FCA 116; [1991] FCA 138 .............................................................................................. [19.390], [19.540], [19.720] Sim v Stretch (1936) 52 TLR 669 ..................................................................................................... [8.1330] Singtel Optus Pty Ltd v ACCC [2012] FCAFC 20 ........................................................................ [18.650] Singtel Optus Pty Ltd v Optus Inc [2018] FCA 575 ..................................................................... [24.470] Slater v May (1704) 2 Ld Raym 1071 ............................................................................................... [1.940] Slatyer v The Daily Telegraph Newspaper Co Ltd [1908] HCA 22 ........................... [8.1330], [8.1340] Smith & Fawcett Ltd [1942] Ch 304 ............................................................................................... [12.170] Smith v Anderson (1880) 15 Ch D 247 ............................................................................................ [11.80] Smith v Commercial Banking Co of Sydney Ltd [1910] HCA 72 .............................................. [7.1460] Smith v Hughes (1871) LR 6 QB 597 .............................................................................................. [6.1540] Snow v Eaton Centre Ltd (1982) 70 CPD (2d) 105 ....................................................................... [24.880] Solle v Butcher [1950] 1 KB 671 ....................................................................... [6.1540], [6.1820], [6.1830] Sony v Stevens [2002] FCA 906 .................................................................................................... [24.1050] South Australia v Tanner [1989] HCA 3 .......................................................................................... [4.210] South Australia v The Commonwealth [1942] HCA 14 ................................................... [1.870], [1.950] South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611 .................................................................................................................................... [1.160] Southern Properties (WA) Pty Ltd v Executive Director of the Department of Conservation and Land Management [2012] WASCA 79 ..................................................... [8.1490] Spalding v Gamage (1916) 32 RPC 273 ......................................................................................... [8.1220] Spedding v Nobles [2007] NSWCA 29 ............................................................................................ [8.390] Spedley Securities Pty Ltd v Bank of New Zealand [1991] ATPR 41-143 .............................. [19.1210] Spencer v Harding (1870) LR 5CP 561 ............................................................................................ [6.300] St Clair v Petricevic [1988] ASC 55-688 ......................................................................................... [20.570] St John Shipping Corporation Ltd v Joseph Rank Ltd [1957] 1 QB 267 .................... [6.1430], [6.1490] Standard Oil Company of California v United States 337 US 293 (1949) .............................. [23.1290] State Energy Commission of Western Australia v Fluor Australia Pty Ltd [1987] FCA 99 ............................................................................................................................... [19.140] State Government Insurance Commission v JM Insurance Pty Ltd [1984] FCA 127 ............. [19.170] State Government Insurance Commission v Trigwell [1979] HCA 40 ............................ [2.370], [3.40] State of South Australia v Clark (1996) 66 SASR 199 .................................................................. [12.160] StatusCard Australia Pty Ltd v Rotondo [2008] QSC 181 ....................... [24.920], [24.1070], [24.1080] Stekel v Elice [1973] 1 All ER 465 ..................................................................................................... [11.70]
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xxxiii
Business and the Law
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Stephens v West Australian Newspapers Ltd [1994] HCA 45 .................................... [8.1430], [8.1440] Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1 .......................... [13.400], [13.410], [13.420] Stevenson Jacques & Co v McLean (1880) 5 QBD 346 ..................................................... [6.500], [6.540] Stevenson Jordan & Harrison Ltd v Macdonald & Evans [1952] 1 TLR 101 ........................... [13.450] Stickney v Kibble [1915] AC 386 ...................................................................................................... [7.410] Stilk v Myrick (1809) 170 ER 1168 ................................................................................... [6.1110], [6.1130] Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 38 ......................... [23.350] Stockdale v Hansard (1839) 112 ER 1112 .............................................................. [3.210], [3.220], [3.230] Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607 ............................................................................................................................. [7.1060] Stone & Wood Group Pty Ltd v Intellectual Property Development Corporation Pty Ltd [2018] FCAFC 29 ............................................................................................................ [19.980] Strickland v Rocla Concrete Pipes Ltd [1971] HCA 40 .................................................. [1.990], [23.110] Strong v Woolworths Ltd [2012] HCA 5 ......................................................................................... [8.780] Stuart Alexander & Co (Interstate) Pty Ltd v Blenders Pty Ltd (1981) 53 FLR 307 ................ [19.840] Suisse Atlantique Société d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] AC 361 ................................................................................................ [6.2320], [6.2450] Sullivan v Moody [2001] HCA 59 ......................................................................... [8.260], [8.280], [8.360] Summers v Solomon (1857) 119 ER 1474 ...................................................................................... [13.190] Suncorp-Metway Ltd v Bellairs [2009] NSWSC 135 ................................................................... [20.520] Surge Licensing Inc v Pearson [1991] FCA 274 ............................................................................ [19.540] Sutherland Shire Council v Heyman [1985] HCA 41 ....................................................... [8.280], [8.950] Sutton’s Hospital Case (1612) 10 Co Rep 23a ................................................................ [12.40], [19.1160] Sydney Corporation v West [1965] HCA 68 ................................................................................. [6.2500] Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd [2002] FCAFC 157 ............ [19.1020] T Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136 .............................................................. [19.100], [19.330], [19.370], [19.420], [19.500], [19.590], [19.600], [19.960], [19.980] Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd [1957] HCA 10 ................................................................................................................................ [7.280] Tamawood Ltd v Henley Arch Pty Ltd [2004] FCAFC 78 .......................................................... [24.890] Tame v NSW [2002] HCA 35 .................................................................... [8.260], [8.420], [8.430], [8.940] Tame v NSW; Annetts v Australian Stations Pty Ltd [2002] HCA 35 ......................................... [8.430] Taprobane Tours WA v Singapore Airlines Ltd [1990] FCA 404 ................................................ [23.290] Targetts Pty Ltd v Target Australia Pty Ltd [1993] FCA 191 ...................................................... [19.980] Taylor Bros Ltd v Taylor Group Ltd [1988] 2 NZLR 1 ................................................................ [19.360] Taylor v Caldwell (1863) 122 ER 309 .............................................................................. [6.2750], [6.2760] Taylor v Combined Buyers Ltd [1924] NZLR 627 ....................................................................... [22.440] Taylor v Johnson [1983] HCA 5; 57 ALJR 197 ................................................. [6.180], [6.1650], [6.1750] Telstra Corporation Limited v Phone Directories Company Pty Ltd [2010] FCA 44 ............. [24.940] Telstra Corporation Ltd v SingTel Optus Pty Ltd [2007] FCA 824 ............................................ [19.820] Telstra Corporation Ltd v Treloar [2000] FCA 1170 ......................................................................... [2.70] Telstra Corporation v Optus Communications Pty Ltd [1996] FCA 1035 ................................ [19.700] Tenax Steamship Co Ltd v Owners of the Motor Vessel “Brimnes” [1974] 3 All ER 88 ........... [7.750] 10th Cantanae Pty Ltd v Shoshana Pty Ltd [1987] FCA 421 ........................................................ [7.210] Tepko Pty Ltd v Water Board [2001] HCA 19 ............................................................................... [8.1050] xxxiv
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
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Table of Cases
Territory Sheet Metal Pty Ltd & Ors v ANZ Group Ltd [2009] NTSC 31 .................................. [7.550] Tesco Supermarkets Ltd v Nattrass [1971] UK HL 1; [1972] AC 153 ......................... [10.480], [12.120] Theophanous v Herald & Weekly Times Ltd [1994] HCA 46 ....................... [1.640], [8.1430], [8.1440] Thomas v Beck (1983) ANZ Conv R 200 ......................................................................................... [9.380] Thomas v Mowbray is (2002) 233 CLR 307 .................................................................................... [2.460] Thompson v Mastertouch TV Services Pty Ltd [1977] ATPR 40-027 ...................................... [19.1120] Thorby v Goldberg [1964] HCA 41 .................................................................................................... [7.50] Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 ...................... [6.320], [6.2390], [6.2410], [6.2430] Thorp v CA Imports Pty Ltd [1989] FCA 515 ............................................................................... [18.610] Tiger Nominees Pty Ltd v State Pollution Control Commission (1992) 25 NSWLR 715 ............................................................................................................................. [10.480] Tillmanns Butcheries Pty Ltd v AMIEU [1979] FCA 85 ............................................................ [23.1100] TNT Ltd v May and Baker Ltd [1966] HCA 46 ............................................................................ [6.2500] Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc [1992] FCA 630; [1993] FCA 83 ................................................... [19.150], [19.490] Tobacco Institute of Australia Ltd v Woodward (1993) 32 NSWLR 559 .................................. [19.270] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 ...................................................................................................... [6.1990], [6.2370], [7.60], [7.790], [20.400] Tooth & Co Ltd, Re; Re: Tooheys Ltd [1979] ATPR 40-113 ........................................ [23.280], [23.1280] Top Performance Motors Pty Ltd v Ira Berk (Queensland) Pty Ltd [1975] ATPR 40-004 ...................................................................................................... [23.240], [23.810] Torkington v Magee [1902] 2 KB 427 ............................................................................................... [9.610] TPC v Allied Mills Industries Pty Ltd [1980] FCA 108; [1981] FCA 11 ...................... [23.850], [23.880] TPC v Ansett Transport Industries (Operations) Pty Ltd [1978] FCA 21 ................................. [23.380] TPC v Arnott’s Ltd [1990] FCA 15 ................................................................................................. [23.290] TPC v Australia Meat Holdings Pty Ltd [1988] ATPR 40-876 ................................................... [23.200] TPC v Australia Meat Holdings Pty Ltd [1988] FCA 338 ........................................................... [23.290] TPC v Calderton Corporation Pty Ltd [1994] ATPR 41-306 ....................................................... [21.460] TPC v Carlton United Breweries Ltd [1990] FCA 248 ............................................................... [23.1730] TPC v CSR Ltd [1990] FCA 521 ...................................................................................................... [23.730] TPC v Cue Design Pty Ltd [1996] FCA 1343 ................................................................................ [21.610] TPC v David Jones (Australia) Pty Ltd [1986] FCA 19 ............................................................... [23.870] TPC v Dunlop Australia Ltd [1980] FCA 76 ............................................................................... [23.1450] TPC v Email Ltd [1980] FCA 86 ...................................................................................... [23.810], [23.880] TPC v General Corporation of Japan (Aust) Pty Ltd [1988] FCA 390 ...................................................................... [23.1430], [23.1500], [23.1540], [23.1550] TPC v Legion Cabs (Trading) Cooperative Society Ltd [1978] FCA 47 ............................................................................................................................. [23.1370] TPC v Massey Ferguson (Aust) Ltd [1983] FCA 124 ................................................................. [23.1270] TPC v Nicholas Enterprises Pty Ltd [1979] FCA 51 ..................................................... [23.810], [23.940] TPC v Orlane Australia Pty Ltd [1984] FCA 3 ........................................................................... [23.1590] TPC v Parkfield Operations Pty Ltd [1985] FCA 27 .................................................................... [23.940] TPC v Prestige Motors Pty Ltd [1994] FCA 495 ......................................................................... [23.1490] TPC v Pye Industry Sales Ltd [1978] ATPR 45-088 ................................................................... [23.1480] TPC v Service Station Association Ltd [1993] FCA 405 ............................................... [23.810], [23.960] TPC v Sharp Corp of Australia [1975] ATPR 40-010 ................................................................. [23.1480] TPC v Simpson Pope Ltd [1980] FCA 83 .................................................................................... [23.1480] TPC v Simsmetal Ltd [1996] ATPR 41-449 .................................................................................. [23.1000]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
xxxv
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Business and the Law
TPC v Sony (Australia) Ltd [1990] FCA 360 ............................................................................... [23.1550] TPC v Stihl Chain Saws (Aust) Pty Ltd [1978] ATPR 40-091 ................................................... [23.1420] TPC v TNT Australia Pty Ltd [1995] ATPR 41-375 .................................................................... [23.1000] TPC v TNT Australia Pty Ltd [1995] FCA 1046 ........................................................................... [23.910] Trade-Mark “Alpine,” Re (1885) 29 Ch D 877 ............................................................... [24.470], [24.510] Trade Practices Commission v Prestige Motors Pty Ltd [1994] FCA 1495 ................................. [25.90] Trade Practices Commission v TNT Australia Pty Ltd [1995] FCA 1046 .................... [25.90], [25.100] Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 ............................................................... [6.2830], [6.2850], [6.2860], [6.3040] Transport Workers’ Union of Australia v Leon Laidley Pty Ltd [1980] ATPR 40-149 ................................................................................................................... [23.1120] Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1985) 165 CLR 107 ................................................................................................................... [6.2580], [7.1200] Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44 ................................................................................................... [2.60], [6.2580], [6.2600] Tru Tone Ltd v Festival Records Retail Marketing Ltd [1988] 2 NZLR 352 ......................................................................................................................... [23.40] Tulk v Moxhay 1848 2 Phil 774 ......................................................................................................... [9.460] Turner Kempson & Co Pty Ltd v Camm [1922] VLR 498 ............................................................. [6.490] Turner v Moreland Finance Corp (Vic) Pty Ltd (1990) ASC 56-006 ............................................ [3.320] Turriff Construction Ltd and Turriff Ltd v Regalia Knitting Mills Ltd (1971) 9 BLR 24 .......................................................................................................................................... [7.300] Tweddle v Atkinson [1861] 121 ER 762 .......................................................................... [6.2570], [7.1200] Twentieth Century Fox Film Group v The South Australian Brewing Co Ltd [1996] FCA 1484 ............................................................................................................ [19.940], [19.970] Two Pesos, Inc v Taco Cabana, Inc 505 US 763 (1992) ................................................................. [24.470] U Ultramares Corp v Touche 174 NE 441 (1932) ............................................................................... [8.940] Ultzyen v Nichols [1891] All ER Rep 1202 ..................................................................................... [9.930] Unilan Holdings Pty Ltd v Kerin [1992] ATPR 41-169 ............................................................... [19.250] Union Carbide Australia Ltd v Duracell Australia Pty Ltd [1987] ATPR (Digest) 46-020 ............................................................................................................................. [19.680] Unisys Australia Ltd v RACV Insurance Pty Ltd [2004] VSCA 81 .......................................... [19.1110] United Dominions Corp Ltd v Brian Pty Ltd [1985] HCA 49 ...................................................... [11.80] United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177 ........................................................................................................................ [7.340] United States v Aluminum Co of America, 148F 2d 416 (1945) ............................. [23.1740], [23.1800] United States v Arnold Schwinn 388 US 365 (1987) .................................................................... [14.100] United States v Socony-Vacuum Oil Co, 310 US 150 (1940) ....................................................... [23.520] United States v Trenton Potteries Co 273 US 392 (1927) ............................................................. [23.960] Universal Music Australia Pty Ltd v TPG Internet Pty Ltd [2017] FCA 435 ......................... [24.1020] Universal Music Australia v ACCC [2003] FCAFC 193 ........................................... [23.1680], [23.1720] University of London Press Ltd v University Tutorial Press Ltd [1916] 2 Ch 601 ........................................................................................................................... [24.1030] Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8 .................................................................................................................................... [7.40] Utans v Consolidated Insurances of Australia Ltd (unreported, Supreme Court of South Australia (Full Court), 17 February 1988) ..................................................................... [10.170] xxxvi
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Table of Cases
V Vabu Pty Limited v Federal Commissioner of Taxation (1996) 33 ATR 537 ......................................................................................... [13.410], [13.420], [13.430] Vairy v Wyong Shire Council [2005] HCA 62 ................................................................................ [8.660] Van den Esschert v Chappell [1960] WAR 114 ............................................................................. [6.2080] Vander Wool v Goddenough [1983] Conv R 55-115 .................................................................... [19.310] Vandervell’s Trust (No 2), Re [1974] 1 Ch 269 ................................................................................ [2.270] Veen (No 2) v The Queen [1988] HCA 14 ..................................................................................... [10.360] Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 ......................... [6.2920] Victoria Park Racing and Recreation Grounds Co Ltd v Taylor (1937) 58 CLR 479; [1937] HCA 45 ................................................................................................................. [15.50], [24.890] Vines v ASIC [2007] NSWCA 75 ..................................................................................... [12.160], [12.190] Vital Finance Corporation Pty Ltd v Taylor [1991] ASC 56-099 .................................................. [20.90] Voli v Inglewood Shire Council [1963] HCA 15 ............................................................................. [8.720]
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W Wakeling v Ripley (1951) 51 SR (NSW) 183 .................................................................................... [6.890] Wakim, Re; Ex parte McNally (1999) 163 ALR 270 .......................................................... [1.680], [2.410] Walford v Miles [1992] 2 WLR 174 .................................................................................................. [7.320] Walker v New South Wales [1994] HCA 64 .................................................................................... [1.110] Walton Stores Ltd v Sydney City Council [1968] 88 WN (Pt 2) (NSW) 153 ............................... [9.920] Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7 .............................................................. [6.1250] Warlow v Harrison (1859) 120 ER 925 ............................................................................................. [6.290] Warner-Lambert Company LLC v Apotex Pty Ltd [2014] FCAFC 59 ...................................... [18.690] Warnock v ANZ Banking Group Ltd [1989] ATPR 40-928 ......................................................... [22.490] Waters v Transport for NSW [2018] NSWCATAD 40 ................................................................. [15.320] Waterside Workers’ Federation of Australia v JW Alexander Ltd (1918) 25 CLR 434 ............. [1.700] Watson v Lee [1979] HCA 53) ............................................................................................................. [1.80] Watt v State Bank of New South Wales [2003] ACTCA 7 ............................................................. [7.980] Weiss v The Queen (2005) 224 CLR 300 ........................................................................................ [20.180] Weitmann v Katies Ltd [1977] ATPR 40-041 .................................................. [19.320], [19.330], [19.520] Weller & Co v Foot & Mouth Disease Research Institute [1966] 1 QB 569 ................................ [8.230] Wertheim v Chicoutimi Pulp Co [1911] AC 301 .......................................................................... [6.2820] West v AGC (Advances) Ltd (1986) 5 NSWLR 610 ..................................................................... [20.550] West v Mead [2003] NSWSC 161 ...................................................................................................... [9.230] Western Australian Bank v Royal Insurance Co [1908] HCA 11 ............................................... [7.1150] Westpac Banking Corporation v Royal Tongan Airlines [1996] NSWSC 409 ............................ [9.960] White v Bluett (1853) 23 LJ Ex 36 ................................................................................................... [6.1040] White v John Warwick & Co Ltd [1953] 1 WLR 1285 .................................................................. [6.2490] White v Malco [1999] NSWSC 1055 ................................................................................................. [22.90] Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11 .................................................................. [12.180] Whitlock v Brew (1968) 118 CLR 445 .............................................................................................. [6.790] Whittaker v Child Support Registrar [2009] FCA 188 ................................................................ [8.1480] Whittet v State Bank of NSW (1991) 24 NSWLR 146 .................................................................. [6.2550] Whitworth Street Estates Limited v Miller (1970) AC 583 ........................................................... [7.420] Wickman Ltd v Schuler AG [1974] AC 276 .................................................................................. [6.2870] Wigan v Edwards (1973) 47 ALJR 586 ........................................................................................... [6.1100]
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xxxvii
Business and the Law
Wik Peoples v State of Queensland [1996] HCA 40 ...................................................................... [1.320] Williams v Commonwealth of Australia [2014] HCA 23 .................... [1.730], [1.740], [1.870], [1.880] Williams v Frayne (1937) 58 CLR 710 .............................................................................................. [7.960] Williams v Raffey Bros & Nicholls (Contractors) Ltd [1999] 1 QB 1 ......................................... [6.1100] Wilmers and Gladwin Pty Ltd v WAL Building Supplies Pty Ltd [1955] SR (NSW) 442 ................................................................................................................................. [9.990] Wilson v Ferguson [2015] WASC 15 .............................................................................................. [15.110] Wingecarribee Shire Council v Lehman Brothers Australia Ltd [2012] FCA 1028 .......................................................................................................................... [18.170], [19.40] Wishart v Fraser [1941] HCA 8 ......................................................................................................... [1.870] Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16 .................................................................................................. [2.160], [8.950], [8.1150], [8.1180], [8.1200], [8.1210] Woolmington v DPP [1935] AC 462 ................................................................................ [10.160], [10.190] Woolworths Limited v BP Plc [2006] FCAFC 132 ......................................................... [20.370], [24.390] Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 ....................................................................................................................... [7.190], [14.390] Wyong Shire Council v Shirt [1980] HCA 12 ................................................................................. [8.650] X X v Amalgamated Television Services Pty Ltd (1987) 9 NSWLR 575 .......................... [2.160], [6.1190]
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Y Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd [1978] HCA 42 ............................... [6.1400] Yanmar Diesel Engine Co Ltd v Kama Diesel Australia Pty Ltd [2002] FCA 1330 ................. [24.720] Yeoman Credit Ltd v Latter [1961] 1 WLR 828 .............................................................................. [7.930] Yerkey v Jones [1939] HCA 3 .......................................................................................................... [7.1000] Yewens v Noakes (1880) 6 QBD 530 .............................................................................................. [13.370] Yonge v Toynbee [1910] 1 KB 215 .................................................................................................. [13.330] Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 .................... [18.360], [19.90], [19.1170], [19.1190], [19.1240], [23.740] Yulema Pty Ltd v Simmons [2015] NSWSC 640 ............................................................................ [7.430] Z Zaravinos v Dairy Farmers [1985] FCA 77 ................................................................................... [22.850] Zaravinos v Dairy Farmers Cooperative Ltd [1985] ATPR 40-559 .............................................. [22.20] Zuijs v Wirth Brothers Pty Ltd [1955] HCA 73 ............................................................. [13.380], [13.450]
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Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:20.
TABLE OF STATUTES COMMONWEALTH Acts Interpretation Act 1901: [3.320], [4.260] s 15AA: [3.330] s 15AA(1): [3.320] s 15AA(2): [3.340] s 15AB(2): [3.350] s 15AC: [22.230] Administrative Appeals Tribunal Act 1975: [4.330] Administrative Decisions (Judicial Review) Act 1977: [4.370] s 5(1): [4.380], [4.390] s 16: [4.380] s 84P(e): [4.400] Anti-Money Laundering and Counter- Terrorism Financing Act 2006: [15.350]
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Australia Act 1986: [1.370], [1.400], [1.1170] Australian Consumer Law: [3.60], [3.250], [5.430], [6.20], [6.120], [6.280], [7.520], [7.530], [8.510], [9.840], [10.450], [14.300], [18.170], [18.200], [18.210], [18.220], [18.280], [18.290], [18.300], [18.340], [18.350], [18.360], [18.370], [18.390], [18.430], [18.440], [18.450], [18.460], [18.490], [18.500], [18.540], [18.580], [18.590], [18.600], [18.620], [18.630], [18.650], [18.660], [18.680], [18.690], [18.700], [18.710], [18.720], [18.750], [18.770], [18.780], [19.160], [20.10], [20.500], [20.600], [21.10], [21.20], [21.150], [21.170], [21.180], [21.270], [21.310], [21.320], [21.340], [21.400], [21.430], [21.510], [21.670], [22.30], [24.530], [25.140] s 2: [18.290], [18.360], [22.50], [22.140], [22.160], [22.470], [22.480], [22.670] s 2(2): [19.210] s 2A: [19.190] s 3: [18.200], [18.700], [21.20], [22.60] s 3(1): [22.60] s 3(1)(a): [22.60] s 3(1)(b): [22.60] s 3(2): [22.60] s 3(3): [22.60] s 3(10): [22.60], [22.90] s 4: [18.730], [19.120], [19.190], [19.1090], [19.1130], [19.1140], [19.1150] s 4B(3): [22.90] s 6: [24.380]
s 7: [22.680] s 7(1): [22.140] s 8: [19.990], [24.1590] s 9: [22.710] s 9(2): [22.710] s 9(3): [22.710] s 10: [24.550] s 14(1): [22.440] s 17: [24.380] s 18: [2.410], [3.450], [5.430], [6.20], [6.1290], [6.2160], [7.170], [7.200], [7.210], [7.230], [7.240], [7.260], [7.320], [7.650], [7.660], [8.1070], [8.1250], [18.100], [18.200], [18.770], [19.10], [19.20], [19.30], [19.40], [19.50], [19.60], [19.70], [19.80], [19.90], [19.100], [19.110], [19.120], [19.130], [19.140], [19.150], [19.160], [19.170], [19.180], [19.210], [19.220], [19.290], [19.300], [19.330], [19.360], [19.370], [19.390], [19.410], [19.430], [19.440], [19.450], [19.460], [19.490], [19.590], [19.770], [19.930], [19.960], [19.970], [19.980], [19.990], [19.1060], [19.1070], [19.1080], [19.1090], [19.1100], [19.1110], [19.1120], [19.1140], [19.1170], [19.1210], [19.1240], [19.1260], [21.40], [21.60], [21.140], [21.170], [21.190], [21.210], [21.250], [22.520], [22.530], [22.620], [24.20], [24.180], [24.270], [24.510], [24.660], [24.670] s 18(1): [19.10], [19.310], [19.490] s 18(2): [19.50], [19.310] s 19: [19.130], [19.290] s 19(1): [22.620] s 19(2): [22.620] s 20: [20.110], [20.120], [20.320], [20.330], [22.620] s 20(2): [20.110], [20.320] s 21: [5.430], [6.20], [6.1960], [6.2330], [6.2520], [18.100], [20.110], [20.120], [20.150], [20.170], [20.200], [20.290], [20.300], [20.320], [20.330], [20.370] s 21(1): [20.370] s 21(2): [20.170] s 21(3): [20.170] s 21(4): [20.170] s 22: [20.150], [20.170], [20.180] s 27: [20.440] s 27(1): [20.440]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
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Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Business and the Law
Australian Consumer Law — cont s 29: [7.670], [21.20], [21.40], [21.70], [21.140], [21.210], [21.590], [24.670] s 29(1): [18.770], [21.220], [24.670] s 29(1)(a): [18.770], [21.170], [21.190] s 29(1)(a)(k): [21.250] s 29(1)(g): [7.670] s 29(1)(i): [6.280] s 29(1)(k): [18.770] s 29(1)(m): [22.520], [22.530] s 30: [21.40], [21.80], [21.140] s 31: [21.40], [21.90], [21.140] s 32: [21.450], [21.460] s 33: [21.40], [21.100], [21.140], [21.170], [21.190] s 34: [21.40], [21.110], [21.140] s 35: [6.280], [21.120], [21.240] s 35(1): [21.240] s 35(2): [21.240] s 36: [21.440] s 37: [21.40], [21.120], [21.140] s 39: [21.490] s 40: [18.290], [21.490], [24.420] s 41: [21.490] s 41(2): [24.420] s 42: [24.420] s 43: [21.490], [24.420] s 44: [7.680], [21.470], [24.420] s 45(1): [21.470] s 45(4): [21.480] s 46: [21.470], [21.480] s 47: [6.280], [21.560] s 48: [21.570], [21.580] s 49: [21.390] s 50: [21.410] s 51: [9.740], [9.840], [22.150], [22.170], [22.190], [22.220] s 51A: [19.1130] s 52: [9.840], [22.150], [22.200], [22.220] s 53: [9.840], [22.150], [22.220] s 54: [9.840], [22.150], [22.230], [22.280], [22.410], [22.440], [22.470], [22.520], [22.550], [22.620] s 54(2): [22.260], [22.450] s 54(3): [22.260], [22.430] s 54(4)(5): [22.310] s 54(6): [22.310] s 54(7): [22.310] s 55: [22.150], [22.300], [22.360], [22.390], 22.410, [22.430], [22.440], [22.500], [22.520], [22.550], [22.620] s 55(2)(b): [22.360] s 56: [22.130], [22.150], [22.440], [22.620] xl
s 57: [22.150], [22.450], [22.620] s 57(3): [22.450] s 58: [21.440], [22.150], [22.460] s 58(2): [22.460] s 59: [22.150], [22.470] s 60: [8.510], [22.150], [22.490], [22.520], [22.620] s 61: [8.510], [22.150], [22.500], [22.620] s 62: [22.150], [22.510] s 64: [6.1440], [6.2520], [22.490], [22.520] s 64A: [22.520], [22.620] s 66(2): [22.240] s 74A(3): [22.700] s 74A(4): [22.700] s 75AC: [22.720] s 75AC(2): [22.720] s 76: [18.290] s 85: [21.20] s 87B: [18.460], [22.520], [22.530] s 96(1): [21.500] s 96(2): [21.500] s 96(3): [21.500] s 97: [21.500], [21.550] s 98: [21.500] s 99: [21.500], [21.550] s 100(1): [21.550] s 101: [21.550] s 102(3): [22.470] s 103: [22.460] s 104: [22.770], [22.790] s 105: [22.790] s 106: [22.770] s 109: [22.790] s 114: [22.780], [22.790] s 120(1): [24.550] s 120(2): [24.550] s 120(3): [24.550] s 122: [22.770], [22.780], [22.800] s 122(1): [24.560] s 123: [22.800] s 128: [22.770], [22.800] s 129: [22.770], [22.820] s 131: [22.770] s 131A: [19.30], [19.40] s 132: [22.800], [22.810] s 134: [21.270] s 135: [22.770] s 138: [22.670], [22.730] s 139: [22.670], [22.730] s 140: [22.670], [22.730] s 141: [22.670], [22.730] s 142: [22.740] s 143: [22.750]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Table of Statutes
Australian Consumer Law — cont s 144: [22.750] s 147: [22.750] s 148: [22.740] s 149: [22.750] s 150: [22.760] s 151: [6.280], [18.770] ss 151-160: [18.620] s 151(1)(a): [18.770] s 151(1)(k): [18.770] s 151(1)(m): [22.520] s 155: [18.500] s 157: [6.280] s 157(4): [21.240] ss 161-163: [18.620] s 162: [18.290], [24.410] s 164: [18.620] s 165: [6.280] s 166: [18.620] ss 167-168: [18.620] s 169: [18.620], [24.410] ss 170-187: [18.620] s 185: [24.410] ss 188-191: [18.620] ss 192-193: [18.620] ss 194-195: [18.620] ss 197-198: [18.620] s 199: [18.620] ss 203-204: [18.620] s 205: [18.500], [18.620] s 206: [18.500], [18.620] s 207: [18.610], [21.20], [21.130] s 208: [18.610], [21.130] s 209: [18.610], [21.130] ss 210-211: [18.610] s 214: [21.20] s 217: [20.150] s 218: [18.460], [18.480] s 218(4): [18.480] s 219: [18.460], [18.500], [21.310] ss 219-222: [18.500] s 219(1): [18.500] s 219(2): [18.500] s 221: [18.500], [21.310] s 223: [18.520] s 224: [18.540], [18.550], [18.620], [18.630], [20.150], [21.170] ss 224-230: [18.630] s 224(2): [18.640] s 225: [18.630] s 229: [18.640] s 232: [18.370], [19.140], [19.150], [20.150] ss 232-235: [18.670]
s 232(1): [18.670], [18.690] s 232(2): [18.680] s 232(4): [18.690] s 232(5): [18.690] s 232(6): [18.690] s 232(7): [18.690] s 233: [18.690] s 234: [18.690] s 236: [7.210], [18.370], [18.700], [18.710], [19.140], [19.150], [20.150] s 236(1): [18.700] s 236(2): [18.700] s 237: [18.710] s 237(1)(b): [18.710] s 239: [18.710] s 243: [18.720], [19.140], [19.150] s 246: [18.730], [18.740] s 246(1): [18.730] s 246(2): [18.730] s 247: [18.740] s 247(1): [18.740] s 247(2): [18.740] s 248: [18.750] s 248(2): [18.750] s 248(3): [18.750] s 255: [21.270] s 255(3): [21.280] s 256: [21.280] s 257: [21.280] s 259(1): [22.570] s 259(2): [22.570] s 259(3): [22.570] s 259(4-6): [22.570] s 259(7): [22.570] s 260: [18.780], [22.560], [22.570] s 261: [22.570] s 262: [22.570] s 263(1): [22.570] s 263(3): [22.570] s 263(4): [22.570] s 264: [22.570] s 265: [22.570] s 266: [22.560], [22.570] s 267(1): [22.580] s 267(2): [22.580] s 267(3): [22.580] s 267(4): [22.580] s 269: [22.580] s 271: [22.140], [22.150], [22.590] s 271(1): [22.590] s 271(2): [22.590] s 271(3): [22.590, [22.590] s 271(5): [22.590]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
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Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Business and the Law
Australian Consumer Law — cont s 271(7): [22.590] s 272(1): [22.590] s 273: [22.590] s 274: [22.140], [22.360], [22.550], [22.590] s 276A: [22.550] s 276A(2): [22.550] Ch 1: [18.230] Ch 2: [6.1950], [18.240], [18.520], [18.580], [18.700], [18.730], [21.10] Ch 3: [18.250], [18.520], [18.580], [18.740], [21.10], [22.570] Ch 3, Pt 3-2, Div 1: [18.780], [22.570] Ch 3, Pt 3-2, Div 1B: [22.580] Ch 4: [18.260], [18.360], [18.520], [18.540], [18.580], [18.590], [18.600], [18.740] Ch 4, Pt 4-6: [18.610] Ch 5: [18.270], [18.360], [18.590] Ch 5, Pt 5-3: [18.770] Ch 5, Pt 5-4: [18.780] Ch 5, Pt 5-4, Div 1A: [22.570] Pt 2-1: [18.620] Pt 2-2: [18.620], [18.650], [18.740] Pt 2-3: [18.620], [20.390] Pt 2.3: [20.390] Pt 3-1: [18.620], [19.50], [21.10] Pt 3-1, Div 1: [18.620] Pt 3-1, Div 2: [18.620] Pt 3-1, Div 3: [18.620] Pt 3-1, Div 4: [18.620] Pt 3-1, Div 5: [18.620] Pt 3-2: [6.2280], [18.620], [21.10] Pt 3-2, Div 1: [18.620], [22.120] Pt 3-2, Div 1A: [22.120], [22.570] Pt 3-2, Div 1B: [22.120] Pt 3-2, Div 2: [18.620] Pt 3-2, Div 3: [18.620] Pt 3-2, Div 4: [18.620] Pt 3-3: [18.620], [21.10], [22.770], [22.780] Pt 3-3, Div 1: [18.620], [22.790] Pt 3-3, Div 2: [18.620] Pt 3-3, Div 3: [18.620], [22.800] Pt 3-3, Div 4: [22.820] Pt 3-4: [18.620], [21.10], [22.770], [22.780], [22.830] Pt 3-5: [18.620], [21.10], [22.660], [22.670], [22.710], [22.720], [22.730], [22.740], [22.750], [22.760] Pt 3.2, Div 2: [21.10] Pt 4-3: [22.840] Pt 5-1: [18.620] Pt 5-1, Div 1: [18.460] Pt 5-1, Div 2: [18.500], [18.620], [21.120] xlii
Pt 5-1, Div 3: [18.520] Pt 5-2: [18.540], [18.630], [18.670] Pt 5-2: [19.140] Pt 5-3: [21.120], [21.270] Pt 5-4: [22.560] Pt 5.3: [21.10] Pt VA: [22.660], [22.720] Div 1: [18.620], [18.630] Div 2: [18.620], [18.670], [21.490] Div 3: [18.620] Div 4: [18.620] Div 5: [18.620] Australian Grape and Wine Authority Act 2013: [24.670] Australian Human Rights Commission Act 1986 Sch 2: [15.170] Australian Industries Preservation Act 1906: [1.990], [23.110] Australian Information Commissioner Act 2010: [18.60] Australian Securities and Investments Commission Act 2001: [7.1160], [12.10], [18.130], [18.170], [18.290], [20.150], [20.390] s 12BAB: [18.170] s 12CB: [20.150] s 12CC: [20.150] s 12DA: [8.1070], [19.30] s 12DA(1): [19.40] s 12DC: [18.290] s 25: [20.450] Pt 2, Div 2 Subdiv BA: [20.390] Pt D Subdiv D: [21.10] Australian Small Business and Family Enterprise Ombudsman Act 2015: [5.50] Banking Act 1959: [6.1400] Bankruptcy Act 1966: [17.50], [17.150], [17.190], [17.540], 1387 s 40: [17.80] s 40(1)(g): [17.80] s 52(2): [17.140] s 52(2)(a): [17.140] s 109: [17.100] s 115: [17.160] s 116: [17.150] s 116(1)(a): [17.150]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
Table of Statutes
Bankruptcy Act — cont s 116(1)(b): [17.150] s 120: [17.170] s 120(3): [17.170] s 121: [17.180] s 122: [17.180] s 123: [17.170] s 126: [6.1360] s 128B: [17.150] s 128C: [17.150] s 133: [6.1360] s 149D: [17.200] s 152: [17.200] s 185C(2): [17.220] ss 187-232: [17.230] s 188: [17.220], [17.230] s 269: [6.1360] s 306: [17.80] Pt IX: [17.210], [17.540] Pt X: [6.1200], [17.210], [17.230], [17.540]
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Bankruptcy and Family Law Legislation Amendment Act 2005: [17.50] Bills of Exchange Act 1909: [6.1530], [7.1410], [7.1600] s 8: [7.1430], [16.290] s 13(2): [7.1440] s 57: [7.1590] s 89: [7.1580] s 90: [7.1590] s 92: [7.1590] s 93: [7.1590] s 94: [7.1590] s 95: [7.1570] Business Names Registration Act 2011: [11.20], [11.40], [11.70], [11.210], [11.320], [24.190] Cheques Act 1986: [7.1410], [7.1600], [7.1660], [7.1760] s 10: [7.1600] s 21: [7.1710] s 22: [7.1710] s 71: [7.1630] s 71s 71: [7.1630] s 71s 72: [7.1630] s 73: [7.1640] s 77: [7.1680] s 86: [7.1640] s 91: [7.1760] s 92: [7.1760]
s 93: [7.1760] s 94: [7.1760] s 94(1): [7.1760] s 94(2): [7.1760] Cheques and Payment Orders Act 1986: [6.1530], [6.2590] Circuit Layouts Act 1989: [24.20], [24.1390] Civil Liability Act 2002: [8.670] Commonwealth Constitution: [1.140], [1.380], [1.390], [1.430], [1.690] s 1: [1.630], [1.660], [3.80] s 3: [1.1310] s 4: [1.1310] s 5: [4.60] s 6: [1.380] s 9: [3.30] s 24: [3.90] s 32: [4.60] s 44: [3.80] s 44(i): [3.80] s 44(iv): [3.80] s 44(v): [3.80] s 51: [1.430], [1.830], [1.850], [1.860], [1.870], [1.890], [1.1180], [1.1230], [1.1250], [1.1300] s 51(ii): [1.1230] s 51(vi): [1.870], [1.1230] s 51(xiv): [7.1160] s 51(xvi): [7.1410] s 51(xviii): [24.20] s 51(xx): [1.980], [1.990], [1.1000], [1.1320], [18.120] s 51(xxi): [1.910] s 51(xxii): [2.320] s 51(xxiiiA): [1.880] s 51(xxix): [1.920] s 51(xxxv): [1.700] s 51(xxxvii): [1.1310], [2.320] s 51(xxxix): [1.870] s 52: [1.820] s 53: [3.120] s 57: [3.190], [3.210], [4.60] s 58: [3.200], [4.60] s 61: [1.540], [1.670], [1.740], [4.30], [4.40] s 62: [1.540], [1.670], [4.30], [4.40], [4.70] s 63: [4.40] s 64: [1.540], [4.40], [4.60] s 68: [1.540]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
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Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Business and the Law
Commonwealth Constitution — cont s 71: [1.550], [1.680], [1.700], [2.410], [2.420] s 72: [1.550], [4.60] s 73: [2.310] ss 73-78: [1.550] s 76: [2.310] s 77: [2.410] s 86: [1.1220] s 87: [1.1220] s 90: [1.560], [1.820] s 92: [1.560], [1.1000], [1.1010], [1.1020], [1.1040], [1.1050], [1.1060], [2.140] s 96: [1.880], [1.1220], [1.1270] s 106: [1.570] s 107: [1.570] s 108: [1.570] s 109: [1.370], [1.430], [1.570], [1.830], [1.890], [1.900] s 115: [1.570] s 116: [1.570] s 121: [1.580] s 122: [1.580], [1.820], [1.1310] s 123: [1.580] s 124: [1.580] s 128: [1.590], [1.1060] Ch 1: [1.530] Ch I: [1.530] Ch III: [1.550], [1.680], [5.70] Ch IV: [1.560] Ch V: [1.570] Ch VI: [1.580] Ch VIII: [1.590] Communist Party Dissolution Act 1950: [1.870] Competition and Consumer Act 2010: [1.980], [1.990], [1.1320], [2.410], [3.60], 6, [6.20], [6.1410], 7, [7.1030], [8.1470], [9.650], [10.30], [10.490], [10.520], [14.240], [14.330], [14.390], [18.60], [18.170], [18.180], [18.210], [18.290], [18.400], [18.410], [18.650], [20.500], [20.600], [21.670], [23.10], [23.20], [23.30], [23.40], [23.80], [23.90], [23.100], [23.140], [23.150], [23.170], [23.440], [23.470], [23.610], [23.670], [23.740], [23.760], [23.800], [23.890], [23.900], [23.970], [23.980], [23.1010], [23.1040], [23.1050], [23.1080], [23.1110], [23.1150], [23.1420], [23.1630], [23.1640], [23.1950], [23.2000], [23.2010], [25.80], [25.170] s 1: [3.60] s 2: [18.180], [23.10], [23.40] s 2A: [23.150] s 2B: [23.150] s 4: [23.310], [23.800] xliv
s 4(2): [19.1210] s 4B: [21.390] s 4E: [23.100] s 4F(b): [23.1230] s 4G: [23.310], [23.1720] s 4M: [7.1030] s 5: [23.100] s 33C(1)(c): [23.670] s 44B: [23.520] s 44H(4): [23.580] s 44N: [23.530] s 44X: [23.590] s 44ZZA: [23.570] s 44ZZA(3): [23.570] s 44ZZCA: [23.590] s 45: [23.790], [23.810], [23.1010], [23.1020], [23.1030], [23.1040], [23.1430], [23.1640] ss 45-45E: [23.40] s 45(1): [23.1010], [23.1020] s 45(1)(c): [23.800], [23.1040] s 45(2): [23.410], [23.1020] s 45(3): [23.1010] s 45A: [23.950], [23.1430] s 45AA: [23.770] s 45AD: [23.770], [23.940] s 45AD(3)(C): [23.980] s 45AD(6): [23.970] s 45AD(11): [23.970] s 45AN: [23.770] s 45AO: [23.770] s 45D: [23.1100], [23.1110], [23.1140] ss 45D-45EA: [23.1110] s 45DC: [23.1110] s 45DD: [23.1110] s 45E: [23.1120] s 46: [23.40], [23.70], [23.150], [23.230], [23.540], [23.1030], [23.1310], [23.1610], [23.1630], [23.1640], [23.1650], [23.1660], [23.1670], [23.1680], [23.1690], [23.1700], [23.1710], [23.1740], [23.1750], [23.1760], [23.1770], [23.1790] s 46(1): [23.1650], [23.1670] s 46(1AA): [23.1640] s 46(1AAA): [23.1640] s 46(1)(c): [23.1780] s 46(3): [23.1660], [23.1670] s 46(8): [23.1660] s 47: [23.40], [23.150], [23.1160], [23.1170], [23.1210], [23.1310], [23.1350], [23.1640] s 47(2): [23.1310] s 47(2)(a)-(c): [23.1250]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Table of Statutes
Competition and Consumer Act 2010 — cont s 47(2)(d): [23.1180], [23.1190], [23.1250], [23.1260], [23.1290] s 47(2)(f): [23.1180], [23.1190], [23.1330], [23.1350] s 47(3)(d): [23.1190], [23.1250], [23.1270] s 47(3)(f): [23.1190], [23.1330], [23.1350] s 47(4): [23.1180], [23.1190], [23.1350] s 47(5): [23.1190], [23.1350] s 47(6): [23.1180], [23.1190], [23.1360], [23.1410] s 47(6)(7): [23.1300] s 47(7): [23.1190], [23.1360] s 47(8): [23.1180], [23.1190] s 47(9): [23.1180], [23.1190], [23.1200] s 47(10): [23.1160], [23.1240], [23.1250], [23.1350] s 47(12): [23.1160] s 47(13)(a): [23.1210] s 48: [7.510], [23.40], [23.80], [23.970], [23.1430] s 50: [23.40], [23.380], [23.670], [23.680], [23.1030], [23.1640], [23.1880] s 50(1): [23.1880] s 50(3): [23.370], [23.1920] s 50(6): [23.1030], [23.1880] s 50A: [23.1950] s 50A(1): [23.1950] s 50IB: [23.1950] s 51: [23.90] s 51(2)(a): [23.1110], [23.1150] s 51(2)(b): [7.1030] s 51(2)(d): [7.1030] s 51(2)(e): [7.1030] s 51AD: [23.200] s 52(1)(a)(i): [3.60] s 75B: [18.360] s 76: [23.680], [23.700], [23.730], [23.740], [23.920] s 76(1): [23.700] s 76(1A): [23.710] s 77: [23.670] s 77A: [23.740], [23.770] s 78: [23.700] s 79: [23.680], [23.770] s 79B: [23.690] s 80: [23.670], [23.680] s 81: [23.670], [23.680], [23.1880] s 82: [23.670] s 83: [23.670] s 84: [10.490], [23.740] s 86: [23.650] s 86C: [10.520], [23.680], [23.770] s 86D: [10.520], [23.680]
s 86E: [23.680], [23.770] s 87: [23.670] s 87B: [18.460], [18.490], [23.680], [23.690] s 88: [23.1960] s 88(3): [23.440] s 90(7): [23.440] s 90(8): [23.440] s 90(9): [23.480] s 90(9A): [23.480] s 90A: [23.440] s 93(3): [23.450] s 93(3A): [23.450] s 93C3A: [23.450] s 95AA: [23.460], [23.1100] ss 96-100: [23.40], [23.1430] s 96(3): [23.1460] s 96(4): [23.1460] s 96A: [23.1460] s 97: [23.1560] s 98: [23.1520] s 98(2): [23.1580] s 98(3): [23.1580] s 99: [23.1460] s 100: [23.1540] s 134: [18.540] ss 134-134G: [18.540] s 134A: [18.540] s 134A(2): [18.540] s 134C: [18.540] s 134D(3): [18.540] s 134E: [18.540] s 137A(1): [22.740] s 137B: [7.230] s 139A: [8.200] s 139B: [8.470] s 155: [18.390], [23.680], [23.840] s 155(6A): [18.390] s 155(7): [18.390] s 159GZZZIA: [3.60] s 160: [3.60] s 160A: [3.60] s 161: [3.60] s 163A: [23.670], [23.680] s 218: [18.490] Pt II: [18.380], [23.620] Pt III: [23.630] Pt IIIA: 6, [23.520], [23.530], [23.540], [23.560], [23.590], [23.640] Pt IV: 6, [6.1380], [7.1030], [18.180], [23.40], [23.70], [23.80], [23.90], [23.100], [23.140], [23.220], [23.620], [23.650], [23.660], [23.680], [23.700], [23.710], [23.740], [23.1740], [23.1880]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
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Competition and Consumer Act 2010 — cont Pt IV, Div 1: [23.770] Pt IVB: [14.350], [20.600], [23.200] Pt IVC: [21.670] Pt VII: [23.430], [23.440], [23.620], [23.1250], [23.1350] Pt VIII: [23.970], [23.1430], [23.1460] Pt IX: [23.440] Pt XI: [18.210], [18.390] Pt XI, Div 5: [18.540] Pt XIB: 6 Pt XIC: 6 Div 1: [23.40], [23.80] Sch 2: [3.60], 7, [18.210], [19.40] Competition and Consumer Amendment (Competition Policy Reform) Act 2017: [23.170] Competition and Consumer Amendment (Misuse of Market Power) Act 2017: [23.170]
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Competition and Consumer Amendment (Industry Code Penalties) Bill 2014: [14.70] Competition and Consumer Law Regulations 2010 reg 90: [22.470] reg 91: [22.460] Competition Policy Reform Act 1995: [1.1320], [23.140], [23.620] Copyright Act 1968: [6.1530], [9.1030], [23.1680], [24.20], [24.70], [24.110], [24.120], [24.800], [24.820], [24.840], [24.940], [24.1010], [24.1050], [24.1060], [24.1130], [24.1160], [24.1390], [24.1550], Corporations Act 2001 s 14(1): [24.1040] s 31(1)(a)(c)(d): [24.810] s 31(1)(b): [24.810] s 40: [24.1160] s 41: [24.1160] s 41A: [24.1160] s 42: [24.1160] ss 54-64: [24.1550] s 74-77A: [24.770] s 85: [24.810] s 86: [24.810] s 87: [24.810] s 88: [24.810] s 103A: [24.1160] s 103A 103B: [24.1040] s 103AA: [24.1160] xlvi
s 103B: [24.1160] s 103C: [24.1160] s 108: [24.1550] s 109: [24.1550] s 115A: [24.1020] s 116A: [24.1050] ss 126-127: [12.100] s 133: [24.1550] ss 180-184: [12.150] ss 236-237: [12.200] Pt IX: [24.860] Copyright Amendment (Digital Agenda) Act 2000: [24.1050], [24.1060] Copyright Amendment (Moral Rights) Act 2000: [24.70] Corporate Law Economic Reform Program Act 1999: [12.190] Corporations Act 1989: [1.980] Corporations Act 2001: [1.980], [1.1310], [4.320], [6.1530], [7.1160], [9.1010], [9.1020], [9.1090], [10.30], [11.450], [12.10], [12.20], [12.80], [12.150], [12.160], [12.200], [17.190], [17.240], [17.310], [17.340], [17.380], [17.400], [17.410], [17.450], [17.490], [17.530], [23.1880], 1387 s 9: [12.150] s 45A: [12.70] s 45A(5): [12.70] s 111J: [12.70] s 112: [12.20] s 114: [11.10], [12.80] s 115: [11.60] s 118: [11.320] s 119A: [23.740] s 124: [11.310] s 136: [12.150] s 140: [12.20] s 141: [12.20] s 180: [12.160], [12.190] s 180(1): [12.170], [12.190] s 180(2): [12.190] s 181: [12.190] s 182: [12.190] s 183: [12.190] s 184(1): [12.190] s 184(2): [12.190] s 184(3): [12.190] s 185: [12.160], [12.190] s 188: [12.150] s 191: [12.160]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Table of Statutes
Corporations Act 2001 — cont s 197s 197: [11.270] s 198A: [11.320], [12.150] s 201A: [11.10], [12.80] s 203C: [12.150] s 203D: [12.150] s 204A: [12.150] s 204D: [12.150] s 206C: [12.200], [17.380] s 206EA: [18.750] s 206F: [17.370] s 232: [12.200] s 233: [17.330] s 254SA: [12.40] s 411: [17.470] s 420: [17.440] s 422: [17.440] s 435A: [17.500], [17.520] s 436A: [17.510] s 436B: [17.510] s 436C: [17.510] s 440A: [17.520] s 444D: [17.540] s 459C: [17.310] s 461: [12.200], [17.310], [17.330] s 461(1)(k): [17.330] s 462: [17.300] s 489EA: [17.300] s 491: [17.280] s 494: [17.280] s 495: [17.280] s 497: [17.290] s 541: [17.330] s 555: [17.400] s 556: [17.400] s 588(3): [17.380] s 588FE: [17.360] s 588FL: [9.1170] s 588G: [11.340], [12.160], [12.190], [17.380] s 588G(2): [12.100], [12.190], [12.200] s 588G(3): [12.200] s 588GA: [12.190], [17.390] s 588H: [12.190], [17.390] s 588M: [17.380] s 588R: [17.380] s 588V: [17.380] s 708: [12.70] s 1041H: [19.30] s 1041H(1): [19.40] s 1041I(1): [19.40] s 1043A: [12.160] s 1070A: [9.610], [9.1010] s 1071B(2): [9.1020]
s 1274AA: [18.750] s 1317E: [12.200], [17.380] s 1317G: [12.200] s 1317J: [12.200] s 1318: [12.180] s 1324: [12.200] Ch 2K: [9.710], [9.1090] Pt 1.5: [12.70] Pt 2D.1: [12.160] Pt 5.1: [17.290], [17.460] Pt 5.3A: [17.490], [17.530] Pt 8.8A: [17.400] Sch 3, Item 138: [12.200] Corporations Amendment (Crowd-sourced Funding) Act 2017: [12.10] Corporations Regulations 2001: [12.10] reg 2A.1.01: [11.60] Crimes Act 1914: [10.30], [18.390] s 4AA(1): [12.200] s 16A: [18.600] Criminal Code Act 1995: [10.30], [10.60], [10.570], [18.600] s 12.2: [18.600] s 12.3: [10.500] Pt 2.5: [12.120] Cross-Border Insolvency Act 2008: [17.250] Customs Act 1901 s 233B(1)(b): [10.240] s 233B(1)(c): [10.240] s 241: [10.480] Cybercrime Act 2001: [10.570] Designs Act 1906: [24.710], [24.740], [24.790] Designs Act 2003: [9.1030], [24.20], [24.710], [24.740], [24.760], [24.780] s 5: [24.730] s 7: [24.730] s 33: [24.760] s 41: [24.760] Disability Discrimination Act: [1.1160] Do Not Call Register Act 2006: [15.430] Electronic Transactions Act 1999: [6.720], [7.590] s 10(1)(a): [7.810] s 10(1)(b): [7.810] s 10(1)(c): [7.810] s 14(1): [7.700]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
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Business and the Law
Electronic Transactions Act 1999 — cont s 14(3): [7.740] s 14(4): [7.740] s 14A: [7.700] s 14B: [7.730] s 14B(2)-14B(4): [7.730] s 15B: [7.760] s 15D: [7.760] Fair Entitlements Guarantee Act 2012: [17.100], [17.400] Fair Work Act 2009: [13.490], [13.570], [23.1110] Fair Work Amendment (Protecting Vulnerable Workers) Act 2017: [13.480], [14.180] s 558B: [14.180] Family Law Act 1975: [2.320], [6.860], [17.50] Family Law Amendment (De Facto Financial Matters and Other Measures) Act 2008: [17.50] Federal Court of Australia Act 1976: [2.330], [5.80] s 40: [5.80]
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Federal Court of Australia Amendment Act 1991: [5.210], [23.670] Franchising Code of Conduct: [14.390] Freedom of Information Act 1982: [4.310] s 3: [4.310] Healthcare Identifiers Act 2010: [15.350] High Court Act 1979: [1.680] Human Rights and Equal Opportunity Commission Act 1986: [1.710] Income Tax Assessment Act 1936: [3.60], [3.310], [6.3180] Pt III, Div 6: [11.290]
s 14(3): [7.1230] s 16: [7.1210] ss 16-18: [7.1210] s 17: [7.1210] s 18: [7.1210] s 20: [7.1200], [7.1210] s 21: [7.1260] s 21(1)(b): [7.1260] s 21(2): [7.1280] s 21(2)(c): [7.1280] s 21(3): [7.1290], [7.1300] s 22: [7.1300] s 22(1): [7.1300] s 22(3): [7.1300] s 23: [7.1310] s 24: [7.1320] s 26: [7.1330] s 27: [7.1340] s 28: [7.1350] s 28(1): [7.1350] s 28(2): [7.1350] s 28(3): [7.1350] s 31: [7.1350] s 33: [7.1350] s 37: [7.1230] s 45: [7.1380] s 48: [6.2590] s 48(1): [7.1200] s 52: [7.1160], [7.1270] s 53: [7.1160], [7.1270] s 56: [7.1360] s 65: [7.1370] s 66: [7.1370] s 76: [7.1380] Div 2,Pt IV: [7.1270] Intellectual Property Laws Amendment (Productivity Commission Response Part 1 and Other Measures) Act 2018: [24.620]
Independent Contractors Act 2006: [13.570]
Intellectual Property Laws Amendment Regulations 2017: [24.1240]
Insolvency Law Reform Act 2016: [17.60], [17.540]
International Arbitration Act 1974: [5.300]
Insurance Act 1973: [7.1160] Insurance (Agents and Brokers) Act 1984: [7.1160] Insurance Contracts Act 1984: [7.1160], [18.290], [20.505] s 13ICA: [7.1230] s 14: [7.1230] xlviii
Judiciary Act 1903: [1.680] Legislative Instruments Act 2003: [4.270] s 3: [4.270] Life Insurance Act 1995: [7.1160] s 9: [7.1190] Marine Insurance Act 1909: [6.1530], [7.1160], [7.1170]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
Table of Statutes
Marriage Act 1961: [1.910], [10.80] s 111A: [6.1150] Marriage Amendment (Definition and Religious Freedoms) Act 2017: [1.910] National Consumer Credit Act 2009: [20.510] National Consumer Credit Protection Act 2009: [7.1725] National Credit Code s 76: [20.510] Native Title Act 1993: [1.320], [9.420] Ombudsman Act 1976: [4.300] s 15(1): [4.300]
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Patents Act 1990: [9.1030], [24.20], [24.1190], [24.1270], [24.1300], [24.1550] s 13(1): [24.1330] s 18(1): [24.1270] s 18(1)(a): [24.1300] s 18(2): [24.1290] Personal Property Securities Act 2009: [9.710], [9.1100], [9.1120], [15.350], [17.100], [17.400], [22.190] s 12: [9.1130] s 12(1): [9.800] s 12(2)(i): [9.1180] s 13: [9.1180] s 14: [9.1180] s 19: [9.1150] s 20: [9.1150] s 21: [9.1150] s 45: [9.800] s 55: [9.1170], [9.1210] s 55(2): [9.1170] s 55(3): [9.1170] s 55(4): [9.1170] s 55(5): [9.1170] s 57(1): [9.1170] s 57(3): [9.1170] s 153: [9.1170], [9.1180] s 166: [9.1180] s 267: [9.1170], [9.1180] Pt 2.6: [9.1170] Personal Property Securities Regulations Sch 1: [9.1170], [9.1180] Plant Breeder’s Rights Act 1994: [24.20], [24.1370] Prices Surveillance Act 1983: [18.380], [23.620] s 17: [23.620] s 28: [23.620]
Privacy Act 1988: [7.830], [14.470], [15.100], [15.170], [15.190], [15.200], [15.230], [15.270], [15.350], [15.390], [15.430], [15.470], [18.60] s 2A: [15.180] s 13: [15.350] s 30: [15.410] s 32: [15.410] s 33E: [15.410] s 33F: [15.410] s 35A: [15.380] s 41: [15.400] s 52: [15.410] s 55A: [15.410] s 62: [15.410] s 80W: [15.410] s 98: [15.410] Pt IIIA: [15.190], [15.350] Sch 1: [15.200] Privacy Amendment (Private Sector) Act 2000: [7.860] Privacy Amendment (Enhancing Privacy Protection) Act 2012: [15.190] Privacy Amendment (Notifiable Data Breaches) Act 2017: [15.240] Privacy Regulation 2013: [15.350] Public Interest Disclosure Act 2013: [4.320] s 6: [4.320] Racial Discrimination Act 1975: [1.710], [1.930], [1.1160] Restrictive Trade Practices Act 1971: [1.990], [23.110] s 51(xx): [23.110] Royal Style and Titles Act 1973: [1.420] Sex Discrimination Act: [1.1160] Spam Act 2000: [15.430] Spam Act 2003: [7.850] Statute of Westminster Adoption Act 1942: [1.400] Taxation Administration Act 1953: [10.30] s 12-55 of Sch 1: 1247 Telecommunications (Interception and Access) Act 1979: [15.430] Pt 5-1A: [15.190] Telecommunications Act 1997: [15.430] Pt 13: [15.430]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
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Business and the Law
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Testator’s Family Maintenance Act 1912: [8.1170] Trade Marks Act 1995: [9.1030], [19.770], [24.20], [24.170], [24.180], [24.280], [24.400], [24.490], [24.760] s 8: [24.440] s 17: [24.410] s 24: [24.650] s 39: [24.420] s 40: [24.450] s 41(2): [24.460] s 42: [24.510] s 43: [24.510] s 44: [24.510] s 51: [24.500] s 58: [24.500] s 59: [24.500] s 60: [24.500], [24.510], [24.520] s 62: [24.500] s 72: [24.630] s 87: [24.650] s 88: [24.630] s 120: [24.260], [24.280] s 122(1)(d): [19.770] s 122(2): [24.610] s 122A: [24.620] s 123: [24.620] Trade Marks Regulations 1995 reg 4.3(7): [24.450] Sch 1: [24.410] Trade Practices Act 1965: [1.990], [23.110] Trade Practices Act 1971: [23.1420], [23.1560] Trade Practices Act 1974: [1.990], [1.1320], [6.1290], 7, [7.370], [14.420], [18.110], [18.120], [18.130], [18.150], [18.170], [18.180], [18.210], [18.380], [18.460], [18.510], [18.530], [19.60], [19.1250], [20.30], [20.150], [20.600], [21.20], [21.140], [22.20], [22.850], [23.110], [23.140], [23.180], [23.400], [23.910], [23.930], [23.1440], [23.1930], [23.2010], [24.240], [25.120] s 4: [22.30] s 4B: [22.60] s 6: [18.120], [22.30] s 45D(3): [23.1120] s 46: [23.300], [23.1740], [23.1750], [23.1780], [23.1790], [23.1800], [23.1810], [23.1820], [23.1830] s 46: [23.1830] s 46(3): [23.1820] l
s 47: [23.750] s 47(2)(d): [23.1270] s 47(3)(d): [23.1340] s 47(6): [23.1390], [23.1400] s 50: [23.1870] s 51AA: [18.120], [20.300] s 51AB: [18.120], [20.150] s 51AC: [18.120], [20.150], [20.300], [20.310] s 51AC(1): [20.300] s 51(i): [18.120] s 51(v): [18.120] s 52: [6.2620], [7.650], [7.790], [18.200], [18.760], [19.10], [19.20], [19.60], [19.140], [19.230], [19.290], [19.490], [19.540], [19.620], [19.800], [19.920], [19.1250], [24.180], [24.280], [24.510], [24.530] s 52(1): [19.40], [19.800] s 53(a): [19.800] s 59(2): [18.760] s 65A: [19.290] s 65AAC(1): [7.680] s 71: [22.90] s 71(1)(a): [22.320] s 87B: [23.680] s 98(2): [23.1590] s 122: [18.120] Pt IIIA: [23.560] Pt IV: [1.1320] Pt IVA: [18.120] Pt IVB: [14.330] Pt V: [18.120], [18.200], [19.800] Pt V, Div 1: [18.130] Pt V, Div 1A: [22.770] Pt V, Div 2: [22.20] Pt V, Div 2A: [22.20] Pt VA: [18.120], [22.20], [22.660] Div 1: [18.120] Div 1A: [18.120], [18.130] Div 1AA: [18.120] Div 1AAA: [7.680], [18.120] Div 2: [18.120], [18.130] Div 2A: [18.120], [18.130] Trade Practices Amendment Act 1986: [20.30] Trade Practices Revision Act 1986: [23.70] WorkChoices legislation (Workplace Relations Amendment (WorkChoices) Act 2006: [1.1000]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
Table of Statutes
AUSTRALIAN CAPITAL TERRITORY Civil Law (Wrongs) Act 2002: [6.1630], [8.200] s 173: [6.1610] Civil Law (Property) Act 2006 s 201: [6.1520], [9.200] s 205: [9.640] Criminal Code 2002: [10.40], [10.60] Fair Trading Act 1992: [18.130] Fair Trading (Australian Consumer Law) Amendment Act 2010: [18.210] Human Rights Act 2004: [1.1130] Information Privacy Act 2014: [15.440] Land Titles Act 1925: [9.460] Marriage Equality (Same Sex) Act 2013: [1.910]
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Partnership Act 1963: [11.60] Sale of Goods Act 1954: [9.650], [22.610] s 23: [9.690] s 25: [9.660] s 26: [9.740] s 29: [9.780], [9.810] s 52: [9.660] NEW SOUTH WALES Auctioneers and Agents Act 1941: [13.90] Building and Construction Industry Security of Payment Act 1999: [7.480] Civil Liability Act 2002: [8.200], [8.220], [8.460], [8.480], [8.550], [8.660], [8.740], [8.760], [8.850] s 5A: [8.550] s 5B: [8.400], [8.500], [8.700] s 5B(2): [8.590] s 5C: [8.700] s 5D(1)(a): [8.760] s 5D(1)(b): [8.760] s 5F: [8.500] s 5L: [8.470], [8.510], [8.520], [8.660], [8.670] s 5M: [8.470], [8.510], [8.520] s 5N: [8.470], [8.510] s 5Q: [8.550] s 30(2): [8.440] s 32: [8.440] s 49: [8.400] s 50: [8.400] s 54: [8.540]
s 55: [8.460] s 57: [8.460] s 61: [8.460] s 69: [8.530] Pt 3: [8.440] Commercial Arbitration Act 2010: [5.290] Community Protection Act 1994: [1.720] Compensation to Relatives Act 1897: [8.910] Constitution Act 1902: [1.790] s 5: [1.720] Contracts Review Act 1980: [20.520], [20.550] s 7: [20.540] s 7(1): [20.550] s 7(1)): [20.530] s 9(1): [20.540] s 9(2): [20.540] s 9(4): [20.540] Conveyancing Act 1919: [9.460] s 12: [9.640] s 23C: [9.200] s 36C: [6.2590] s 54A: [6.1520] Crimes Act 1900: [10.40], [15.110] Crimes Amendment (Intimate Images) Act 2017: [15.110] Crimes Legislation Amendment (Existing Life Sentences) Act 2001: [1.730] Defamation Act 1974: [8.1300] Defamation Act 2005: [8.1380] s 26: [8.1390] District Court Act 1973: [2.390] Electronic Transactions Act 2000: [7.600], [7.610] s 3: [7.600] s 3(a)-(d): [7.600] s 4: [7.620] s 8(1): [7.610], [7.620] s 9(1): [7.610] s 10: [7.610] s 12(1): [7.610] Employees Liability Act 1991: [13.560] Fair Trading Act 1987: [18.130] Fair Trading Act (Australian Consumer Law) Act 2010: [18.210]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
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Business and the Law
Frustrated Contracts Act 1978: [6.2790] Industrial Relations Act 1996: [20.510] s 106: [20.510] Law Enforcement (Powers and Responsibilities) Act 2002 s 219: [9.800] Liquor Act 1982: [8.390]
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Minors (Property and Contracts) Act 1970: [6.1350] s 18: [6.1350] s 19: [6.1350] s 26: [6.1350] s 27: [6.1350] s 30: [6.1350] s 31: [6.1350] s 47: [6.1350]
s 17: [22.170] s 23: [9.690] s 25: [9.660] s 26: [9.760] s 26(1): [9.740] s 27: [9.800] s 28(1): [9.780] s 28(2): [9.810] s 43: [9.1080] s 51: [9.660] Subordinate Legislation Act 1989: [4.270] Trustee Act 1925: [11.260] Unlawful Gambling Act 1998 s 56(1): [6.1440] Workers Compensation Act 1987: [13.530] s 9: [8.80]
Motor Dealers and Repairers Act 2013: [6.240], [20.510] s 63: [6.240] Pt 6: [20.510]
World Youth Day Act 2006: [4.220] s 58: [4.220] s 58(1): [4.220] s 58(2): [4.220]
Partnership Act 1892: [11.60], [11.150], [11.450] s 1: [11.60] s 5: [11.90] s 32: [11.150] s 32(b): [11.80] s 33: [11.150] s 35: [11.150] s 35(f): [11.150] s 39: [11.150] Pt 3: [11.190]
World Youth Day Regulation 2008 cl 7: [4.220] Clause 7: [4.220]
Privacy and Protection Act 1998: [15.320]
NORTHERN TERRITORY Consumer Affairs and Fair Trading Act 1990: [18.130] Consumer Affairs and Fair Trading Amendment (National Uniform Legislation) Act 2010: [18.210]
Property (Relationships) Act 1984 s 45: [6.1460]
Criminal Code Act 1983: [10.40]
Protection of the Environment Operations Act 1997: [10.520]
Law of Property Act 2000 s 56: [6.2590] s 62: [9.200] s 221: [6.1520]
Public Interest Disclosures Act 1994: [4.320] Real Property Act 1900: [9.460] Restraints of Trade Act 1976: [7.1070] s 4(1): [7.1070] Retail Leases Act 1994: [20.510] s 62B: [20.510] Sale of Goods Act 1923: [7.370], [7.560], [9.650], [9.1080], [22.610] s 4(2A): [6.1610] s 8: [22.610] lii
Land Title Act 2000: [9.460]
Partnership Act 1997: [11.60] Personal Injuries (Liabilities and Damages) Act 2003: [8.200] Sale of Goods Act 1972: [9.650], [22.610] s 23: [9.690] s 25: [9.660] s 26: [9.740] s 28: [9.780], [9.810] s 51: [9.660]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
Table of Statutes
QUEENSLAND Civil Liability Act 2003: [8.200] Constitution Act 1867: [1.360] Criminal Code Act 1899: [10.40]
TASMANIA
Fair Trading Act 1989: [18.130]
Australian Consumer Law (Tasmania) Act 2010: [18.210]
Fair Trading (Australian Consumer Law) Act 2010: [18.210]
Civil Liability Act 2002: [8.200]
Land Title Act 1994: [9.460] Partnership Act 1891: [11.60] Property Law Act 1974: [9.460] s 11: [9.200] s 55: [6.2590] s 59: [6.1520] Sale of Goods Act 1896: [9.650], [22.610] s 21: [9.690] s 23: [9.660] s 24: [9.740] s 27: [9.780], [9.810] s 50: [9.660] SOUTH AUSTRALIA Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Statues Amendment and Repeal (Australian Consumer Law) Act 2010: [18.210]
Civil Liability Act 1936: [8.200] Constitution Act 1856: [1.360] Criminal Law Consolidation Act 1935: [10.40]
Constitution Act 1855: [1.360] Conveyancing and Law of Property Act 1884: [9.460] s 36: [6.1520], [9.200] Criminal Code Act 1924: [10.40] Fair Trading Act 1990: [18.130] Land Titles Act 1980: [9.460] Partnership Act 1891: [11.60] Sale of Goods Act 1896: [9.650], [22.610] s 9: [22.610] s 23: [9.690] s 25: [9.660] s 26: [9.740] s 30: [9.780], [9.810] s 53: [9.660] VICTORIA
Fair Trading Act 1987: [18.130]
Charter of Human Rights and Responsibilities Act 2006: [1.1130]
Frustrated Contracts Act 1988: [6.2790]
Crimes Act 1958: [10.40]
Law of Property Act 1936: [9.460] s 15: [9.640] s 26: [6.1520] s 29: [9.200] Misrepresentation Act 1972: [6.1630] s 6(1)(b): [6.1610] Partnership Act 1891: [11.60] Real Property Act 1886: [9.460] Sale of Goods Act 1895: [9.650], [22.610] s 18: [9.690] s 20: [9.660] s 21: [9.740] s 25: [9.780], [9.810] s 48: [9.660]
Fair Trading Act 1999: [18.130], [20.410], [20.420] Pt 2B: [20.390], [20.410] Fair Trading Amendment (Australian Consumer Law) Act 2010: [18.210] Goods Act 1958: [9.650], [22.610] s 23: [9.690] s 25: [9.660] s 27: [9.740] s 30: [9.780] s 31: [9.810] s 55: [9.660] Instruments Act 1958 s 126: [6.1520] Judicial Proceedings Act 1958: [8.1500]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
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Business and the Law
Partnership Act 1958: [11.60] s 5: [11.60]
Colonial Laws Validity Act 1865: [1.370], [1.400]
Property Law Act 1958: [9.460] s 53: [9.200] s 134: [9.640]
New South Wales Constitution Act 1855: [1.350], [1.360] s 1: [1.350] s 15: [1.350] s 21: [1.350] s 51: [1.350]
Subordinate Legislation Act 1994: [4.270] Transfer of Land Act 1958: [9.460] Wrongs Act 1958: 839
Statute of Frauds 1677: [6.1520], [9.440], [22.610]
WESTERN AUSTRALIA Civil Liability Act 2002: [8.200]
Statute of Monopolies: [24.1190] s 6: [24.1190]
Criminal Code Act 1913: [10.40]
Statute of Westminster Act 1931: [1.400]
Fair Trading Act 1987: [18.130]
Victoria Constitution Act 1855: [1.360]
Fair Trading Act 2010: [18.210]
West Australia Constitution Act 1890: [1.360]
Law Reform (Statute of Frauds) Act 1962 s 2: [6.1520] Partnership Act 1895: [11.60]
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Pay-Roll Tax Act 2002: [13.450] Property Law Act 1969: [9.460] s 11: [6.2590] s 20: [9.640] s 34: [9.200] Sale of Goods Act 1895: [9.650], [22.610] s 4: [22.610] s 18: [9.690] s 21: [9.740] s 25: [9.660], [9.780], [9.810] s 48: [9.660] Transfer of Land Act 1893: [9.460]
NEW ZEALAND Commerce Act 1986 s 3(1A): [23.240] s 4E: [23.240] s 50(6): [23.240] UNITED KINGDOM Bubble Act 1720: [12.10] Commonwealth of Australia Constitution Act 1900: [1.270] s 9: [1.500] Companies Act 1862: [11.330], [12.10], [12.90] Conduct Code Agreement: [1.1320]
EUROPE
Copyright Act 1956: [6.1020]
1995 European Data Protection Directive (95/ 46/EC): [14.470]
Factories Act 1961: [3.300]
General Data Protection Regulation: [15.470]
First Charter of Justice 1787: [1.330] Joint Stock Companies Act 1844: [12.10]
IMPERIAL
Limited Liability Act 1855: [12.10]
Australian Constitutions Act (No 1) 1842: [1.340]
Merchant Shipping (Safety and Load Line Conventions) Act 1932: [6.1430]
Australian Constitutions Act (No 2) 1850: [1.340], [1.360] Australian Courts Act 1828: [1.340], [1.370] liv
Pharmacy and Poisons Act 1933: [6.270] Protection of Birds Act 1954: [6.240]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
Table of Statutes
Restriction of Offensive Weapons Act 1959: [6.260] Sale of Goods Act 1893: [1.100], [3.360], [6.2280], [7.560], [18.10], [22.10], [22.610] Second Charter of Justice 1814: [1.330] Third Charter of Justice 1823: [1.330] Trade Descriptions Act 1968: [12.120] UNITED STATES Competition Code: [1.1320] False Claims Act: [25.150] Health Insurance Act: [4.260] Sherman Act s 2: [23.540]
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INTERNATIONAL Agreement on Trade-Related Aspects of Intellectual Property Rights: [16.310], [24.140] Art 22: [24.670] Art 23: [24.670] Australia-United States Fair Trade Agreement: [24.80] Berne Convention for the Protection of Literary and Artistic Works (1886): [16.310], [24.70], [24.140], [24.840] Convention for the Unification of Certain Rules Relating to International Carriage by Air Art 17: [3.250] Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958): [16.330] Dispute Settlement Understanding Art 3.2: [16.60] Art 3.7: [16.60] Art 19.2: [16.60]
Hague Convention on Choice of Court Agreements Art 1(2): [7.900] Art 2(1): [7.900] Art 3(a): [7.900] Art 3(c): [7.900] Art 8: [7.900] Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks (1957): [24.410] Paris Convention for the Protection of Industrial Property (1883): [16.310], [24.140] Art 1.1: [16.310] Art 2.1: [16.310] Art 9.1: [16.310] Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organisations (1961): [24.140] UNCITRAL Model Law: [7.600], [7.700], [7.710], [7.810] Art 6(3): [7.810] United Nations Convention on Contracts for the International Sale of Goods: [16.240] Art 35: [16.240] Art 35(2)(a): [16.240] Art 35(2)(b): [16.240] Art 35(2)(c): [16.240] Art 35(3): [16.240] Art 36: [16.240] Art 53: [16.240] Art 56: [16.240] Art 57: [16.240] Art 58: [16.240] Art 74: [16.240] Art 77: [16.240] Art 79: [16.240] Art 80: [16.240] Pt 2: [16.240] WIPO Treaty on the Protection of Intellectual Property in Respect of Integrated Circuits: [24.1390]
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
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Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved. Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:29.
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Part 1 THE AUSTRALIAN LEGAL SYSTEM
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:47.
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved. Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:47.
1
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
1
The Law, the Legal System and the Constitution Andrew Terry THE BUSINESS CONTEXT Australia is a well-developed nation commercially, politically and socially. Those characteristics of an advanced society are held in place by a complex set of rules that make up the law and by a similarly complex system which administers that law. In the daily lives of all of us the law is at work, unceasingly, sometimes surreptitiously, but as essential to the functioning of the state as is oxygen to the body. An informed understanding of contemporary business law requires an understanding of the underlying legal system through which laws are made and applied and interpreted and enforced. This chapter aims to provide that understanding.
1.1
THE NATURE AND ROLE OF LAW ......................................................................................................................... 5
1.2
THE REQUISITES OF LAW ......................................................................................................................................... 7
[1.50] Certainty ........................................................................................................................................................... 7 [1.60] Flexibility .......................................................................................................................................................... 8
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:59.
3
Business and the Law
[1.70] Fairness ............................................................................................................................................................. 8 [1.80] Accessibility ...................................................................................................................................................... 8 1.3
THE SOURCES OF LAW .............................................................................................................................................. 9
[1.100]
Customary law ................................................................................................................................................. 9
[1.120]
Common law .................................................................................................................................................. 10
[1.140] Legislation ...................................................................................................................................................... 11 1.4
LAW, ORDER, JUSTICE AND MORALITY ............................................................................................................ 12
[1.170]
Law and order ................................................................................................................................................ 13
[1.190]
Law and morality ........................................................................................................................................... 14
[1.210]
Law and justice .............................................................................................................................................. 16
1.5
THE NATURE AND ROLE OF A LEGAL SYSTEM .............................................................................................. 18
[1.240]
Common Law and Civil Law Systems ...................................................................................................... 18
[1.270] Constitutions .................................................................................................................................................. 19 1.6
THE DEVELOPMENT OF THE AUSTRALIAN LEGAL SYSTEM ..................................................................... 21
[1.280]
The reception of English law ....................................................................................................................... 21
[1.290]
Terra nullius, Mabo and native title ........................................................................................................... 21
[1.330]
The constitutional development of the Australian colonies ................................................................. 23
[1.350]
State constitutions ......................................................................................................................................... 24
[1.370]
Increasing legislative authority .................................................................................................................. 25
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[1.380] Federation ....................................................................................................................................................... 25 [1.390]
Enactment of the Commonwealth Constitution ..................................................................................... 26
[1.400]
Breaking the colonial ties ............................................................................................................................. 26
1.7
AN OUTLINE OF THE AUSTRALIAN LEGAL SYSTEM .................................................................................... 27
[1.420]
A constitutional monarchy .......................................................................................................................... 27
[1.430]
Federation, the Constitution and the division of powers ...................................................................... 27
[1.440]
The separation of powers ............................................................................................................................. 28
[1.450]
Responsible government ............................................................................................................................. 28
[1.460]
The sovereignty of Parliament .................................................................................................................... 28
[1.470]
The rule of law ............................................................................................................................................... 28
[1.490]
The Australian legal system ........................................................................................................................ 30
1.8
THE CONSTITUTION ................................................................................................................................................ 31
[1.500]
The Constitution ............................................................................................................................................ 31
[1.530]
Chapter I: The Parliament ........................................................................................................................... 34
[1.540]
Chapter II The Executive Government ..................................................................................................... 34
[1.550]
Chapter III The Judicature ........................................................................................................................... 35
[1.560]
Chapter IV Finance and trade .................................................................................................................... 35
[1.570]
Chapter V The States ..................................................................................................................................... 35
[1.580]
Chapter VI New States ................................................................................................................................. 35
[1.590]
Chapter VIII Alteration of the Constitution ............................................................................................. 36
[1.620]
Implied rights under the Constitution ...................................................................................................... 38
1.9
THE SEPARATION OF POWERS –LEGISLATURE, EXECUTIVE AND JUDICIAL POWERS ................... 39
[1.660]
Legislative power .......................................................................................................................................... 40
[1.670]
Executive power ............................................................................................................................................. 41
4
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:02:59.
Chapter 1 The Law, the Legal System and the Constitution
[1.680]
Judicial power ................................................................................................................................................ 41
[1.690]
The separation of powers under the Constitution .................................................................................. 42
1.10 PARLIAMENTARY SOVEREIGNTY ........................................................................................................................ 45 [1.750]
The struggle for legislative supremacy ..................................................................................................... 45
[1.780]
The sovereignty of Parliament in Australia .............................................................................................. 46
[1.790]
Legal sovereignty and manner and form provisions ............................................................................. 47
[1.800]
Political sovereignty ...................................................................................................................................... 48
1.11 THE DIVISION OF LEGISLATIVE POWER BETWEEN THE COMMONWEALTH AND THE STATES ....................................................................................................................................................... 48 [1.820]
Exclusive powers ........................................................................................................................................... 48
[1.830]
Concurrent powers ....................................................................................................................................... 49
[1.840]
Residual powers ............................................................................................................................................ 49
1.12 THE LEGISLATIVE COMPETENCE OF THE COMMONWEALTH ................................................................. 49 [1.860]
The interpretation of the concurrent powers ........................................................................................... 51
[1.890]
Inconsistency between Federal and State laws ....................................................................................... 53
[1.920]
The expansion of Commonwealth legislative competence through the “external affairs” power ............................................................................................................................... 55
[1.980]
The expansion of Commonwealth legislative competence through the “corporations” power .................................................................................................................................... 57
1.13 FREEDOM OF INTERSTATE TRADE AND COMMERCE ................................................................................. 60
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1.14 THE CONTINUING DEVELOPMENT OF THE AUSTRALIAN LEGAL SYSTEM ........................................ 61 [1.1070]
The parliamentary system and the role of the Executive ...................................................................... 62
[1.1080]
The changing role of the High Court ........................................................................................................ 62
[1.1100]
The increasing Australianness of Australian law .................................................................................... 63
[1.1110]
A Bill of Rights? ............................................................................................................................................. 64
[1.1150]
Implied Rights under the Constitution ..................................................................................................... 65
[1.1170]
The move to a republic? ............................................................................................................................... 66
[1.1180]
Expanding Commonwealth jurisdiction ................................................................................................... 67
[1.1220]
The financial strength of the Commonwealth ......................................................................................... 69
[1.1230]
The Uniform Tax Scheme ............................................................................................................................. 69
[1.1270]
Tied grants ...................................................................................................................................................... 71
[1.1300]
Uniform legislation in a federal system .................................................................................................... 71
[1.1310]
Ceding powers ............................................................................................................................................... 71
[1.1320]
National cooperative schemes .................................................................................................................... 72
1.1 THE NATURE AND ROLE OF LAW [1.10] The initial inquiry in a book of this nature must be as to the essential quality of the law. This is a very big topic, which over the centuries has engaged the attention of the world’s greatest philosophers. It does not do justice to the complexity of this debate but, for our purposes, it is sufficient to describe the law as essentially the system of control through which society operates. The law is a necessary and inevitable requirement
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Business and the Law
of a civilised society. Life as we know would not be possible without a comprehensive body of law that regulates our social lives and our business lives –indeed every aspect of human endeavour. Even primitive societies develop systems of social control which may derive their authority from customs which have developed over time rather than from the commands of the person or body with the acknowledged power to make rules for that community. Today most of the world’s seven billion inhabitants are subject to much more sophisticated, comprehensive and voluminous laws made by the body to which a country’s legal system enshrined in its constitution is entrusted with that role.
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The law is the witness and external deposit of our moral life. Its history is the history of the moral development of the race. The practice of it, in spite of popular jests, tends to make good citizens and good men. Justice Oliver Wendell Holmes.
A society such as ours has a ferocious appetite for law and our nine legislatures –federal, State and Territory –enact well over 20,000 pages of legislation every year. In the words of Henry Bosch over 30 years ago when he was the Chairman of the body that is now the Australian Securities and Investments Commission (ASIC) –despite the lure of deregulation it necessarily remains a fact of modern life that economic and social growth “depends on a highly complex economy which requires sophisticated rules and enforcement procedures across a wide range of activities”. [1.20] In the middle ages there was wide support for a theory of natural law –that the ultimate test of a law’s validity was its conformity with the principles of reason and justice flowing from the law of nature (frequently identified with the law of God). The rules of natural law were thought to bind all earthly authorities. No sovereign, government or church could enact a law in contradiction to those rules. Any attempt to do so was thought to be completely ineffectual. Attacks on the theory of natural law ultimately led to the development of the jurisprudential theory which became known as positivism. In essence, positivism requires that society be obedient to a certain superior: this superior (or sovereign, in our case a parliament) issues commands enforced by sanctions. This is how positive law operates. The two essential elements are that rules of conduct are enforced by the imposition of a sanction, the whole bolstered by the sovereign power of the law maker. Whereas today natural law may be regarded as what the law ought to be, positive law is what the law is. Positive law is contained in the mass of statutes, regulations and case law that together make up our law. [1.30] A contemporary issue which raises the natural law/positivism dichotomy is the relationship between law and morality, between law and ethics. It is accepted that the law is a systematic set of rules to control conduct within a society and a modern view requires that the rules should reflect the changing values of society, especially in sensitive moral and ethical areas so that as science advances and makes possible new methods of, for example, healing disabilities, the law should change to allow such processes (see the cloning debate). Justice Windeyer of the High Court of Australia remarked that “the law marches with medicine, but in the rear and limping a little” (Mount Isa Mines Ltd v Pusey [1970] HCA 60 at [3]). The place of the law in a dispute with considerable social, political, economic and emotional consequences is nevertheless clear –in the words of the Full Federal Court in Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] FCA 397 the business of the court is “legality”. That case arose out of a hotly contested dispute between Patrick Stevedores, a shipping company seeking extensive reform of waterfront labour practices, and the Maritime Union. The court stated that:
6
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Chapter 1 The Law, the Legal System and the Constitution Before dealing with the case as presented, it is perhaps useful for us to say a word on what the case is not about. We do so because many commentators … appear to have laboured under a misconception of the role of a court in a situation like this. As individuals, each member of the Bench, like all sensible Australians, is in favour of an efficient waterfront. Export income is the economic lifeblood of our nation. Most of our exports depart by sea, many through container terminals. It is obviously important to ensure that the operation of container terminals is as efficient and economical as reasonably possible. But these are personal views. We each have personal views, not necessarily identical, about how this might best be achieved. But the Court, as a Court, has no view about such matters. The Court does not have the material that would be necessary for it to make a judgment about the efficiency of the Australian waterfront, either in absolute terms or relative to other countries, the causes of such inefficiencies as may exist, or the desirable steps to overcome any perceived problems. This material has not been placed before the Court because the parties have realised, although some commentators have not, that these are not issues for the Court’s determination. The business of the Court is legality. Just as it is not unknown in human affairs for a noble objective to be pursued by ignoble means, so it sometimes happens that desirable ends are pursued by unlawful means. If the point is taken before them, courts have to rule on the legality of the means, whatever view individual judges may have about the desirability of the end. This is one aspect of the rule of law, a societal value that is at the heart of our system of government. It follows that this judgment should be seen only as a judgment about legal issues, not a view about the social, economic and political arguments concerning waterfront management that have dominated the media during the last couple of weeks.
The law is “like an ice-cream container full of hot, steamy, juicy pies … they just mix it all up together”. Sir Joh Bjelke- Petersen, The Bulletin (20 July 1993).
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1.2 THE REQUISITES OF LAW [1.40] The legal rules which govern the complex interactions in society and which form the legal system under which we live depend for much of their strength on widespread community acceptance. To gain that acceptance the laws must possess certain qualities. While there may be some debate as to the exact range of those necessary characteristics, it is clear that at least the following are essential: • certainty; • flexibility; • fairness; and • accessibility.
Certainty [1.50] The degree of certainty required, of course, falls short of the absolute. What is necessary is that people, in both their personal and their business lives, should be able to form relationships with others, enter into contracts, and acquire and dispose of property reasonably secure in their knowledge of what they are doing and their understanding of its effects. One of the powerful arguments against the retrospective operation of new laws is that this may make unlawful an act which was lawful at the time it was done, or change the effect of an agreement after it was entered into. Similarly, the argument raised by the business community (in relation to the current trend to confer broad discretions on the courts eg misleading or deceptive conduct or unconscionable conduct) is that justice
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Business and the Law
between individuals is sought at the expense of predictability on which the operation of business relies. The orderly conduct of business is incompatible with unpredictability of the relevant law, but to seek too great an element of certainty is inconsistent with the equally legitimate demand for flexibility to achieve justice in individual cases.
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They (the Law Lords) think the great aim is certainty in the law. My aim is justice. Lord Denning, Sunday Times, United Kingdom (1 August 1982).
Flexibility [1.60] Modern society is complex and continually changing and the law must be able to respond without undue delay to the challenge of change at all levels of society. In the words of the American jurist Benjamin Cardozo, “the law, like the traveller, must be ready for the morrow” (The Growth of the Law (Yale University Press, 1924) p 19). A change in moral values brings with it a need for a corresponding adjustment of the law, not all are greeted with unanimous approval. Additionally, the increasingly complex demands made by the rapid advance of technology have required flexibility and change in the law. To say that does not override the earlier requirement of certainty. What it does require is a readiness on the part of the law to adapt to changing circumstances, to react to new and unforeseen situations and, where possible, to predict developments and have in place rules and structures to cater for them as they arise. The subject matter may be largely ethical (eg dealing with the rapid advance in medical technology) or it may be largely commercial (eg facilitating new business structures and regulating innovative commercial conduct), but in all cases the law must respond accordingly.
Fairness [1.70] In a modern democratic society the effectiveness of a law ultimately depends upon its acceptance, or at least toleration, by members of that society. That will not be available where a law is manifestly inequitable, unfair or unreasonable. The classic example is the prohibition laws of the United States in the late 1920s, which prohibited the production, sale and consumption of alcohol. The view in the community that the Prohibition Amendment was unfair and unreasonable led to its widespread violation, the growth of organised crime and, ultimately, its repeal in 1933. The requirement of fairness also encompasses the need for the law to reflect the moral and ethical concerns of society, and for it to endeavour to move with changing societal standards. The law and justice are not synonymous. Rather, the law is to justice what the violin is to music, simply an imperfect vehicle. Like a Stradivarius, it often needs fine-tuning. L H Granoff, Letter to the editor, Time Magazine (1 March 1993).
8
Accessibility [1.80] Ignorance of the law does not excuse liability for its breach. Despite the often- heard assertion that everyone is presumed to know the law, the fact is that no one knows all of it. What is important, however, is that all should have access to that knowledge either directly or through the intermediary of a legal adviser. A former chief justice of the High Court of Australia (Sir Garfield Barwick in Watson v Lee [1979] HCA 53) commented that “to bind the citizen by a law, the terms of which he has no means of knowing, would be a mark of tyranny”: at [5]. While the law is increasingly accessible in an age of information technology (see eg http://www.austlii.edu.au) such access does not solve
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Chapter 1 The Law, the Legal System and the Constitution
the more complex problem of citizens understanding the massive regulatory regime that governs them.
1.3 THE SOURCES OF LAW [1.90] With the increasing sophistication of society, customary law –the unwritten laws established by habitual use by a community –is no longer a source of law of any real significance in Australia and other developed countries. Under Australia’s common law legal system, which is described below, the law was originally developed by judges through their decisions in disputes that came before them. While the role of the judges in developing the common law remains a central characteristic of our legal system it is legislation –the written law made by the legislature, the Federal Parliament in the Australian context –that is the dominant source of law today.
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Customary law [1.100] In its most general sense, customary law consists of unwritten law established by the habitual use of a group of people, usually the inhabitants of a particular territory, over a long period of time. English law, which provides the heritage for Australian law, has its genesis in customary law administered in local community courts. It was not until after the Norman Conquest in 1066 that customary law became incorporated as part of the common law, and since that time it has not represented a significant force in that legal system. In a less-developed legal system, customary law has a more important role. With the increasing sophistication of a legal system the influence of custom as a separate source of law is minimal. Customs that are generally applied become incorporated in the common law and, at a later stage of development, may be enshrined in legislation. An example is provided by the Sale of Goods Act 1893 (UK) which provided the model for the sale of goods legislation adopted in each Australian State and Territory. The accepted trade customs and practices of merchants which developed in England in the eighteenth and nineteenth centuries were recognised and applied as the “law merchant” by special mercantile courts prior to being incorporated by the common law courts as part of the common law. The 1893 Act was virtually a codification in statutory form of the common law that had developed from habitual mercantile customs.
When asked by anthropologists what the Indians called America before the white man came, an Indian said simply, Ours. Vine Deloria.
Today the scope for custom to generate new law is very restricted. In the words of Hon Pru Goward NSW Minister for Community Services in the context of forced marriages of underage children: “The message is very simple. Whatever the cultural practice, whatever the religious practice, there is no law in Australia above Australian law”. One area in which it retains an influence is in contract law where the existence of a custom or usage will justify the implication of a term into a contract if there is evidence that the matters relied on are so well known and acquiesced in that everyone making a contract in the situation can reasonably be presumed to have imported a term embodying them into the contract (Con-Stan Industries of Australia Pty v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14). (See [6.2120])
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Business and the Law
IN CONTEXT
Indigenous customary law [1.110] The extent to which the Australian legal system should recognise customary
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Aboriginal and Torres Strait Islander laws that sit outside the formal legal system raises complex issues. In Walker v New South Wales [1994] HCA 64, the High Court held that Australian criminal law could not accommodate an alternative body of customary Indigenous criminal law operating alongside it. Mason CJ stated (at [4]-[6], references omitted) that: [C]ounsel for the plaintiff … submitted that the question which arose was whether customary Aboriginal criminal law is something which has been recognised by the common law and which continues to this day … That proposition must be rejected. It is a basic principle that all people should stand equal before the law. A construction which results in different criminal sanctions applying to different persons for the same conduct offends that basic principle. The general rule is that an enactment applies to all persons and matters within the territory to which it extends, but not to any other persons and matters. The rule extends not only to all persons ordinarily resident within the country, but also to foreigners temporarily visiting. And just as all persons in the country enjoy the benefits of domestic laws from which they are not expressly excluded, so also must they accept the burdens those laws impose. The presumption applies with added force in the case of the criminal law, which is inherently universal in its operation, and whose aims would otherwise be frustrated … Even if it be assumed that the customary criminal law of Aboriginal people survived British settlement, it was extinguished by the passage of criminal statutes of general application … English criminal law did not, and Australian criminal law does not, accommodate an alternative body of law operating alongside it. There is wide acceptance that Indigenous laws have been treated with disdain and that their recognition, particularly customary laws dealing with marriage, adoption, inheritance and family relationships, is long overdue. The recommendations of the Australian Law Reform Commission (“Recognition of Aboriginal Customary Laws”, Report No 31 (1986)) have been given greater impetus by the Mabo decision (see [1.290]) but recognition of Indigenous customary laws is ultimately a matter for legislative action.
The message is very simple. Whatever the cultural practice, whatever the religious practice, there is no law in Australia above Australian law. Pru Goward, NSW Minister for Community Services, The Australian (8 February 2014).
10
Common law [1.120] The term “common law” has three main meanings. For present purposes, and generally throughout this book, the term “common law” is used to describe judge- made law, that is, the source of law developed by the courts (also known as case law), as opposed to legislation. Second, reference is made to Australia having a common law legal system, which is often contrasted with a civil law legal system. An integral feature of the common law system is common law in the sense of judge-made law as a source of law, that is, court decisions that interpret statutory provisions enacted by Parliament and develop the areas of law
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Chapter 1 The Law, the Legal System and the Constitution
over which Parliament has not legislated. Legislation is also a source of law in a common law system. In contrast, civil law systems are codified (set out specifically in Codes), that is, authoritatively and comprehensively laid down in a systematic form.
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Third, the term “common law” may refer to the judge-made law developed in the King’s courts (or common law courts) as opposed to equity, the judge-made law developed in the equity courts (Chancellor’s courts ie the Courts of Chancery). Equity evolved centuries ago to provide recourse in situations where the common law either operated to produce a defective result or failed entirely. Equity grew initially not as a rival to the common law but rather as a supplement to it in certain instances. The function of equity was to intervene when the normal processes of common law failed. While it might seem that such a system would lead to chaos, the birth and growth of equity were both justified by and controlled by the Monarch’s conscience. It was simply part of the Monarch’s duty to intervene to prevent injustice. From such simple beginnings it developed an influence of critical significance (see [2.30]). [1.130] What is the common law in the sense of judge-made law? Many descriptions are offered but for present purposes it is the law that has evolved through judicial decision and practice as distinct from law laid down by statute. In simple terms, the common law is found in the reported decisions of the cases. It consists of case law. When Blackstone says that the common law is “declared”, he advances the traditional theory that judges do not make law, they simply declare the law as it exists. The theory gives comfort to those who believe that laws should only be made by those elected for that purpose. It does not reflect reality. Within the common law systems, judges are regularly confronted with cases that require more than a declaration of a pre-existing precept. They have to make new law. This reality was forcefully expressed by the then Chief Justice of the High Court, Brennan CJ, in O’Toole v Charles David Pty Ltd [1990] HCA 44 at [17]: Nowadays nobody accepts that judges simply declare the law; everybody knows that, within their area of competence and subject to the legislature, judges make law. Within the proper limits, judges seek to make the law an effective instrument of doing justice according to contemporary standards in contemporary conditions. And so the law is changed by judicial decision, especially by decision of the higher appellate courts.
The common law would not have survived in any of those countries which have adopted it, if it did not reflect the changing norms of the particular society of which it is the basic legal system. Cassell & Co Ltd v Broome [1972] AC 1027 at 1127 per Lord Diplock.
In essence, the doctrine of stare decisis, or binding precedent, requires a court to follow the reason for the decision, the ratio decidendi, of a higher court within the same system of courts. Given the contemporary reality that statutes are numerous and far-reaching much of the work of the courts involves the interpretation and application of legislation. In other areas, legislation may not have been enacted and the development of the law is left to the courts. The decisions of the courts in applying the law to individual cases, whether that law derives from a statute, from a precedent interpreting a statute or from a precedent in an area not regulated by statute, all form part of the common law. Case law or judge- made law is discussed in more detail in Chapter 2.
Legislation [1.140] Legislation refers to the laws made by the body recognised by the particular legal system as having the supreme power and authority to make laws. Australia, like any
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11
Business and the Law
complex modern society, requires regulation across a broad range of economic, commercial and social activities and legislation enacted by the Federal and State Parliaments (on whom legislative ownership is conferred by their respective constitutions) is the dominant source of law in Australia today. Under the common law system (indeed under most modern legal systems), supreme law-making authority resides in a legislature. Under the Commonwealth Constitution, legislative power is conferred on the Federal Parliament and the laws it makes are referred to as legislation, or written law, or enacted law, or more specifically, statutes or Acts of Parliament. The Parliaments of the States and Territories also have law-making powers. But not all legislation is statutory law. A little government and a little luck are necessary in life but only a fool trusts either of them. P J O’Rourke, A Parliament of Whores (Atlantic Monthly Press, 1991).
Statutes are the products of Parliament. Subsidiary to the statutes is delegated or subordinate legislation: the rules and regulations made pursuant to the statutes with the purpose of setting out more detail as to the scope and application of the statute itself. Many such matters of detail require frequent adjustment to cater for changing situations. The cumbersome process of amending statutes in Parliament would not provide sufficient flexibility and speed. The rule-making powers are therefore delegated to the executive arm of government, the Executive being empowered to create rules and to amend those already in existence. Legislation is discussed in more detail in Chapter 3. Delegated legislation is discussed in more detail in Chapter 4.
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1.4 LAW, ORDER, JUSTICE AND MORALITY [1.150] Although the principal function of law is to ensure order in an increasingly complex society, it must at the same time respect and help shape the morality of that society and reflect that society’s notions of “justice”. Whatever justice is –and this is a much debated topic –it is not the same as the law. For our purposes we can regard justice as “fair play” and this is an admirable aspiration for any law. But it must be remembered that under our legal system the law is what it actually is and not what it should be to accord with underlying notions of justice. No court has the power to strike down a law because it is “unjust” or does not accord with community standards or does not represent fair play. Similarly with morality. It is obviously desirable that in our society laws reflect underlying concepts of justice and morality but these are abstract concepts which, in a pluralistic society, will have shades of meaning. The fact that our politicians in Australia have to face the electorate every three years (Federal Parliament) or four years (State Parliaments) mean that our laws will generally accord with acceptable community standards of justice and morality. When the nature of things changes the rules of law must change too. Davies v Powell (1737) 125 ER 1048.
12
A legal system does not operate in a vacuum. It exists to serve its society, and in order to fulfil this role it requires the respect and cooperation of the members of that society. In the words of Lyndon B Johnson, when he was President of the United States, “Respect for law is the condition upon which our whole social order depends”. That necessary respect and cooperation will be given more readily when the law reflects contemporary societal values. In a complex multicultural nation such as Australia, the challenges have no easy solutions. Australia’s people are multi-religious or non-religious and reflect diverse cultural backgrounds. For this reason, it is not possible to have simple resort to those rules adopted by one religious or value system, be it Christian or otherwise, in the quest for
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Chapter 1 The Law, the Legal System and the Constitution
expression of ethical and moral standards of conduct. What is now required of our law, in its ethical content, is that it should reflect and enforce the broad ethical principles of the diverse society. The appropriate response to these challenges falls both to the Parliaments and the courts.
IN CONTEXT
Law and community values [1.160] In 2000, proceedings were instituted by the South Sydney Rugby League Club (Souths) claiming it had been improperly excluded from the National Rugby League. Justice Finn observed that the real matter of contention was whether commercial interests should be permitted to override something valued in the community. Souths’ view (South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611 at [564]) was that: in our view Rugby League is an icon to be preserved for the people who love and support it, not a product to be carved up to the media for their own financial gratification.
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Finn J said (at [564]) that: It usually is only fortuitous that some legal principle can be found that could provide such preservation as is sought … I have not been able to arrive at the conclusion in the present proceeding that such a principle is available to Souths. This is not one of the fortuitous cases. The High Court upheld the decision of Finn J (News Ltd v South Sydney District Rugby League Football Club [2003] HCA 45) but Souths nevertheless remain in the competition because of a change of heart by the NRL driven largely by the massive public outpouring of support for the Rabbitohs. To the uninitiated this may explain the delight of many –perhaps with the exception of Bulldogs supporters –when Souths won the 2014 Premiership.
Law and order [1.170] One of the primary functions of the state, through the legal system, is the preservation of order within the community. It may be said that in a perfect world the force of a legal system would be unnecessary. When, however, our society is less than perfect, some compulsion is necessary. It is largely for that reason that the restraints imposed by law are tolerated, it being accepted that the alternative is chaos and damage to the legitimate interests of everyone. Order is necessary at all levels of social interaction –from laws governing road use to those regulating affairs of state. It is often said that law is currently failing in its stated aim of preserving order but this opinion is of course coloured by different perceptions of what order entails.
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Laws are generally found to be nets of such a texture, as the little creep through, the great break through, and the middle-sized are alone entangled in. William Shenstone.
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Business and the Law
“Naked Rambler” Stephen Gough makes UK legal history by facing court in the nude N Miller, “Eccentric “Naked Rambler” Makes Legal History”, Sydney Morning Herald (11 June 2015)
[1.180] London: He wears boots, a hat, a backpack, and not much else, and he’s singlehandedly making the law an ass.
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The UK’s so- called “Naked Rambler”, Stephen Gough, suffered another loss on Tuesday, when despite (or perhaps because of) a history-making nude court appearance, he lost his appeal.
making people aware about our bodies because we are so paranoid about them”. Because public nudity is not a crime, authorities instead imposed an Anti-Social Behaviour Order, or “Asbo”, making it unlawful for Gough to be nude in public.
But legal experts are calling for an end to what one called the “legal daftness” of the pursuit of this 56 year-old ex-Royal Marine, whose only crime is persistent nudity.
“The result is that the only person in the country who actually wants to wander naked around the streets of Winchester is also the only man in the country who commits a crime by doing so”, criminal barrister Matthew Scott wrote.
On Tuesday Gough appeared in the Court of Appeal, naked, via prison video link from Winchester Prison, where he is serving a two and a half year sentence for breach of a court order.
“An eccentric who poses no risk to anybody is being made to spend the rest of his life in jail – incidentally at huge public expense –because of a law that has been crafted to criminalise his chosen way of life.”
The sentence, imposed in 2014, was just the latest in a string of convictions and prison terms for Gough, who has spent eight years behind bars thanks to his unshakeable conviction that he has the right to wander England in the buff.
“He has chosen to look ridiculous. The law is making itself look ridiculous.”
Despite often freezing temperatures he sticks to his chosen outfit of socks, boots, hat and rucksack, saying it was “one step in the whole process of
Another legal blogger, lawyer David Allen Green, said on Twitter on Tuesday that Gough’s case “exposes the illiberal daftness of our legal system”.
On Tuesday Mr Scott calculated that it had cost £330,000 ($660,700) to keep Gough in prison, not including legal costs.
Law and morality Never forget that if you leave your law to judges and your religion to bishops you will presently find yourself without either law or religion. George Bernard Shaw.
14
[1.190] Natural law theory and its prominence in the history of our legal system highlight the interrelationship between law and morality. The tension in that relationship has become critical in a society increasingly faced with great moral issues in areas such as euthanasia, abortion, artificial reproduction, rights of frozen embryos, information technology, surveillance, etc. The domain of morality spreads over a wide territory. An essential conflict arises between competing viewpoints. In the context of what are known as “victimless crimes” (eg drug-taking and prostitution), there are those who take the view that the law should not intervene in the private lives of citizens any more than
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Chapter 1 The Law, the Legal System and the Constitution
is necessary to preserve public order and decency. This approach, in Victorian times, was put simply in the instruction that consenting adults could do what they liked, so long as they didn’t do it in the street and frighten the horses. Given that horses are not a common feature of Australian streets today a more substantial standard is required, but the search for it remains elusive.
IN CONTEXT
Law, morality and the necessity defence [1.200] While the status of necessity as a defence to crime is uncertain, the leading case of R v Dudley and Stephens (1884) 14 QBD 273 raises important issues concerning the relationship between law and morality.
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This celebrated case, widely known as “the case of the Mignonette” concerned the yacht Mignonette that put to sea on 5 May 1884 from Tollesbury in Essex, with a crew of four to sail to Sydney –a four-month voyage. Two months later, during a severe storm in the South Atlantic Ocean, the Mignonette was struck by a massive wave and sank within five minutes. The crew escaped in a flimsy dinghy without fresh water and with only two tins of turnips, and a chronometer and sextant with which they would determine that they were drifting away from shipping lanes towards South America, over 3,000 kilometres away.
Even the House of Lords can be pragmatic. The trial of Lady Chatterley’s Lover aroused parliamentary comment. In the House of Lords a noble Lord defending the book was asked, “would you want your wife to read it?” and responded, “I would not object to my wife reading it but I don’t know about my game-keeper”. “Lady Chatterley Letters” (1962) 48 American Bar Association Journal 43 at 47.
For the first 11 days they subsisted on turnips and a small turtle, and the principal problem was not hunger but thirst. By that time they had begun to drink their own urine, a standard technique in such conditions. Then hunger became a problem. A not-so-standard technique adopted on the twentieth day was to kill the weakest of the four and thereafter for the remaining three to sustain themselves by eating his body. That continued for the next four days, at which time they were rescued by a passing ship. Their subsequent prosecution for murder tempered the joy of their rescue. The facts, agreed upon by the jury, were that without the cannibalism, the others would not have survived, and that the victim was likely to have died before them. Indeed, the jury found that the only way to save life was to sacrifice one as a source of protein for the others. The question then of whether this act amounted to the crime of murder was ultimately referred, on appeal, to the Queen’s Bench Division. That court found the defendants guilty and sentenced them to death. A reprieve followed and the punishment was reduced to six months’ imprisonment. The case of Dudley and Stephens is still cited today as an authority for the defence of necessity to a murder charge. The decision captures not only many of the peculiarities of legal reasoning but also questions of practical living and morality with which the law must deal. These issues are commonly raised, albeit in less dramatic circumstances. The need to achieve a workable resolution to the conflict between the survival instinct of the individual and social demand for an objective moral standard is not amenable to one solution for all time. It presents itself again and again in different guises. This is reflected, for example, in the contemporary debate over euthanasia and the allocation of scarce medical resources. Is there to be a case-by-case approach (probably trusting in
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Business and the Law
non-observance of the law by the authorities), or is there to be a single objective standard against which all such conduct may be measured? The dangers inherent in either approach are obvious, but inconsistency and the protection of some individuals where others are not so favoured can lead to cynicism and distrust of the legal system. The Court of Queen’s Bench in Dudley and Stephens somewhat pompously demanded of the defendants the observance of a duty (at 287): not of the preservation, but of the sacrifice of their lives for others, from which in no country, least of all it is to be hoped in England, will men ever shrink, as indeed they have not shrunk … It is enough in a Christian country to remind ourselves of the Great Example whom we profess to follow. In so far as some general statement as to the availability of necessity as a defence can be made it seems that the defence exists, albeit with some caprice, and in Victoria the Full Supreme Court has recognised its existence (see R v Loughnan [1981] VR 443), provided that the consequence to be averted is serious and that the steps taken to accomplish that aversion are in proportion and appropriate to the gravity of the dangers.
Law and justice [1.210] On the occasion of his swearing in as Chief Justice on 21 April 1995 Brennan CJ spoke of law, justice and society in a provocative and stimulating way: Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Justice is a social goal, a guarantee of order and peace in the community, a precondition of human development –and it is therefore of concern to every member of our community. For the Christian, justice has a special and central significance: it is a divine imperative. Justice is not brought to the people either by populist clamour or by implementing the will of the powerful. It must be sought by careful reflection upon the interests of the individual and of society as a whole and there must be an especial concern for the powerless, the socially insignificant, the weak minority. The bruised reed may be a drug addict, an unemployed boy or girl, an innocent but discarded spouse. The dimly burning wick may present itself as a refugee, a lonely migrant, an Aboriginal group removed from the traditional land, the children of a broken family, the lonely aged.
[1.220] To the question “What is justice?” there are many answers. They range from that cited by Thomas Aquinas that it is “the perpetual and constant will to render to each one his right” to the view of the practising lawyer in contemporary times that “justice is what happens when the money runs out”. The expectation that the legal system is the complete source of justice is doomed to disappointment for various reasons. Most significantly, the achievement of justice requires a general approach by all in their dealings with each other –it is not always controlled by to the specific regulation of the statute nor the individual reach of the court in judging a case. Its field of operation is wider, indeed, it is all-encompassing. In England, justice is open to all –like the Ritz Hotel. Mathew LJ.
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In essence we must ourselves set standards or meanings for justice in our own community. That such an approach is embraced by the judges is evidenced by the comments of Sir Edward Pearce, then a member of the English Court of Appeal, when he said that “since every case has merits one way or the other there may at any time be a pull to deflect
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Chapter 1 The Law, the Legal System and the Constitution
decision from the straight and narrow path of logic in order to secure fair play”: E Pearce, “Our Common Heritage” (1959) 33 Australian Law Journal 103 at 105. In the course of the same address (at p 105) he said that: When the law is derived from cases, the merits of the individual case are bound to influence the decisions in some degree. It is quite useless to expect an English judge, or, I suspect, an Australian judge, to reach a decision that he feels to be unjust or unworkable if with industry and ingenuity he can produce a result that is fair and workable. His judicial duty compels him to follow decided cases and his judicial conscience compels him to follow the general direction of the riverbed. But within those limits he will slightly deflect, if thereby he can secure justice and fair play. For to the ordinary judge fairness between man and man is of paramount importance. I know that I and most of my colleagues are made miserably unhappy, if we find ourselves compelled to give a judgment that to our minds in the circumstances of the cases produces unfairness and injustice.
Abstract notions of justice are reduced to the search for “fair play”. In a very practical sense that approach is to be applauded. “Fair play” in reality is more comforting than “justice” in theory. It is as unrealistic to expect the law to provide justice at all times as it is to expect pharmacology to cure all ills. The discipline must do its best. Very often the people subjected to it must play their part also, not by a resort to self-help but by introducing into their society the aspects of justice already described.
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IN CONTEXT
The role of the judges [1.230] On the occasion of this swearing in as a justice of High Court in 1952 ((1951-1952) 85 CLR XIV) Sir Owen Dixon said:
Faced with glaring injustice, the judges are, it is said, impotent, incapable and sterile. Not so with us in this court. Nothman v Bomet London Borough Council [1978] 1 WLR 220 at 228 per Lord Denning MR.
It may be that the Court is thought to be excessively legalistic. I should be sorry to think that it is anything else. There is no other safe guide to judicial decisions in great conflicts than a strict and complete legalism. Four decades later in the occasion of his swearing in as a justice of the High Court Michael Kirby said (“Farewell Speech” (1996) 70 Australian Law Journal 271 at 275-276 (footnotes omitted)): Since that April day in 1952 much has changed. The world, our country and its law have changed. Technology has put our species into Space. Scientists have unravelled the double helix of DNA. Information technology has revolutionised our planet and now reaches towards simple artificial intelligence. But the abiding judicial duties of neutrality, integrity and the provision of persuasive reasoning remain as strong today as they were in Sir Owen Dixon’s time. The termination of Privy Council appeals has finally released Australian law from accountability to the judicial values of England that lasted so long. The slow realisation of this fact, and its implications, in a profession often so resistant to change, presents to this, as to other Australian courts and courts of the region, challenges which are exciting and sometimes difficult. There will be no returning to the social values of 1952 when Sir Owen Dixon spoke, still less those of 1903 when this Court was established. It falls to each generation of Australian lawyers, led by this Court, to fashion new principles of the Constitution,
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Business and the Law
common law, and of equity, which will contribute wisely to the good governance of the Australian people. There is now a greater public understanding of the limited, but still very real, scope for judicial creativity and legal development. Judges are now more candid about this aspect of their function. Without a measure of creativity how else would the common law have survived seven centuries, from feudalism to the spaceage? How else would it have endured in so many lands after the sun had set on the British Empire? In any case, the “good old days” were not always so good in the law of Australia, including the common law. They were not so good if you happened to be an Australian Aboriginal. Or indeed, a woman. Or an Asian confronted by the White Australia policy. Or a homosexual Australian. A conscientious objector. A person with heterodox political views. A homeless person. A publisher of the mildly erotic. A complainant against official oppression. A person with little English involved in a court case. We in Australia have now taken a confident turn in our legal journey towards enlightenment and justice for all under the law. But the lesson of our present enlightenment must be that there are other injustices to which we are still impervious, or indifferent or which we do not yet see clearly. We need to defend our legal institutions and to adhere to time- honoured legal principles. Not blindly. And not mechanically. But with ears, minds and hearts always open to the call of justice. Only the quest for justice gives our profession its claim to nobility. These two passages obviously reflect very different attitudes to the judicial rule in accommodating changing community values. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
1.5 THE NATURE AND ROLE OF A LEGAL SYSTEM Common Law and Civil Law Systems [1.240] The totality of the laws that regulate a state –a legally organised community –is known as a legal system which comprises not so much the rules and regulations governing that community but the more basic issues of how those laws are made and applied and administered. Australia is a common law legal system. It shares traditions, principles, procedures, rules and institutions with other common law countries that derived their legal system from England, such as New Zealand, Canada and the United States but, given that the law reflects the general character of the society in which it exists, it is not surprising that over a period of 200 years there is a lack of complete uniformity between the laws of those countries influenced by British settlement. There are obviously important differences between the legal systems of these countries both at the lofty level of constitutional arrangements and at the more basic level of the particular rules and regulations. Nevertheless, those systems have more in common than they have elements of difference. The common law model shares common values, institutions and principles.
Reporter: What do you think of Western civilisation?
[1.250] There are other legal systems throughout the world other than the common law system. Most countries in Western Europe, Latin America and Asia have adopted the civil law system, which has its heritage in Roman law. The common law system is generally
Mahatma Gandhi: I think it would be a very good idea.
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Chapter 1 The Law, the Legal System and the Constitution
uncodified –there is no comprehensive compilation of legal rules in legislation and the judges play a key role in developing the law through the doctrine of precedent, while in civil law systems the law is essentially codified with the law enshrined in comprehensive continuously updated legislative codes with the rule of the judges being to establish the facts and apply the provisions of the applicable code. Other systems include those based in religion (such as Islamic law) or politics (such as socialist law). [1.260] Figure 1.1: World Legal Systems CIVIL LAW
COMMON LAW
MUSLIM LAW
CUSTOMARY LAW
MIXED SYSTEM
ASIA
NORTH AMERICA
EUROPE MIDDLE EAST
CENTRAL AMERICA
WEST INDIES AFRICA
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SOUTH AMERICA
SOUTH EAST ASIA OCEANIA
Source: University of Ottawa, Faculty of Law JuriGlobe –World Legal Systems Research Group (http://www.juriglobe.ca/eng).
Constitutions [1.270] The basis of the legal system of any state is its constitution, defined by Professor Hood Phillips as “the system of laws, customs and conventions which define the composition and powers of the organs of the state and regulate the relations of the various state organs to one another and to the private citizen”: Constitutional and Administrative Law (5th ed, 1973, p 5). The constitution of any country must, at the very least, provide for the process of government and the allocation of legislative (law-making), executive (administrative) and judicial powers, to those bodies which are to exercise them. The development of a country’s constitution –its fundamental political and legal framework –is shaped by history. In the United Kingdom it has developed from the experience of centuries of struggle between the Crown, its council of advisers and the courts. The Constitution of the United Kingdom is unusual in that it is unwritten (New Zealand provides one of the few other examples). Instead of one fundamental document
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It has been said that democracy is the worst form of government except all those other forms that have been tried from time to time. Winston Churchill, speech in the House of Commons, November 1947.
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Business and the Law
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enshrining the country’s government, the principles and rules are found in various statutes, judicial decisions and the unwritten usages and practices (the “conventions”) which have evolved over centuries. A legal tradition … is not a set of rules of law about contracts, corporations, and crimes, although such rules will almost always be in some sense a reflection of that tradition. Rather it is a set of deeply rooted, historically conditioned attitudes about the nature of law, about the role of law in the society and the polity, about the proper organisation and operation of a legal system, and about the way law is or should be made, applied, studied, perfected and taught. J H Merryman, The Civil Law Tradition (Stanford University Press, 1976).
The United States on the other hand has a written Constitution, which was drawn up in 1787, the preamble to which declares that: We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
Similar sentiments are expressed in the preamble to the French Constitution, which declares that: the people freely created the political institutions, based on the “common ideal of liberty, of equality and fraternity” and that France “is a republic, indivisible, secular, democratic and social”.
The US Constitution represented that country’s breaking away from imperial dominance and marked the start of a new era. The sentiments which brought to a head the breaking away from Britain are dramatically expressed in the 1776 Declaration of Independence, the opening words of which state that: When in the Course of Human Events it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the Powers of the earth, the separate and equal station to which the Laws of Nature and of Nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation. We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed. That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles, and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.
In Australia the driving force behind the Constitution was the recognition in the late 1890s that several independent colonies locked within the one island would be better served by a form of cooperative federalism. It came into effect on 1 January 1901. Whereas the US Constitution was a product of revolution and was enacted through that emerging nation’s 20
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Chapter 1 The Law, the Legal System and the Constitution
own processes, the Commonwealth Constitution, a product of evolution, was enacted for Australia by the Imperial (British) Parliament (Commonwealth of Australia Constitution Act 1900 (UK)). The Commonwealth Constitution is discussed in Chapter 3.
1.6 THE DEVELOPMENT OF THE AUSTRALIAN LEGAL SYSTEM The reception of English law [1.280] Unlike many other examples of colonial expansion made by European countries from the seventeenth century onwards, Australia (and in particular New South Wales) was treated as settled by England rather than conquered. The distinction has importance in that a settled colony is regarded as unoccupied (terra nullius) and thereby acquires as its first laws those of the country making a settlement, at least in so far as they are appropriate. On the other hand, a conquered colony will normally retain its existing legal framework, subject to alterations imposed upon it by the conquering or colonising state (Blackstone, Commentaries on the Laws of England (1765)):
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It hath been held, that if an uninhabited country be discovered and planted by English subjects, all the English laws then in being, which are the birthright of every subject, are immediately there in force. But this must be understood with very many and very great restrictions. Such colonists carry with them only so much of the English law as is applicable to their own situation and the condition of an infant colony.
These principles had been expounded prior to Governor Phillip setting sail to establish the colony of New South Wales in 1788, and were confirmed by the Privy Council in Cooper v Stuart (1889) 14 App Cas 286. The effect of Australia being held to be a settled colony rather than a conquered colony was the application of English Law, the failure to acknowledge the rights and customary laws of the Indigenous people (and indeed their very existence) and the Crown’s ownership of all land in the colony.
Terra nullius, Mabo and native title [1.290] As indicated above, the starting point for the legal system of an English colony depends upon whether the land, being uninhabited, was settled or whether the land, being previously occupied was conquered. The view taken in the case of Australia was that at the time of colonisation, New South Wales (and later, Australia) was uninhabited. As Australia clearly was not uninhabited the legal conclusion was supported by the legal fiction that whatever occupation by Indigenous peoples there may have been did not amount to the land being inhabited in the legal sense. In Mabo v Queensland (No 2) [1992] HCA 23 the High Court made law in rejecting the fiction that inhabited land may be terra nullius. Brennan J expressed the history in this way (at [39]):
[Indigenous law was] a subtle and elaborate system highly adapted to the country in which the people led their lives. Milirrpum v Nabalco Pty Ltd (1971) 17 FLR 141 at 143 per Blackburn J.
As the indigenous inhabitants of a settled colony were regarded as “low in the scale of social organisation”, they and their occupancy of colonial land were ignored in considering the title to land in a settled colony. Ignoring those rights and interests, the Crown’s sovereignty over a territory which had been acquired under the enlarged notion of terra nullius was equated with Crown ownership of the lands therein, because, as Stephen CJ said, there was “no other proprietor of such lands” … The theory that the indigenous inhabitants of a “settled” colony
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Business and the Law had no proprietary interest in the land thus depended on a discriminatory denigration of indigenous inhabitants, their social organisation and customs. As the basis of the theory is false in fact and unacceptable in our society, there is a choice of legal principle to be made in the present case. This Court can either apply the existing authorities and proceed to inquire whether the Meriam people are higher “in the scale of social organisation” than the Australian Aborigines whose claims were “utterly disregarded” by the existing authorities or the Court can overrule the existing authorities, discarding the distinction between inhabited colonies that were terra nullius and those which were not.
Six of the seven members of the court agreed that Australian common law recognised a form of native title which, in the cases where it has not been extinguished, reflects the entitlement of the indigenous inhabitants, in accordance with their laws or customs, to their traditional lands.
IN CONTEXT
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The Mabo decision and judicial activism The acts and events by which that dispossession in legal theory has carried into practical effect constitute the darkest aspect of the history of this nation. Mabo v Queensland (No 2) [1992] HCA 23 at 109 per Gaudron and Deane JJ.
[1.300] Justice Dyson Heyden with reference to Mabo (No 2) in a speech prior to his appointment to the High Court (Quadrant Magazine (January 2003)) said: It is questionable whether it is the proper role of the courts to introduce radical changes of this kind, which Parliament had not done, particularly in view of their tendency to cause immense strains, not only within the community as a whole, but also within the legislature. It is legislators which create new laws. Judges are appointed to administer the law, not change it or undermine it.
[1.310] In Mabo, the status of the Australian colonies as “settled” was confirmed, the established order of sovereignty was undisturbed, and although a form of native title was recognised, in respect of any particular land it was to survive only until it was extinguished by a valid exercise of sovereign power by or on behalf of the Crown. For those purposes the court required action by the legislature or the Executive that demonstrated a clear intention to nullify the native interests. For example, native title is lost if freehold title has been granted to someone else. Justice Brennan was of the view that the court was not free “to adopt rules that accord with contemporary notions of justice and human rights if their adoption would fracture the skeleton of principle which gives the body of our law its shape and internal consistency”. His Honour recognised the chaos that would result from a declaration that might permit the entire continent to revert to Indigenous ownership. There is now some uncertainty as to what will suffice to extinguish native title. Crown grants of land and alienation by statute are sufficient. Doubt is raised by lesser dealings.
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Chapter 1 The Law, the Legal System and the Constitution
IN CONTEXT
Native title [1.320] After Mabo recognised native title, many complex issues arose –in particular,
whether native title could co-exist with certain non-Indigenous land tenures. To help clear the way, the Federal Government introduced the Native Title Act 1993 (Cth). The Native Title Act established the National Native Title Tribunal to hear and decide applications as to the existence of native title to particular areas of land. It has been said that “the fundamental requirement in an application for determination of native title is that the Applicants satisfy the court, on the balance of probabilities, that the group to which they belong maintains its connection with its country by laws and customs based on the laws and customs that have governed the group since the date the British claimed sovereignty over the country under claim”.
“Like reading porridge”. BHP’s John Prescott on the substance of native title legislation, The Australian (29 November 1993).
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Subsequently, in a further decision of the High Court, Wik Peoples v State of Queensland [1996] HCA 40, it was decided that native title rights could co-exist with other land tenures. There was a considerable public reaction to Wik, the Howard government describing it as creating “a crisis in land management”. That government subsequently passed amendments, in 1998, to the Native Title Act that substantially cut back native title rights as protected in the 1993 legislation by validating certain non-Indigenous titles; confirming the extinguishment of certain native titles; winding back the right to negotiate for native title; and widening the uses available to others (eg primary producers) on native-title land. The 1998 amendments were deemed to be in breach of Australia’s international human rights obligations by The United Nations Committee for the Elimination of Racial Discrimination.
The constitutional development of the Australian colonies [1.330] In the early days of the establishment of New South Wales as a penal colony the Governor determined which of the existing English laws should apply in NSW and laid down other laws by proclamation. The first courts of criminal and civil jurisdiction established by the Imperial Parliament at an early date by the First Charter of Justice (1787) were to be supplanted, in so far as civil matters were concerned, by the Second Charter of Justice (1814) which established the Supreme Court and a rudimentary subordinate structure. The Third Charter of Justice (1823) provided a comprehensive court system for both civil and criminal matters and the model for the system currently in use in New South Wales. At the same time steps were being taken to vest the law-making power of the colony in a body more representative than the Governor alone. That process of development was furthered in New South Wales when in 1823 the Imperial Parliament passed an Act (under which the Third Charter of Justice was issued) establishing New South Wales as a full colony and constituting a Legislative Council consisting of residents of the colony appointed by the Crown. A legislative procedure was established. Bills were to be initiated by the Governor and then voted upon by the Council. The Chief Justice of the Supreme Court was required to certify that any proposed law was consistent with the laws of England. As a move towards self-government it was a paltry measure.
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One of the things for which we must thank the fathers of the Constitution is that they were very short-sighted. H B Turner, Sydney Morning Herald (14 March 1970).
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Business and the Law Some men look at Constitutions with sanctimonious reverence, and deem them like the Ark of the Covenant, too sacred to be touched. They ascribe to the men of the preceding age a wisdom more than human, and suppose what they did to be beyond amendment. T Jefferson, Letter to Samuel Kercheval (12 July 1816).
[1.340] Some advancement came in 1828 with the passage by the Imperial Parliament of the Australian Courts Act 1828 (Imp), which increased the size of the Legislative Council, the members of which were still to be appointed by the Crown, and which diminished the powers of the Governor. Significantly, the Act provided that all applicable common and statute laws of England in force in 1828 were to have effect in New South Wales. The colony was kept waiting for its first representative government until 1842. In that year the Australian Constitutions Act (No 1) 1842 (Imp) established an enlarged Legislative Council and required that two-thirds of its members must be elected. There were substantial restrictions on those qualified to vote. After a series of intermediate steps the Australian Constitutions Act (No 2) 1850 (Imp) was passed in 1850 with two profound consequences: • it severed the Port Phillip district of New South Wales and created of it the colony of Victoria; and • it empowered the Legislative Councils of the various colonies to amend their constitutions to establish parliaments of two houses. Qualifications for voting were eased.
State constitutions
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[1.350] In New South Wales in 1853 the Legislative Council passed a Bill for submission to the Imperial Parliament, necessary because its terms exceeded the authority granted by the Act of 1850. The purpose of the Bill was to create two houses of parliament, the upper house (the Legislative Council) consisting of nominees of the Governor and the lower house (the Legislative Assembly) consisting of representatives elected by a wider electorate. That Bill, upon its passage by the Imperial Parliament, became the New South Wales Constitution Act 1855 (Imp). Section 1 invested that legislature with power to make laws for the peace, welfare and good government of the colony. Section 15 gave power to alter electoral boundaries and the number of members. Section 21, in furtherance of long- standing British practice, provided that taxation and appropriation Bills were to originate in the Assembly, not the Council. The Act also introduced a system of responsible government under which a government no longer enjoying the confidence of Parliament was to resign. To ease the burden s 51 provided for the payment of pensions to ministers retiring in such circumstances. The result was that New South Wales now had a representative and responsible government. [1.360] The New South Wales Constitution Act 1855 had its counterpart in each of the other colonies. All such constitutions were enacted in furtherance of the powers granted by the Australian Constitutions Act (No 2) 1850 (Imp): • In Victoria, the Victoria Constitution Act 1855 (Imp) was passed and ratified by the Imperial Parliament in 1855. It created a legislature of two elected houses: the Legislative Assembly and the Legislative Council. • Tasmania’s Constitution Act 1855 (Tas) was passed by that colony (then known as Van Diemen’s Land) in 1854 and received the royal assent in 1855. Similarly, it established a Parliament of two elected houses. • The 1855 Constitution Bill of South Australia, which achieved a similar result, was assented to in 1856, becoming the Constitution Act 1856 (SA). 24
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Chapter 1 The Law, the Legal System and the Constitution
• Queensland was separated from New South Wales and established as a colony in 1859. That separation was completed in 1867, the power being held by the Queensland Parliament with its own consolidation of the laws (previously those of New South Wales) relating to the “Constitution of the Colony of Queensland” (the Constitution Act 1867 (Qld)). Having established two houses of Parliament earlier, Queensland abolished its Legislative Council in 1922. • The colony of Western Australia passed its Constitution Bill in 1889, and this was ratified by the Imperial Parliament in 1890 becoming the West Australia Constitution Act 1890 (Imp). Again a Parliament of two elected houses was established.
Increasing legislative authority
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[1.370] The residual doubts as to which English laws applied after settlement were resolved by the Imperial Parliament’s enactment of the Australian Courts Act 1828 (Imp), which provided that, as far as they could be applied, all laws and statutes in force in England on 25 July 1828 should be applied in New South Wales and Tasmania, the colonies in existence at that time. English laws made after 1828 did not automatically apply in the colonies, although the Imperial Parliament retained the power to legislate for the colonies.
Professor La Nauze has provided some analysis of those who constituted the 1891 Convention: “There was one clean-shaven member; one wore a moustache only; one a moustache and side whiskers; the rest beards … The clean- shaven features of Edmund Barton … are untypical; the Constitution emerged from the labours of an overwhelming majority of hairy men”. M Coper, Encounters with the Australian Constitution (CCH, 1987).
A further restriction on the legislative power of the colonies was contained in the Colonial Laws Validity Act 1865 (Imp). That Act, while it confirmed the ability of colonial legislatures to amend their own constitutions, declared that colonial Parliaments had no power to pass laws that were “repugnant” to English laws directly applicable to the colony in question and passed expressly for that purpose. However, English laws, which were part of the received law of the colonies pursuant to the 1828 Act, could be amended or repealed. The restriction on legislative power imposed by the Colonial Laws Validity Act 1865 (Imp) continued, despite the transition of the colonies to statehood on Federation. Although it became increasingly unlikely that the Imperial Parliament would pass laws affecting the States against their wishes, it was not until 1986, when both the Australian and the United Kingdom Parliament passed the Australia Act 1986 (Cth), that any lingering operation of the Colonial Laws Validity Act was terminated and the authority of State Parliaments was confirmed. The Australia Act repealed the Colonial Laws Validity Act, with the consequence that the States (as the colonies became known on Federation) could legislate contrary to imperial legislation. The Australia Act also conferred express authority to pass laws with extra- territorial application, provided that a sufficient connection exists between the Territory or the State and the subject matter of the statute. However, the greatest fetter on the law-making power of State Parliaments is to be found in s 109 of the Commonwealth Constitution, which provides that where a State law is inconsistent with a Commonwealth law, the latter shall prevail (see [1.890]).
Federation [1.380] There was considerable dispute over whether the colonial legislatures of Australia should join to create an Australian government. The debate was contested during the 1880s and 1890s and finally a Bill for a national constitution was submitted to
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all colonies in 1899, with the exception of Western Australia, which at that stage refused to cooperate. It was initially anticipated the colony of New Zealand form part of the Federation. (Indeed New Zealand is still included in the definition of “State” in s 6 of the covering clauses of the Constitution).
Enactment of the Commonwealth Constitution [1.390] Once the negotiations and preparatory phase were over, the Constitution had to be enacted by the British Parliament. The Bill was passed on 5 July 1900 (during this time Western Australia had agreed to hold a referendum on the Bill, which resulted in its approval on 31 July) and in the following September Queen Victoria proclaimed that the Commonwealth of Australia would be born on 1 January 1901, the first day of the new century. Prior to this Australia of course existed as a country –the world’s largest island and the world’s smallest continent –but not as a nation. In simple terms, the events leading to 1 January 1901 converted six colonies –each independent of the other, each with separate legal systems and legislative and executive structures –into one nation. The shared history of each of the colonies made the mission possible. It involved, of course, an agreement to relinquish certain powers –legislative, administrative and judicial. Without that nothing could have been achieved.
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What was necessary (in 1895) was commitment to support the whole, even if at the expense of the interests of some of the parts. That commitment has been described in these terms (Irving, “Mapping a Constitution”, Sydney Morning Herald (25 June 1995)): In an extraordinary moment of self-denial and co-operation, and despite reservations held by Queensland and Western Australia, the Premiers all agreed to pass enabling acts in their respective colonies, so that 10 delegates each could be chosen to meet in a convention, draft a Federal Constitution and have it put to the people before submitting it to the Crown.
While the colonies (now States) gave up powers, rights and duties to the new central government, they retained their individual identities and a great deal of legislative authority. In any federation it is necessary that the powers of government be divided between the central or national government and those of the various States. The method was put by A V Dicey (Law of the Constitution (8th ed, Macmillan, 1927)) at its simplest: Whatever concerns the nation as a whole should be placed under the control of the national government. All matters which are not primarily of common interest should remain in the hands of the several States. The only sure bulwark of continuing liberty is a government strong enough to protect the interests of the people and a people strong enough and well enough informed to maintain its sovereign control over its government. F D Roosevelt, Fireside Chat (14 April 1938).
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In this way the tension naturally arising between the concepts of national union and its constituent but independent States is resolved. The Constitution by which the division of powers is achieved must possess supreme authority and the appropriate judicial mechanism must be in place to resolve issues as to its interpretation. The division of powers under the Constitution, and the Constitution itself, are examined at [1.810] and [1.500].
Breaking the colonial ties [1.400] The fundamental changes to the Australian legal system introduced by the Commonwealth Constitution did not have the effect of granting full legislative independence to the Commonwealth of Australia. The earlier imperial legislation, the Colonial
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Chapter 1 The Law, the Legal System and the Constitution
Laws Validity Act 1865 (Imp), continued to limit the legislative competence of the States and the Commonwealth by prohibiting legislation contrary to the provisions of Imperial legislation applying in Australia. Pressure from former British colonies who sought independence from Britain led to the enactment of the Statute of Westminster Act 1931 (Imp), which provided for the dominion Parliaments to assume full legislative competence. This imperial legislation was adopted by the Commonwealth Parliament in the Statute of Westminster Adoption Act 1942 (Cth). As a result of this legislation, the Colonial Laws Validity Act no longer applied to the Commonwealth of Australia, which could finally legislate contrary to imperial legislation and make laws with extra-territorial effect. The Imperial Parliament could no longer legislate for the Commonwealth of Australia, unless the Commonwealth Parliament expressly requested and consented to such an enactment. An example of this process is the Australia Act 1986 passed by both the Imperial and Commonwealth Parliaments, which finally repealed the Colonial Laws Validity Act and freed the States (who were not affected by the Statute of Westminster) from the restrictions on legislative power imposed by that legislation. Today, the legislative competence of the Commonwealth and the States is a matter for domestic law to be allocated under the Commonwealth and State constitutions, and is free from the interference of, or limitations imposed by, the Imperial Parliament.
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1.7 AN OUTLINE OF THE AUSTRALIAN LEGAL SYSTEM [1.410] In addition to inheriting British laws, Australia also inherited the UK model of liberal democracy known as the Westminster system incorporating a constitutional monarchy, the separation of powers, responsible or representative government, the sovereignty of Parliament and the rule of law.
A constitutional monarchy [1.420] Australia is a constitutional monarchy. The official Head of State of the Commonwealth of Australia and the States is the Monarch, the Queen of Australia (as Her Majesty has been titled since the Royal Style and Titles Act 1973 (Cth)). (Australian citizens are indeed entitled to receive certain “nationhood material” –including a portrait of Her Majesty –on request to their federal member of parliament). The reference to a constitutional monarchy signifies that the Monarch is Head of State pursuant to underlying constitutional arrangements rather than pursuant to the force of arms which was of course the case in the Middle Ages. The powers of the Monarch, represented by the Governor-General in relation to the Commonwealth, and the Governor in relation to the States, are largely formal today, the constitutional arrangements requiring the Head of State to act on the advice of her or his ministers (known formally as the Executive Council). The debate as to whether Australia should move from a constitutional monarchy to a republic is referred to below.
And indeed it is one of the characteristic marks of English liberty, that our common law depends upon custom; which carries this internal evidence of freedom along with it, that it probably was introduced by the voluntary consent of the people. Blackstone, 1 Comm 74.
Federation, the Constitution and the division of powers [1.430] The constitutional arrangements outlined above are enshrined in so far as the Commonwealth of Australia is concerned, in the Commonwealth Constitution of 1900 which was enacted for Australia by the Imperial (United Kingdom) Parliament to unite
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the separate Australian colonies in a federation. By definition, a federation involves a division (or distribution) of powers between the constituent elements –in Australia that is between the States and the federal body, the Commonwealth of Australia. One of the most important roles of the Constitution is the division of powers between the Federal and State legislatures. The Constitution confers a limited number of exclusive powers on the Commonwealth (defence, foreign trade and immigration etc) but most of the Commonwealth’s powers, granted under s 51, are concurrent powers. These powers can be exercised by the Commonwealth and the States but, in the event of conflict, the Commonwealth law will prevail (s 109). Powers which are not expressly mentioned in the Constitution, residual powers, remain with the States.
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The separation of powers [1.440] Australia also inherited the Westminster system’s concept of the separation of powers, under which the functions of government, viz, (i) legislative (making laws), (ii) executive (administering laws) and (iii) judicial (applying laws to individual cases), are allocated to different institutions. Under the Commonwealth Constitution, legislative power is formally allocated to the Commonwealth Parliament, executive power to the Crown (the Governor-General acting through the Federal Executive Council, effectively the government) and judicial power to the courts. Under the Westminster system the separation of powers is not absolute. In Australia (unlike eg the United States), there is a substantial overlap between the Executive and the legislature. The Prime Minister and the Ministers of the Crown, who in practical terms constitute the Executive, are required by the Constitution to be members of the legislature.
Responsible government Democracy is the recurrent suspicion that more than half the people are right more than half the time. E B White.
[1.450] Australia also inherited the concept of responsible or representative government, a term which is used today in a general sense to denote “a form of government which is responsive to public opinion and answerable to the electorate” (D Walker, Oxford Companion to Law (Oxford University Press, 1980)) and an executive government responsible to the legislature. It is a concept of real and enduring significance. It is a concept which is given effect to in the Constitution and has a real and enduring impact in shaping our personal liberties, for example, through supporting an implied right of political communication under the Constitution (see [1.500]) and underpinning the rule of law.
The sovereignty of Parliament [1.460] It is a fundamental principle of the Westminster system that Parliament is the supreme law-making body. This principle is enshrined in the Constitution but, given that Australia is a federal system, is not absolute in Australia because of the necessity for legislative power to be all divided between the Commonwealth Parliament and the State Parliaments.
The rule of law [1.470] It will be clear from what has already been said in this chapter that there exists a problem in achieving the correct balance to be struck between personal freedom and 28
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Chapter 1 The Law, the Legal System and the Constitution
legislative power in a modern democracy. Traditionally, the rule of law has been regarded as the means of maintaining that balance. Although it is often cited as the foundation of constitutional democracy it is not easy to define. Professor Walker has suggested in The Rule of Law (Melbourne University Press, 1988, p 3) that this is because: it manifests itself more as an absence than a presence, rather like those other great negatives, peace and freedom. It imports an attitude of restraint, an absence of arbitrary coercion by governments or by other individual groups.
The rule of law is essentially a rule of fair play. All members of society must be equally subject to the ordinary law of the land, and Parliament itself, although largely omnipotent in the Australian context, is subject to the rule to the extent that it should act fairly and not arbitrarily. A particular application of the rule is in the control of public administration. The delegation of near legislative powers to administrative departments and the creation of quasi-judicial bodies demand active safeguards and plead for a restoration of the influence of the rule of law. Ruth McColl SC has commented that the “essence of the rule of law is that all authority is subject to, and constrained by law” and that it “lies at the heart of Australian society”: (address to Australian Bar Association, 13 November 2001). Former High Court Justice Robert French argues that it is “perhaps the most important protector of our freedom and rights” (The Australian, 17 February 2017).
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IN CONTEXT
The rule of law [1.480] Under the “rule of law” … it is not possible, at least without explicit parliamentary legislation to the contrary, for most important material or personal interests of one citizen to be radically damaged against that citizen’s wishes by another citizen, a corporation, or an arm of government unless some independent person holds that that is right. The rule of law prevents citizens being exposed to the uncontrolled decisions of others in conflict with them. Powerful citizens are not permitted to use self-help against other citizens so far as their arbitrary might permits. Officers of the state are not permitted to imprison or otherwise deal forcibly with citizens or their property merely because they think it is their duty to do so. Mobs are not able to loot or lynch their enemies at will. Indeed, St Augustine thought that without a rule of law states themselves were nothing but organised robber bands. The rule of law operates as a bar to untrammeled discretionary power. It does so by introducing a third factor to temper the exposure of particular citizens to the unrestrained sense of self-interest or partisan duty of other citizens or institutions –an independent arbiter not affected by self-interest or partisan duty, applying a set of principles, rules and procedures having objective existence and operating in paramountcy to any other organ of state and to any other source of power, and possessing a measure of independence from the wrath of disgruntled governments or other groups. These independent arbiters are usually judges.
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I believe with all my heart that justice cannot be rationed. Justice is owned by the people. Justice must be available to the people and until justice is affordable to all members of the community we do not have a proper or effective judicial system. J R Marsden, President, Law Society of New South Wales.
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Unpalatable statute law may not be disregarded or rejected, merely because it is unpalatable. Duport Steels Ltd v Sirs [1980] ICR 161 at 190 per Lord Scarman.
The rule of law preserves for citizens an area of liberty in which they can live their lives free from the raw and direct application of power. It creates a framework within which the creative aspects of human life can thrive. The rule of law dilutes power; it diffuses it; and yet it also makes it more efficient. The rule of law prevents police officers trespassing on and seizing private property or holding citizens without trial or other hearing; yet it permits and facilitates the procurement of evidence in a regular way with a view to the convincing demonstration of criminal guilt in due course. It prevents the employees of banks, for example, applying the strict terms of oppressive mortgages ejecting debtors from their houses at will; but it enables the enforcement of whatever contractual rights there are in due course. The rule of law operates on principles which are known or readily discoverable and hence do not change erratically without notice; which are reasonably clear; which apply uniformly and generally, not in a discriminatory way; which apply prospectively, not retroactively; and which are in force through public trials operating on rational procedural rules before judges who are independent of the state and of all parties. All parties are treated as intrinsically important, however unequal in strength and however lacking in popularity or virtue they may be. The more ineffective a state’s laws are against private coercion or anarchy or government power, the less they can be described as representing the rule of law. The purpose of the rule of law is to remove both the reality of injustice and the sense of injustice. Justice Dyson Heyden, “Judicial Activism and the Death of the Rule of Law” (January 2003) Quadrant Magazine.
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The Australian legal system [1.490] It should be apparent even from this brief outline that the Australian legal system is a complex animal. It may indeed be regarded as comprising nine separate but related systems –the Commonwealth system, the six State systems and the two Territory systems –each of which is underpinned by a constitution (in the case of the Commonwealth and the States) or empowering legislation providing for self-government under the jurisdiction of the Commonwealth (in the case of the Territories). In many areas where the Commonwealth does not have exclusive legislative jurisdiction there can be nine separate regulatory regimes, although in this, as in other areas where uniformity is desirable, agreement between Commonwealth, State and Territory governments has increasingly delivered a greater degree of uniformity in the disparate schemes. While the federal and State/Territory tiers of Australian democracy are accommodated in the Constitution, Australians’ third tier of government –local government –is entirely overlooked. Local and municipal authorities have massive powers to pass delegated legislation under powers delegated to them by the legislative arm of government, and to make binding administrative decisions which affect all individuals and businesses –the lack of constitutional recognition may be thought surprising.
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Chapter 1 The Law, the Legal System and the Constitution
1.8 THE CONSTITUTION The Constitution [1.500] The events leading to Federation and the Constitution that enshrined the arrangements for the division of power between the Commonwealth and the States and for the functions of government within the Commonwealth were outlined above. It may be thought surprising today that the Australian Constitution was formally enacted by the Imperial Parliament as s 9 of the Commonwealth of Australia Constitution Act 1900 (UK). This simply reflects the historical fact that Australian Federation and the Constitution developed not from revolution but by evolution. In place of the stirring words of, for example, the US and French Constitutions which reflect the circumstances in which the constitutions of those countries were drafted, the preamble to the legislation of the Imperial Parliament enacting the Commonwealth Constitution seem very prosaic:
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Whereas the people of New South Wales, Victoria, South Australia, Queensland, and Tasmania, humbly relying on the blessing of Almighty God, have agreed to unite in one indissoluble Federal Commonwealth under the Crown of the United Kingdom of Great Britain and Ireland, and under the Constitution hereby established: And whereas it is expedient to provide for the admission into the Commonwealth of other Australasian Colonies and possessions of the Queen: Be it therefore enacted by the Queen’s most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:
What the Commonwealth proposes will be a test of the genuineness of its commitment to cooperative federalism rather than the stupid antagonism and rivalry which has grown up over the post half-century. P P McGuinness, The Australian (27 October 1990).
[1.510] The Constitution is divided into eight chapters: Chapter I
The Parliament
Chapter II
The Executive Government
Chapter III
The Judicature
Chapter IV
Finance and Trade
Chapter V
The States
Chapter VI
New States
Chapter VII
Miscellaneous
Chapter VIII Alteration of the Constitution
IN CONTEXT
The spirit of magna carta could serve us well today [1.520] The English template for individual liberty retains a universal appeal 800 years later On Monday it will be 800 years since a bunch of barons forced King John of England to give his seal to a documentary they had drawn up. Scrawled on sheepskin, in ink made from dust, water and apples, the document contained 63 clauses.
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Its aim was to prevent a civil war between the irate barons and autocratic John. To avoid his kingdom descending into strife, the barons said, John should accede to their demands, which were as varied as “There should be standard measures of ale, wine and corn throughout the kingdom” to “If a man dies owing money to Jews, his wife (should) pay nothing towards the debt from it”. Reluctantly, John signed. But the peace was short-lived. Within weeks the document had been annulled by Pope Innocent III, who described it as “shameful” and the barons and king were at war. None of the men who gathered in that field near Windsor on June 15, 1215 to watch John give a tentative nod to their demands could have imagined the impact their document would have –not just in England, but everywhere. It’s no exaggeration to say that Magna Carta, as it came to be known, has shaped the world we live in more than any other single document. It propelled England into the modern era, helped give birth to liberty in America, inspired French revolutionaries, shaped Aussie law, and inspired radicals as far afield as South Africa and China. Not bad for a list of demands made by some pissed-off medieval barons 800 years ago.
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The reason the Great Charter had such a planet-quaking impact is because, for all its quirkier demands about ale, women and debt, it unleashed a simple but revolutionary idea: that the power of the state must sometimes be shackled in order to allow individual liberty and autonomy to flourish. The idea sings through clauses 38 and 39. “In future no official shall place a man on trial upon his own unsupported statement, without producing credible witnesses to the truth of it,” says clause 38. Here, in words that sounds as relevant to us today as they must have done to those barons 800 years ago, we have one of the earliest articulations of the rule of law. Let people be, Magna Carta says, unless there’s a strong case they’ve done something wrong. Clause 39 says: “No free man shall be seized or imprisoned, or stripped of his rights or possessions, or outlawed or exiled … except by the lawful judgment of his equals or by the law of the land.” Here again we have a proposal to limit pesky officials’ ability to interfere with people’s rights and property unless they have a very good reason to do so, Magna Carta, with its king-defying –even God-defying –insistence that the power of the state should be limited in the name of letting “free men” go about their business, let the genie of liberty out of the bottle. And there was no forcing it back in. Subsequent generations built on Magna Carta, arguing that it shouldn’t only be barons who enjoyed protection against nosy, interfering officials –so should everyone. In England in the 17th century, the radical jurist Edward Coke cited Magna Carta in his successful arguments against the right of officials to search people’s homes. He said: “(T)he house of everyone is to him as his Castle and Fortress.”
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Chapter 1 The Law, the Legal System and the Constitution
That is, an Englishman’s home is his castle. Coke was saying the falling-down home of a dirt-poor farmer should be treated the same as a baron’s castle: a place where officialdom should not tread. And so was Magna Carta’s promise of liberty spread beyond barons. In America in the 1760s, the revolutionary James Otis denounced the British colonialists’ use of “writs of assistance”, which allowed them to search people’s homes. Such meddling went against Magna Carta, he said. He went so far as to say that when the document was signed in 1215, “American independence was then and there born”. The Fourth Amendment of the US constitution –which guarantees “The right of the people to be secure in their persons, houses, papers and effects” –made clause 39 of Magna Carta a reality for all. Magna Carta energised the French Revolution. The 1789 Declaration of the Rights of Man and Citizen borrows from the barons when it says no man should be “indicted, arrested, or detained except in cases determined by law”. In South Africa, Nelson Mandela appealed to Magna Carta in his famous 1964 trial, insisting that he and all black South Africans deserved protection against the excessive power of apartheid courts.
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In Tiananmen Square in 1989, the rowdy students who faced down the Communist Party’s tanks also harked back to that document drawn up by English barons. They pinned Magna Carta to their “Democracy Wall”. On the 800th anniversary of Magna Carta, the thing most people are saying about it is that it pretty much invented the rule of law. That’s true. But it makes Magna Carta’s achievements sound boring, lawyerly. For what Magna Carta ultimately did is point to a potential, and profound, shift in the relationship between the state and the individual. It implied that there’s something bad in an overweening state, and something good in letting individuals be. “The right to be let alone”, as American revolutionaries would put it. “Let alone” –this is Magna Carta’s true revolutionary idea, the one that spoke to generation after generation who longed to get officials off their backs so they could live more freely. The Levellers, the most radical wing in the English Civil War of the 1640s, put it best. Magna Carta, they said, was a “brazen wall and impregnable bulwark” protecting people from power. This is what humans have longed to build, using Magna Carta as a foundation stone: a brazen wall guarding the individual from officialdom. From the Levellers to the Tiananmen revolters, the human, demand has been the same: shackle the state in order that the individual might live a freer happier life. Today, even as we celebrate Magna Carta’s birthday, this idea is under attack. We’re no longer “let alone”. The bossiness of the state is growing, at the expense of the individual autonomy. Whether it’s banning smoking, restricting boozing, censoring speech, reading our emails, storing our phone data, or telling us how we should eat, parent and behave, the state’s instinct to interfere in our lives is as strong today as it’s ever been.
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The state is breaking down the “impregnable bulwark” between itself and us, now monitoring the minutiae of our lives. Waving the Magna Carta won’t ward off these nannies, nudgers and naggers. Instead we need to recover the spirit of Magna Carta, which was expanded on by hordes of humans over 800 years: the spirit of freedom; the spirit of independence; the spirited demand to be let alone to determine our destinies for ourselves. B O’Neill, The Australian (13 June 2015).
Chapter I: The Parliament [1.530] Chapter I, s 1 of the Constitution vests the legislative power of the Commonwealth in a “Federal Parliament, which shall consist of the Queen, a Senate, and a House of Representatives, and which is hereinafter called “The Parliament”, or “The Parliament of the Commonwealth”. Chapter 1 also provides for the establishment of the Houses, the significant procedures, and the powers of the Parliament. These provisions are dealt with in five parts: Part I General; Part II The Senate;
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Part III The House of Representatives; Part IV Both Houses of the Parliament and Part V Powers of the Parliament. The powers of the Parliament are discussed at [1.660]. The Parliament itself and the nature of the legislative process are discussed in Chapter 3.
Chapter II The Executive Government No constitution can work too smoothly if politicians play too rough. J Kerr, Sydney Morning Herald (14 September 1985).
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[1.540] This chapter of the Constitution vests the executive power of the Commonwealth in the Queen and provides for it to be “exercisable by the Governor-General as the Queen’s Representative” (s 61) with the advice of the Federal Executive Council (s 62). The command-in-chief of the naval and military forces of the Commonwealth is vested in the Governor-General as the Queen’s Representative (s 68). The Federal Executive Council comprises the Ministers of State for the Commonwealth, who must sit in Parliament and who “hold office during the pleasure of the Governor-General” (s 64). Section 64 creates an exception to the general rule that the Governor-General acts with the advice of the Federal Executive Council. It creates a reserve power of dismissal which may be exercised without the advice of the Executive Council or indeed in a manner contrary to any such advice. The most dramatic example of the Governor-General’s exercise of the reserve power was the dismissal of the Whitlam Labor government by the Governor- General Sir John Kerr in 1975. This was due to the government’s inability to pass supply legislation necessary to fund the administration of the Commonwealth through the Senate. The Governor-General then appointed the Liberal-Country Party coalition, led by Malcolm Fraser, which controlled the Senate and could pass the legislation as
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Chapter 1 The Law, the Legal System and the Constitution
caretaker government until a federal election could be held. The reserve power under s 64 conflicts with the long-established constitutional conventions, the accepted practices that are recognised as obligatory events, though not laid down in statute or case law, that the Governor-General acts only on the advice of her or his government. The events of 1975 are still strongly debated by constitutional scholars. The executive power is discussed in more detail in Chapter 4.
Chapter III The Judicature [1.550] Chapter III of the Constitution vests the judicial power of the Commonwealth in a “Federal Supreme Court, to be called the High Court of Australia, and in such other federal courts as the Parliament creates, and in such other courts as it invests with federal jurisdiction” (s 71). The chapter also provides for the appointment, tenure and remuneration of the Justices of the High Court (s 72) (such provisions being designed to preserve their independence) and defines the jurisdiction of the High Court (ss 73-78). The High Court and the judicial power are discussed in more detail in Chapter 2.
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Chapter IV Finance and trade [1.560] Chapter IV of the Constitution contains some of the most important and contentious provisions of all. Section 90 grants exclusive power to the Federal Parliament over customs and excise duties, while s 92 provides that “trade, commerce and intercourse among the States … shall be absolutely free” and has alone provided thousands of pages of High Court judgments as to its meaning, which provides evidence of remarkable shifts in understanding. There are encouraging signs that the confusion may be ending. The meaning of s 92 is discussed in [1.1010].
Chapter V The States [1.570] Chapter V of the Constitution preserves State constitutions (s 106), State laws (s 108) and the powers of State Parliaments (s 107). Section 109, however, provides that “when a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid”. Section 109 is one of the most difficult and most litigated sections of the Constitution (see [1.890]). Section 115 prohibits States from coining money and s 116 prohibits the Commonwealth from legislating with respect to religion, apparently disenfranchising both Caesar and God in succeeding sections.
Chapter VI New States [1.580] Chapter VI of the Constitution provides for new States to be admitted to the Commonwealth (ss 121, 124) and for the territorial limits of a State to be altered (s 123). Chapter VI also provides for the Commonwealth Parliament’s authority over the Territories. Section 122 states that: The Parliament may make laws for the government of any Territory surrendered by any State to and accepted by the Commonwealth, or of any Territory placed by the Queen under the authority of and accepted by the Commonwealth, or otherwise acquired by the
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In a federal system the absolute independence of the judiciary is the bulwark of the constitution against encroachment whether by the legislature or by the executive. R v Kirby; Ex parte Boilermakers Society of Australia (1957) 95 CLR 529 (Privy Council)
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Business and the Law Commonwealth, and may allow the representation of such Territory in either House of the Parliament to the extent and on the terms which it thinks fit.
Laws establishing responsible governments for both the Northern Territory and the Australian Capital Territory have been passed under this power.
Chapter VIII Alteration of the Constitution [1.590] Chapter VIII contains only one section (s 128) that provides the procedure by which the Constitution may be amended. In order to protect both the Constitution and the less populous States, s 128 requires that any law to alter the Constitution must be passed by both houses of Parliament and then submitted to vote in each State. That vote must be carried by a majority of voters and a majority of the States. Section 128 provides that:
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Make no mistakes about referendums. Their results are notorious. You couldn’t introduce free beer by referendum. Sir John Walsh, Sydney Morning Herald (5 June 1965).
This Constitution shall not be altered except in the following manner: The proposed law for the alteration thereof must be passed by an absolute majority of each House of the Parliament, and not less than two nor more than six months after its passage through both Houses the proposed law shall be submitted in each State and Territory to the electors qualified to vote for the election of members of the House of Representatives. But if either House passes any such proposed law by an absolute majority, and the other House rejects or fails to pass it, or passes it with any amendment to which the first-mentioned House will not agree, and if after an interval of three months the first-mentioned House in the same or the next session again passes the proposed law by an absolute majority with or without any amendment which has been made or agreed to by the other House, and such other House rejects or fails to pass it or passes it with any amendment to which the first-mentioned House will not agree, the Governor-General may submit the proposed law as last proposed by the first-mentioned House, and either with or without any amendments subsequently agreed to by both Houses, to the electors in each State and Territory qualified to vote for the election of the House of Representatives. When a proposed law is submitted to the electors the vote shall be taken in such manner as the Parliament prescribes. But until the qualification of electors of members of the House of Representatives becomes uniform throughout the Commonwealth, only one-half the electors voting for and against the proposed law shall be counted in any State in which adult suffrage prevails. And if in a majority of the States a majority of the electors voting approve the proposed law, and if a majority of all the electors voting also approve the proposed law, it shall be presented to the Governor-General for the Queen’s assent. No alteration diminishing the proportionate representation of any State in either House of the Parliament, or the minimum number of representatives of a State in the House of Representative, or increasing, diminishing, or otherwise altering the limits of the State, or in any manner affecting the provisions of the Constitution in relation thereto, shall become law unless the majority of the electors voting in that State approve the proposed law. In this section, “Territory” means any territory referred to in section one hundred and twenty-two of this Constitution in respect of which there is in force a law allowing its representation in the House of Representatives.
This requirement of a “double majority” allows the States with small populations to have an opportunity to prevent constitutional change that is contrary to their interests being forced upon them simply because of the greater number of voters in a few States. The provision has had the effect that amendment of the Commonwealth Constitution is a rare event. 36
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Chapter 1 The Law, the Legal System and the Constitution
UNFINISHED BUSINESS –A REFERENDUM TO CHANGE THE CONSTITUTION TO RECOGNISE INDIGENOUS PEOPLE G Williams, Sydney Morning Herald (11 April 2015)
[1.600] Recognition of Indigenous Australians in constitution will help alleviate disadvantage. The 1967 referendum that deleted discriminatory references to Aboriginal people from the constitution left unfinished business. Half a century ago, 30 University of Sydney students boarded a bus and journeyed through rural New South Wales to draw attention to discrimination against Indigenous people.
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Their landmark action plus the determined advocacy or Aboriginal and Torres Strait Islander campaigners generated overwhelming support for removing discrimination against Aboriginal people from the constitution. At the 1967 referendum more than nine in 10 Australians voted yes, making it the most successful in Australia’s history. Since then, many people –including a long list of Aboriginal and Torres Strait Islanders and successive prime ministers –have agitated for further changes as it became clear that the 1967 referendum had left unfinished business. The 1967 referendum deleted discriminatory references specific to Aboriginal people, but put nothing in their place. Torres Strait Islanders have never been referred to in the constitution. As a result, rather than recognising Indigenous people, the referendum left a silence at the heart of the constitution.
The document reflects Australia’s history of British settlement, but fails to mention the much longer occupation of the continent by Aboriginal and Torres Strait Islander peoples. It is as if their history does not matter, and is not part of the nation’s story. That referendum also failed to deal with clauses in the constitution that permit racial discrimination generally. As the group in the community that has most often been subjected to discrimination under the law –such as in regard to voting rights –Aboriginal people have spoken strongly about their desire to see such clauses removed. Doing this would help modernise the Australian constitution and bring it into line with contemporary values. Indeed, Australia is now the only democratic nation in the world that has a constitution with clauses that still authorise discrimination on the basis of race… … So constitutional change could have broad, positive effects that extend far beyond the law. For example, the referendum could unite Australians around a sense of their shared history which, for the first time in the constitution, would include the long habitation of the continent by Indigenous peoples. As in other nations, these words in the founding document could be used in schools to educate young people.
IN CONTEXT
Constitutional reform [1.610] The Australian Constitution can only be changed by referendum. There have been
44 referendums held since 1901 and only eight of these have been successful. The most successful referendum in Australia’s history was in 1967 where 90.77% of the nation voted
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Business and the Law
“Yes for Aborigines”. The 1967 referendum amended the Australian Constitution to give the federal parliament the power to make laws in relation to Aboriginal and Torres Strait Islander people and to allow for Aboriginal and Torres Strait Islander people to be included in the census. This is in stark contrast to the 1999 referendum which proposed to alter the Australian Constitution so that Australia became a republic and insert a new preamble. The result was a no vote for both amendments. On the question of a republic, 54.87% voted against the proposal and on the question of the preamble 60.7% voted no. Australian Human Rights Commission, Constitutional reform: Fact Sheet –Historical Lessons for a Successful Referendum (http://www.humanrights.gov.au/publications).
Implied rights under the Constitution
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[1.620] Unlike the US Constitution the Commonwealth Constitution does not incorporate a Bill of Rights guaranteeing basic personal freedoms. In the 1990s the High Court nevertheless recognised an implied right of free speech in the form of freedom of political communication distilled from the concept of representative or responsible government enshrined in the Westminster system and given effect in the Constitution.
Australian Capital Television Pty Ltd v The Commonwealth [1992] HCA 45 [1.630] Commonwealth legislation required television and radio broadcasters to provide free time for political broadcasts prior to elections. Of the total time available for such broadcasts, 90% was to be made available to political parties already represented in the relevant Parliament in proportion to their share of votes in the last election. While the Commonwealth claimed that this system offered equality of access to all, in fact it denied substantial access to those who had not succeeded at the prior election. The High Court held that the legislation was invalid. The principal argument raised against the legislation was based on the fact that the Constitution provides for representative government. It was argued that it was essential to the effective operations of that system of representative government that there should be a guarantee of freedom of expression in relation to public and political affairs. The High Court adopted that view and said that such a guarantee of freedom of expression was necessarily implied in the Constitution itself where it created that system of representative government. Mason CJ stated that: The Constitution provided for representative government by creating the Parliament … in which legislative power is vested (s 1), the members of each House being elected by popular vote … The very concept of representative government and representative democracy signifies government by the people through their representatives. Translated into constitutional terms, it denotes that the sovereign power which resides in the people is exercised on their behalf by their representatives … The Constitution brought into existence a system of representative government for Australia in which the elected representatives exercise sovereign power on behalf of the Australian people … The point is that the representatives who are members of Parliament and Ministers of State are not only chosen by the people but exercise their legislative and executive
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Chapter 1 The Law, the Legal System and the Constitution powers as representatives of the people. And in the exercise of those powers the representatives of necessity are accountable to the people for what they do and have a responsibility to take account of the views of the people on whose behalf they act.
His Honour held that freedom of communication, at least in relation to public affairs and political discussion, was indispensable to that accountability: Only by exercising that freedom can the citizen communicate his or her views on the wide range of matters that may call for, or are relevant to, political action or decision. Only by exercising that freedom can the citizen criticise government decisions and actions, seek to bring about change, call for action where none has been taken and in this way influence the elected representatives. By these means the elected representatives are equipped to discharge their role so that they may take account of and respond to the will of the people. Communication in the exercise of the freedom is by no means a one-way traffic, for the elected representatives have a responsibility not only to ascertain the views of the electorate but also to explain and account for their decisions and actions in government and to inform the people so that they may make informed judgments on relevant matters. Absent such a freedom of communication, representative government would fail to achieve its purpose, namely, government by the people through their elected representatives; government would cease to be responsive to the needs and wishes of the people and, in that sense, would cease to be truly representative.
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[1.640] The implied right of free speech was later reconsidered by the High Court in the context of a defence to defamation in Theophanous v Herald & Weekly Times Ltd [1994] HCA 46 and Lange v Australian Broadcasting Corporation [1997] HCA 25 (Political Free Speech case). In Theophanous the High Court by a 4:3 majority held that defamation was subject to the implied freedom of political communication and that there was a “constitutional defence” where a defamatory publication was a matter of political discussion. In Lange a former Prime Minister of New Zealand brought a defamation action against the ABC who defended it on the basis of the “Theophanous defence”. The High Court retreated from Theophanous –it upheld the implied constitutional right of political communication but held that it operated as a constraint on legislation and did not confer personal rights to freedom of speech. The High Court nevertheless developed a modified form of qualified privilege to accommodate the principle that: “each member for the Australian community has an interest in disseminating and receiving information, opinions and arguments concerning government and political matters that affect the people of Australia”.
1.9 THE SEPARATION OF POWERS –LEGISLATURE, EXECUTIVE AND JUDICIAL POWERS [1.650] The government of any organised community requires the exercise of legislative, executive and judicial powers. Legislative power is the power to make laws. Executive power is, in general terms, “the authority within the State which administers the law, carries on the business of government and maintains order within and security from without the State” (W A Wynes, Legislative, Executive and Judicial Powers in Australia (4th ed, The Law Book Co, 1970) p 364). Judicial power is the power to apply the law to individual cases and to resolve disputes arising under the law.
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Power corrupts. Absolute power is kind of neat. John Leman, US Secretary of the Navy.
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Business and the Law
The institutions in which the three branches of government are entrusted are provided for in the Constitution.
Legislative power [1.660] Section 1 of the Constitution provides that: The legislative power of the Commonwealth shall be vested in a Federal Parliament, which shall consist of the Queen, a Senate and a House of Representatives, and which is hereinafter called “The Parliament”, or “The Parliament of the Commonwealth”.
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The essential feature of the Westminster system is the recognition that Parliament has the absolute right to make or unmake any law without any limitation. This sovereignty or supremacy of Parliament was the outcome of a long and bitter struggle between the Monarch and the Monarch’s council. The council, the ancient predecessor of the elected houses of Parliament, ultimately prevailed when in 1689 the Bill of Rights denied the Monarch any right to legislate independently of the embryonic assembly of representatives. The formal institution of Parliament which developed in the United Kingdom, the Westminster Parliament, provided the model for Australia. Under the Commonwealth Constitution the legislative, or law-making, function of government is vested in the Federal (or Commonwealth) Parliament –a bicameral legislature comprising two elected houses, the Senate or upper house, consisting of members elected from and representing the States, and the House of Representatives or lower house, consisting of members elected to represent constituencies into which the country is divided. The vesting of certain legislative powers in the Commonwealth does not deny the fundamental role assigned to the High Court by the Constitution. It is the right and the task of the High Court to interpret the Constitution, a task which involves determining the proper role of the Parliament within that Constitution. Power granted is seldom neglected. United States v Wunderlich 342 US 98 at 101 (1951).
The Crown –represented by the Governor-General –is also part of the legislature and measures passed by both houses of Parliament are not law unless and until they receive the royal assent. Similar constitutional arrangements exist under the constitutions of the States (with the exception of Queensland which has a unicameral legislature, its upper house having been abolished in 1922). In the States, the upper house is called the Legislative Council and the lower house is called the Legislative Assembly, except in Tasmania and South Australia where it is called the House of Assembly. The Crown is represented in each State by a State Governor. The Territories have power to make their own laws but their power derives from Commonwealth legislation and their legislatures are subordinate legislatures to the Commonwealth Parliament. In Australia, the consequences of Federation impose a significant qualification on the sovereignty of Parliament. In unitary systems such as those of the United Kingdom or New Zealand, the central legislature is the supreme law-making authority. Other legislative bodies may be allowed to function but they will always be subordinate to the primary legislature. In federal systems such as those of Australia, the United States or Canada, legislative powers must be shared between the central body and its constituent parts (in Australia between the Commonwealth and the States). A vital role of the Constitution is the allocation of power between the Commonwealth and the States. Australia adopted
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Chapter 1 The Law, the Legal System and the Constitution
the US model whereby the Federal Parliament’s powers are limited by and enumerated in the Constitution with all residuary powers being vested in the State parliaments. The Canadian model differs in that under the Constitution, specified legislative powers are assigned to the provinces and the residue, the unspecified powers, is vested in the Dominion Parliament. The legislative competence of the Parliament is discussed throughout this chapter. The machinery of enacting legislation is discussed in Chapter 3.
Executive power [1.670] Section 61 of the Constitution provides that: The executive power of the Commonwealth is vested in the Queen and is exercisable by the Governor-General as the Queen’s representative, and extends to the execution and maintenance of this Constitution, and of the laws of the Commonwealth.
The executive power vested in the Queen is exercisable by the Governor-General on the advice of the Federal Executive Council (s 62) drawn from the Ministers of Crown, that is, those members of the Government (the party controlling the lower house) appointed by the Governor-General on the advice of the Prime Minister (the leader of the government) to administer the Commonwealth Departments of State.
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Patrick O’Brien has traced the development of executive government (“The Fatal Flaw: Has the Westminster System Produced a Form of Executive Dictatorship?”, Time Magazine (16 September 1991)): The origins of the Westminster system lie in the long struggles between the British crown and the British parliament over the right to exercise the executive powers of government. The battle for power began in the 17th century when Charles I claimed a divine right to rule and sacked the parliament. But parliament refused to be sacked: there was a revolt, Charles was tried, convicted of treason and executed. There followed decades of turmoil, including a civil war and a republican dictatorship under Cromwell. Over time, a system of absolute monarchy was transformed into a constitutional monarchy and, in the process, the crown, albeit reluctantly, relinquished its powers, to a “sovereign parliament” at Westminster hence the term “Westminster system”. There was a struggle between parliament and the crown for sovereignty; the people had no real part in it … Under the Westminster system … all significant constitutional, political and administrative powers have been transferred from the crown to the executive government.
The role of executive government and its exercise is discussed in greater detail in Chapter 4.
The parliamentary process has changed. To a large extent we’ve got executive government. Parliament is a sham. I just observe the fact that the man on the bus thinks all politicians are bloody idiots. S Jacobs, Business Review Weekly (5 November 1993).
Judicial power [1.680] Section 71 of the Constitution provides that: The judicial power of the Commonwealth shall be vested in a Federal Supreme Court, to be called the High Court of Australia, and in such other federal courts as the Parliament creates and in such other courts as it invests with federal jurisdiction. The High Court shall consist of a Chief Justice, and so many other Justices, not less than two, as the Parliament prescribes.
The High Court of Australia was established in 1903 under the Judiciary Act 1903 (Cth) (since replaced by the High Court Act 1979 (Cth)). Since that time a number of other
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Business and the Law Igor Karpec, head of the Soviet Lawyers’ Delegation, stated that he was “delighted with the whole series of events … (but) … we do not believe in the separation of powers doctrine, and you will just have to accept this”. American Bar Association, News Release (17 September 1986).
federal courts (the Federal Court, the Family Court and the federal Circuit Court) have been created, and State courts have been given federal jurisdiction in particular cases (see Chapter 4). On the other hand, legislation which has provided for Commonwealth courts to exercise State jurisdiction has been held invalid by the High Court in Re Wakim; Ex parte McNally (1999) 163 ALR 270. The basis of the decision was that Chapter III of the Constitution fully set out the matters with which a Commonwealth court could deal. It was not possible for States to grant further jurisdiction to Commonwealth courts. The High Court occupies a pre-eminent position in the administration of justice in Australia. It not only is responsible for matters relating to the interpretation of the Constitution (eg the limits of the Commonwealth Parliament’s legislative competence, and demarcation disputes between the Commonwealth and the States) but it is also the highest appellate court for matters of Federal and State laws.
The separation of powers under the Constitution
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[1.690] The government of any organised community requires the exercise of legislative, executive and judicial powers. In an autocratic or dictatorial system these powers may be concentrated in one body. In the mid-eighteenth century, Montesquieu developed the theory of the separation of powers, conscious that power corrupts and absolute power corrupts absolutely. Liberty is effectively safeguarded only by the separation of legislative, executive and judicial powers between separate and independent persons or bodies. However, the Westminster system of government (Westminster being the home of the form of parliamentary democracy which Australia inherited, and parts of which are enshrined in the Commonwealth Constitution) has never satisfied Montesquieu’s ideal. The operation of the separation of powers under the Commonwealth Constitution does not achieve the ideal because it fails to bring about the actual result that the three powers are in fact exercised by organs of government separate from and independent of each other. This has not been realised in practice in Australia because the Cabinet and other ministers who comprise the Executive Council in whom executive power resides are members of Parliament, the legislative body. The reality of the Westminster system is that the Executive is drawn from the government and the government, by virtue of its parliamentary majority, controls Parliament, although in recent years it has frequently been found that the Senate is not under the control of the government (majority) in the lower house. A useful contrast arises out of the US Constitution. In the United States, those who make up the legislature are not those who collectively constitute the executive branch of government, so that in fact there exists a real separation between these two powers. The constitutional intention is that any combination of the powers in the same hand must be prohibited. The position in Australia is not so clear. Executive and legislative powers are not exercised by strictly independent bodies. But the separation of judicial, executive and legislative functions under the Constitution has been applied by the High Court in a number of cases:
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Chapter 1 The Law, the Legal System and the Constitution
R v Kirby, Ex parte the Boilermakers’ Society of Australia [1956] HCA 10
Case Study
Facts
[1.700] The leading case on the judicial power is the Boilermakers’ case, a decision of the High Court which was confirmed by the Privy Council on appeal in Attorney-General of Australia v The Queen; Ex parte the Boilermakers’ Society of Australia (1957) 95 CLR 529. That case concerned the powers of the then existing Commonwealth Court of Conciliation and Arbitration. That court was functioning in two capacities. One was in its judicial capacity to interpret and apply the law and to impose penalties where appropriate. The other was to make awards between the parties to an industrial dispute, with a view to settling that dispute. That was the primary and essential object of the legislation that established the court. Decision It was found in both the High Court and in the Privy Council that the function of an industrial arbitrator is completely outside the realm of the judicial power and is of a different order. It had earlier been explained by Isaacs and Rich JJ in Waterside Workers’ Federation of Australia v JW Alexander Ltd (1918) 25 CLR 434 at 463-4 that:
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The two functions therefore are quite distinct. The arbitral function is ancillary to the legislative function, and provides the factum upon which the law operates to create the right or duty. The judicial function is an entirely separate branch, and first ascertains whether the alleged right or duty exists in law, and, if it binds it, then proceeds if necessary to enforce the law. Not only are they different powers, but they spring from different sources in the Constitution. The arbitral power arises under s 51(xxxv); the judicial power under s 71.
It was therefore concluded that the Commonwealth Court of Conciliation and Arbitration was a non- judicial tribunal exercising arbitral functions. It could not purport to exercise judicial functions; in particular it had no power to impose a fine on union officials for contempt of court. Implications Following Boilermakers, the old court was split into two bodies, one now known as the Australian Industrial Relations Commission, which makes awards, and one now known as the Industrial Division of the Federal Court, which interprets and enforces the award in the exercise of judicial power. The strict separation of the judicial power was enforced for many years after Boilermakers but recent times have seen the creation of a number of federal bodies, in particular tribunals, which may contravene the Boilermakers principle.
Brandy v Human Rights and Equal Opportunity Commission [1995] HCA 10 [1.710] In Brandy, the High Court had the opportunity to reconsider the Boilermakers case when the Human Rights and Equal Opportunity Commission (HREOC), a non-judicial tribunal, sought to enforce its findings by having them treated as if they were Federal Court orders. That capacity had been given to the HREOC
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Business and the Law by its enabling legislation, the Human Rights and Equal Opportunity Commission Act 1986 (Cth). The judgment of the High Court was that the legislation was invalid because it provided for an exercise of judicial power contrary to the Constitution. The case arose out of a complaint by a white man, John Bell, that he had been racially abused by an Aboriginal man, Harry Brandy. The HREOC found the complaint established and ordered Brandy to apologise and pay Bell $2,500. It was the enforcement of that determination which brought the matter before the High Court, with the ironic result that it was an appeal by an Aboriginal person that struck down the enforcement provisions of the Racial Discrimination Act 1975 (Cth). The effect of the Brandy decision may be wide-ranging, and may subject the validity of decisions of many other tribunals to scrutiny, including the Industrial Relations Commission and the Australian Broadcasting Authority. Such Commissions and Authorities may register their determinations in the Federal Court, thus effectively making them orders of that court and therefore enforceable.
Kable v Director of Public Prosecutions (NSW) [1996] HCA 24 [1.720] The question of whether the doctrine of separation of powers operates with in State constitutions came before the High Court in the Kable case. That case arose out of the enactment by the NSW Parliament of the Community Protection Act 1994 (NSW) for the purpose of keeping Kable, who had been convicted of the manslaughter of his wife, in jail after the expiration of his sentence, for the safety of the community. The Act conferred on the Supreme Court the power to:
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order that a specified person be detained in prison for a specified period if it is satisfied, on reasonable grounds:
(a) that the person is more likely than not to commit a serious act of violence; and
(b) that it is appropriate, for the protection of a particular person or persons or the community generally, that the person be held in custody.
This power was described by Gummow J as allowing an order depriving an individual of liberty on the basis of an opinion. As such it was the antithesis of the judicial process and could not be characterised as a judicial function. The High Court was then faced with the argument that the NSW State Parliament, having constitutional authority to pass laws for the “peace, order and good government” of the State (Constitution Act 1902 (NSW), s 5), had jurisdiction to grant to its Supreme Court whatever powers it saw fit. The State was not constrained, as the Commonwealth was, by the doctrine of separation of powers. The response of the majority of justices was that the State courts form part of an integrated Australian court hierarchy, the High Court being the final court of appeal in that hierarchy. The State courts thus are part of a judicial system that exercises both Federal and State power, and therefore no State Parliament could assign to the courts of that State, functions that are repugnant to the exercise of federal judicial power. It was observed by Gummow J, at [35], that the Commonwealth Constitution invests State courts with jurisdiction to try offences against federal criminal law and that: the appearance of institutional impartiality in administering that law, and in inflicting punishment for breach of it, is sapped to an impermissible degree by ad hominem legislation of the nature I have discerned in the Act … The Act requires the Supreme Court to inflict punishment without any anterior finding of criminal guilt by application of the law to past events, being the facts as found. Such an activity is said to be repugnant to judicial process.
The High Court therefore concluded that while the separation of powers doctrine does not prevent States investing their courts with non-judicial functions, the law in question in Kable was repugnant to or incompatible with the exercise by those courts of Commonwealth judicial power and was therefore invalid.
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Chapter 1 The Law, the Legal System and the Constitution
[1.730] Subsequent to the decision of the High Court in Kable the NSW Parliament passed the Crimes Legislation Amendment (Existing Life Sentences) Act 2001 (NSW) which provided that for prisoners who were sentenced “never to be released”, there must exist “special reasons” for a judge to consider an application for the grant of parole. That legislation has survived a High Court challenge in Baker v The Queen [2004] HCA 45. Gleeson CJ rejected the appellants’ submission that the amended legislative scheme “was a charade” (at [19]). To strike down the legislation it was necessary to show that it was impossible to establish special reasons and that no application could succeed. That had not been shown. The relatively slight distinction between the prior Act (struck down in Kable) and the amendment was sufficient for the amendment to succeed (Baker v The Queen [2004] HCA 45).
Each one of them believes that the Constitution prohibits that which they think should be prohibited, and permits that which they think should be permitted. Justice Hugo Black, Newsweek (9 December 1968).
A further issue relating to the independence of the judicial power arises in the context of mandatory sentencing under what legislators specifies the sentences that courts must impose for the commission of certain offences. It has been suggested that those laws are open to constitutional attack based on the (Justice K Santow, Sydney Morning Herald (28 March 2000)): contention that these mandatory sentencing regimes undermine the integrity of the court’s sentencing processes and the independence of the court from the executive and legislature, viewed –and tested –as a matter of objective reality.
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Williams v Commonwealth of Australia [2012] HCA 23 [1.740] The plaintiff, the father of four children attending a state school in Queensland, challenged a funding agreement between the Commonwealth and Scripture Union Queensland for the provision of chaplaincy services at that school. The constitutional challenge was on the basis that the funding agreement was not supported by s 61 of the Constitution. The High Court by majority held that the funding agreement was invalid because it was beyond the executive powers of the Commonwealth. There was no statutory authority for the funding agreement and s 61 did not empower the Commonwealth to make the agreement. The majority held that the Commonwealth Executive power did not include a power to do what the Parliament could, but had not, authorised the Executive to do.
1.10 PARLIAMENTARY SOVEREIGNTY The struggle for legislative supremacy [1.750] By the seventeenth century English political history was dominated by the struggle for law-making supremacy between the Crown and Parliament. The Monarch claimed the right to legislate by proclamation by virtue of the royal prerogative. The Parliament claimed that the Monarch could legislate only with its consent. The struggle culminated in the “glorious revolution” of 1688 when James II’s claim of a prerogative right to dispense with laws in the face of increasing parliamentary opposition forced him to flee from England. The offer of the vacant Crown of England to
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Business and the Law An Act of Parliament can do no wrong, though it may do several things that look pretty odd. City of London v Wood (1701) 88 ER 1592 per Holt CJ.
William III and Mary II was conditional on their acceptance of the Declaration of Rights which detailed a list of grievances which it sought to correct, and to remove the improper assumption of powers by James II. The Declaration of Rights was enacted as the Bill of Rights –a document which ranks as one of the world’s great charters of rights and liberties. Parliament emerged victorious when the judiciary accepted that the Crown in Parliament was the supreme legislative authority. [1.760] A V Dicey, in An Introduction to the Study of the Law of the Constitution (10th ed, Palgrave Macmillan, 1985), described parliamentary sovereignty in these words: The principle of Parliamentary sovereignty means neither more nor less than this, namely, that Parliament thus defined has under the English constitution the right to make or unmake any law whatever; and, further, that no person or body is recognised by the law of England as having a right to override or set aside the legislation of Parliament.
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[1.770] In Australia the sovereignty of Parliament is enshrined in the Constitution which confers legislative authority on the Federal Parliament acting within the scope of the powers conferred. The sovereignty of State Parliaments is achieved in a similar manner under State Constitutions. In New Zealand, which is one of the few countries in the world without a formal written constitution contained in a fundamental document, it was necessary for the Supreme Court to resort to the Bill of Rights of 1688 to vindicate the authority of Parliament. The facts of Fitzgerald v Muldoon [1976] 2 NZLR 615 arose out of the announcement by the then newly elected Prime Minister Robert Muldoon, honouring an election promise that the government’s legislative intention was to disband the Superannuation Board and that compulsory deductions from employees for the statutory superannuation scheme should cease. The Chief Justice, Sir Richard Wild, granted a declaration that this announcement was illegal (at 622-623): [The plaintiff’s case] asserts a breach of s 1 of the Bill of Rights 1688: That the pretended power of suspending of laws or the execution of laws by regal authority without consent of Parliament is illegal. It is a graphic illustration of the depth of our legal heritage and the strength of our constitutional law that a statute passed by the English Parliament nearly three centuries ago to extirpate the abuses of the Stuart Kings should be available on the other side of the earth to a citizen of this country which was then virtually unknown in Europe and on which no Englishman was to set foot for almost another hundred years. And yet it is not disputed that the Bill of Rights is part of our law. The fact that no modern instance of its application was cited in argument may be due to the fact that it is rarely that a litigant takes up such a cause as the present, or it may be because governments usually follow established constitutional procedures. But it is not a reason for declining to apply the Bill of Rights where it is invoked and a litigant makes out his case. The Act of Parliament in force required that those deductions and contributions must be made, yet here was the Prime Minister announcing that they need not be made. I am bound to hold that in so doing he was purporting to suspend the law without consent of Parliament. Parliament had made the law. Therefore the law could be amended or suspended only by Parliament or with the authority of Parliament.
The sovereignty of Parliament in Australia [1.780] Dicey’s classic formulation of parliamentary sovereignty, that the English Parliament has “the right to make or unmake any law whatever; and, further, that no 46
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Chapter 1 The Law, the Legal System and the Constitution
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person or body is recognised by the law of England as having a right to override or set aside the legislation of Parliament”, requires some modification in the United Kingdom of the present day. As a member of the European Community, sovereignty in certain matters has been ceded to the Council and Commission of the European Community. This reality has led to Brexit –Britain’s decision to leave the European Community as the result of a national referendum supporting this drastic move. In Australia, Dicey’s proposition obviously requires substantial modification, as the inevitable result of the constitutional sharing of legislation power between the commonwealth and the states under our federal system. A federal system requires a division of legislative power between the central Federal Parliament and the State Parliaments. Under the Constitution the Commonwealth Parliament is limited to the legislative powers expressly conferred on it by the Constitution. The High Court has the power to declare legislation unconstitutional and invalid if it is not supported by a head of power granted by the Constitution. But, if legislation is constitutionally valid, the consequences of parliamentary sovereignty follow. No person or body whether judge, prime minister, department head or government can override or amend a law made by Parliament, assuming that the law has been validly enacted under the terms of the Constitution. In Coco v The Queen (1994) 179 CLR 427 this proposition was clearly reaffirmed by the High Court, Mason CJ, Brennan, Gaudron and McHugh JJ stating that even fundamental rights, freedoms and immunities can be reduced by a State Parliament acting within its constitutional powers provided that the intention of Parliament is “clearly manifested by unmistakable and unambiguous language” (at 437). However, the attempted exercise by the NSW Parliament of its legislative power to confer jurisdiction on the NSW Supreme Court (which was incompatible with the role of that court in the Australian judicial system) was struck down by the High Court in Kable v DPP (NSW) [1996] HCA 24 (see 3.5).
The whole development of parliament was in the struggle to establish first its independence of the Crown and then its final superiority. It is the gradual encroachment of the executive, usurping the role of the Crown, which has undermined first of all the powers, then the responsibility, and finally the reputation, of parliament. This has allowed governments to escape serious scrutiny in Parliament. The executive has simply become too powerful. P P McGuinness, The Australian (April 1992).
Legal sovereignty and “manner and form” provisions [1.790] Another consequence of parliamentary sovereignty is that Parliament cannot legislate to limit its future sovereignty. If, for example, a Parliament controlled by a government opposed to a particular form of tax passed legislation declaring that such a tax could never be introduced, a later Parliament could repeal that legislation. But although future Parliaments cannot be bound as to the substance of legislation they can be bound as to the manner and form or procedure for passing legislation. The leading authority is A-G (NSW) v Trethowan (1931) 44 CLR 394. The Constitution Act 1902 (NSW) provided that the upper house of the New South Wales Parliament could not be abolished except by a Bill passed by both houses and approved at a referendum. This procedural requirement was itself “entrenched” and could not be amended or repealed except by the same manner and form. Both the High Court (A-G (NSW) v Trethowan (1931) 44 CLR 394) and the Privy Council (A-G (NSW) v Trethowan [1932] AC 526) held that the current Parliament was bound by the manner and form requirement of the referendum imposed by an earlier Parliament. The procedures laid down had to be followed.
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Business and the Law It is impossible for a Federal Constitution which divides powers between a central government and governments of States or Provinces to satisfy all sections of any community. Complaints of the difficulties of amending the Constitution are often made, and it is argued that the Commonwealth Parliament itself ought to be able to amend the Constitution. If the Commonwealth Parliament had such a power the Constitution would become a unitary as distinct from a Federal Constitution. Sir John Latham, “Interpretation of the Constitution”, in Else- Mitchell (ed), Essays on the Australian Constitution (2nd ed, The Law Book Company Limited, 1961).
Political sovereignty [1.800] The above discussion has addressed legal sovereignty. In practice extra-legal considerations provide an effective restraint on the powers of Parliament. The common law’s tradition of equality, freedom and justice, although undefined, is a powerful factor as are the moral and religious views of those exercising legislative power. The cynic would argue that the most effective restraint on legislative excess is the power of the ballot box. In this respect political sovereignty may be said to reside in the citizenry who can democratically reject an unpopular government through the ballot box. The ultimate sanction of course is revolution, and history abounds with examples of the overthrow of oppressive regimes by the citizens. The French revolution is one example; the declaration of independence from Britain by the United States is another. The preamble to the Constitution of the United States enshrines popular sovereignty: We the People of the United States, in order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common Defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
1.11 THE DIVISION OF LEGISLATIVE POWER BETWEEN THE COMMONWEALTH AND THE STATES [1.810] Australia is a federation which requires law making powers to be distributed between the Commonwealth and the States. In Law of the Constitution (8th ed, Macmillan, 1927), Dicey suggested that: Whatever concerns the nation as a whole should be placed under the control of the national government. All matters which are not primarily of common interest should remain in the hands of the several States.
Under Australian Federation, while the colonies (now States) gave up powers, rights and duties to the new central government, they nevertheless retained their individual identities and a great deal of legislative authority. There are three categories of legislative powers: exclusive, concurrent and residual.
Exclusive powers [1.820] An exclusive power is one exercisable only by the Parliament in which it is vested and no other. In Australia, there are few exclusive powers, the principal of which are vested in the Federal Parliament by s 90 of the Constitution which, in part, provides: On the imposition of uniform duties of customs the power of the Parliament to impose duties of customs and of excise, and to grant bounties on the production or export of goods, shall become exclusive.
Other exclusive powers are granted by s 52 (in relation to the seat of government of the Commonwealth and places acquired by it for public purposes, and matters relating to the Executive Government of the Commonwealth) and s 122 (in relation to the Parliament’s 48
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Chapter 1 The Law, the Legal System and the Constitution
power to make laws to the territories). Where the Commonwealth is granted an exclusive power, the States are deprived of any right to legislate in respect of that matter.
Concurrent powers [1.830] Concurrent powers are those exercisable by either Federal or State Parliaments. Within the Australian context, that means they are powers specifically granted to the Commonwealth under s 51 of the Constitution but remaining also within the general law-making capacity of the States. Section 51 confers 39 heads of power in relation to which the Commonwealth can legislate for the “peace, order and good government of the Commonwealth”. Because the s 51 powers are concurrent powers, that is, overlapping powers, the States retain their right to legislate in these fields, but in the event of a conflict arising between Federal and State law, s 109 of the Constitution provides that the Federal legislation prevails. Sections 51 and 109 are discussed at [1.890].
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Residual powers [1.840] Residual powers embrace all non-exclusive and non-concurrent powers. In the Australian context the residual powers are matters within the legislative competence of the States. These powers are not specifically enumerated in State constitutions –the grant of legislative power under State constitutions is in general terms and authorises all legislation necessary for “good government” –and they are simply those heads of power over which the Commonwealth has no specific exclusive or concurrent powers. The residual powers cover a wide area: education, health, traffic, buildings and construction, local government, crime, contracts and so on. However, the trend since Federation, which has increased significantly over the last few decades, is for the Commonwealth to assume, by cooperative means as well as through generous High Court interpretations of its concurrent powers, greater responsibilities in areas which, at the time of Federation, were assumed to be within the exclusive jurisdiction of the States.
Our Constitution is now over 80 years old and stands, almost in its entirety, in its original form. It’s a remarkable thing that during more than 80 years our polity has functioned as smoothly as it has, governed as it is by a constitution formed in the 1890s by middle-aged and elderly men who, most of them, had their views formed in the social climate of the 1860s and 70s, now well over a hundred years ago. This is remarkable in any age; it is truly remarkable in an age which has seen swifter and more radical changes than ever before. Sir Ninian Stephen.
1.12 THE LEGISLATIVE COMPETENCE OF THE COMMONWEALTH [1.850] The heads of power granted to the Commonwealth to pass legislation, albeit concurrently with the States, are set out in s 51 of the Constitution. That section commences with the words: 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 …
and thereafter lists 39 specific heads of power. The effect of the provision is that if subject matter proposed for Commonwealth legislation is not included within the 39 heads, then the Federal Government has no legislative authority to deal with it. The “concurrent powers laid down in s 51 are” … (i)
trade and commerce with other countries, and among the States;
(ii)
taxation; but so as not to discriminate between States or parts of States;
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Business and the Law
(iii)
bounties on the production or export of goods, but so that such bounties shall be uniform throughout the Commonwealth;
(iv)
borrowing money on the public credit of the Commonwealth;
(v)
postal, telegraphic, telephonic and other like services;
(vi)
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;
(vii)
lighthouses, lightships, beacons and buoys;
(viii)
astronomical and meteorological observations;
(ix)
quarantine;
(x)
fisheries in Australian waters beyond territorial limits;
(xi)
census and statistics;
(xii)
currency, coinage and legal tender;
(xiii)
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;
(xiv)
insurance, other than State insurance; also State insurance extending beyond the limits of the State concerned;
(xv)
weights and measures;
(xvi)
bills of exchange and promissory notes;
(xvii)
bankruptcy and insolvency;
(xviii)
copyrights, patents of inventions and designs and trade marks.
(xix)
naturalization and aliens;
(xx)
foreign corporations, and trading or financial corporations formed within the limits of the Commonwealth;
(xxi)
marriage;
(xxii)
divorce and matrimonial causes; and in relation thereto, parental rights, and the custody and guardianship of infants;
(xxiii)
invalid and old-age pensions;
(xxiiiA) the provision of maternity allowances, widows’ pensions, child endowment, unemployment, pharmaceutical, sickness and hospital benefits, medical and dental services (but not so as to authorize any form of civil conscription), benefits to students and family allowances;
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(xxiv)
the service and execution throughout the Commonwealth of the civil and criminal process and the judgments of the courts of the States;
(xxv)
the recognition throughout the Commonwealth of the laws, the public Acts and records, and the judicial proceedings of the States;
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Chapter 1 The Law, the Legal System and the Constitution
(xxvi)
the people of any race for whom it is deemed necessary to make special laws;
(xxvii)
immigration and emigration;
(xxviii)
the influx of criminals;
(xxix)
External affairs;
(xxx)
the relations of the Commonwealth with the islands of the Pacific;
(xxxi)
the acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws;
(xxxii)
the control of railways with respect to transport for the naval and military purposes of the Commonwealth;
(xxxiii)
the acquisition, with the consent of a State, of any railways of the State on terms arranged between the Commonwealth and the State;
(xxxiv)
railway construction and extension in any State with the consent of that State;
(xxxv)
conciliation and arbitration for the prevention and settlement of industrial disputes extending beyond the limits of any one State;
(xxxvi)
matters in respect of which this Constitution makes provision until the Parliament otherwise provides;
(xxxvii) 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; (xxxviii) 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; (xxxix)
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.
The interpretation of the concurrent powers [1.860] It would be idle to pretend that lawyers are unanimous in their views of what matters fall within s 51 of the Constitution and the section has been much litigated. The Commonwealth Government is, of course, enthusiastic in its endeavours to expand the scope of the listed powers, and the States, and those adversely affected by Commonwealth legislation, are just as enthusiastic to restrict them. Some significant examples are discussed below.
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I’m the Parliamentary Draftsman, I compose the country’s laws, and of half the litigation, I’m undoubtedly the cause. JPC, Poetic Justice (Stevens & Sons, 1947).
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Australian Communist Party v Commonwealth [1951] HCA 5 [1.870] The High Court has been confronted with many other challenged assumptions of Commonwealth power. A celebrated case arose in 1951 after the Menzies government passed the Communist Party Dissolution Act 1950 (Cth). In essence, the Act declared that the Australian Communist Party was an unlawful association and seized its assets. Other bodies dominated by communists could be declared unlawful and individuals could be prohibited from holding Commonwealth offices and some industrial positions, any such declaration or prohibition being at the instigation of the Executive. The case highlights the problems inherent in the Australian system of legislative power-sharing. The Commonwealth sought to justify the Act by the defence power (s 51(vi)) with a supplementary reliance on the incidental power in s 51(xxxix). This paragraph of s 51, gives power for legislation on matters “incidental to the execution of any power” vested in the Parliament. The High Court, with the sole dissentient being Latham CJ, declared the Act invalid. Fullagar J pointed out that the defence power was given by reference to the purpose or object of the law (to secure the defence of the Commonwealth) and not by reference to some concrete subject matter (eg to provide for railway construction). This characteristic had led to alternative tests of validity; if the law had defence as its direct and immediate object then it would have effect, notwithstanding that there was no current or threatened war at the time of the enactment. If, however, an actual state of war exists or there is some immediate apprehension of war, then the power could extend to (at [12] per Fullagar J): an infinite variety of matters which could not be regarded in the normal conditions of national life as having any connection with defence. Examples … are … the rationing of goods … and the conditions of employment in industry.
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In these circumstances the court would acknowledge the force of the incidental power and the width of the executive powers. In an earlier decision (Wishart v Fraser [1941] HCA 8) Dixon J had said: the defence of a country is particularly the concern of the Executive, and in war the exigencies are so many, so varied and so urgent, that width and generality are a characteristic of the powers which it must exercise.
The problem for the Commonwealth was that although in 1950 the Communist Party was certainly not the flavour of the month in Australia, and was the subject of virulent attack elsewhere in the Western world, there was no state of war on which to hang the extended authority of the Executive and the extraction of all that the incidental power might offer. With the exception of the Chief Justice and in so far as one can draw a common thread from the judgments of the other members of the court, the High Court was not about to allow the Parliament and the Executive to usurp its right and authority to define the content of the powers granted to the Commonwealth in s 51. Even Latham CJ had said, at an earlier time (South Australia v The Commonwealth [1942] HCA 14) that: A Parliament of limited powers cannot arrogate a power to itself by attaching a label to a statute.
The nub of the problem was put by Fullagar J when he said that the dissolution of the Communist Party considered alone and not as a restraint on activities such as espionage and sabotage themselves: “cannot be supported as an exercise of any power conferred by the Constitution on the Parliament. It is not possible by means of anything that appears on its face to relate it to any subject matter that is not left by the Constitution exclusively within the legislative powers of the States”. The case is a useful illustration of the constant potential for tension between any State and the Commonwealth, each jealous of its powers, and the judiciary itself when not disposed to relinquish its assigned role. The then
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Chapter 1 The Law, the Legal System and the Constitution Prime Minister, Robert Menzies, not content with the restraints imposed by the High Court, called a referendum for constitutional power to declare the Communist Party illegal. The proposal was narrowly defeated by a people moved by the eloquence of HV Evatt, then leader of the opposition and a former High Court justice himself, who warned of the potential for abuse of civil liberties and the ultimate risk of the creation of a police state.
Williams v Commonwealth of Australia [2014] HCA 23
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[1.880] In an earlier case the plaintiff successfully challenged a Commonwealth government funded program for religious teaching in State schools. The High Court held that it was beyond the executive powers of the Commonwealth as there was no statutory authority for it (Williams v Commonwealth of Australia [2014] HCA 23 (see [1.740])) The government’s response was for the Parliament to pass laws providing legislative support for the school chaplaincy program and other like arrangements and grants. The persistent Mr Williams again challenged the scheme and was again successful. The High Court held that the legislative provisions which supported the challenged chaplaincy arrangements were not valid laws of the Commonwealth as they were not supported by a head of legislative power under the Constitution. In particular, providing chaplaincy services in school was not within the s 51(xxiiiA) power in respect of “benefits to students”. In these circumstances the only way in which school chaplaincy programs could be continued –other than by amendment of the Constitution –is by the federal government providing s 96 grants to State governments other than directly to the chaplaincy service provided to fund the program.
Inconsistency between Federal and State laws [1.890] It has been seen that while the Commonwealth has specified legislative powers, the States have general non-specific authority to legislate on virtually any subject. Where the Commonwealth validly exercises its power to legislate pursuant to s 51, the effect of s 109 is that the Commonwealth law shall prevail over any State law inconsistent with it. Section 109 states that: When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid.
The power of the States to legislate with respect to most of the matters listed in s 51 continues, but in the event of inconsistency, the Commonwealth law prevails. On occasion the Commonwealth Constitution grants to the Federal Parliament exclusive rights to legislate with respect to a subject. The powers are otherwise known as concurrent.
The rights of self- government of the States have been fondly supposed to be safeguarded by the Constitution. It left them legally free, but financially bound to the chariot wheels of the Central Government. Alfred Deakin, 1902.
The time that has elapsed since the enactment of the Constitution has permitted the development of criteria to determine whether or not an Act passed by a State, under legislative powers concurrently held with the Commonwealth, is invalid pursuant to s 109 because it is inconsistent with a law of the Commonwealth. The High Court has shown an evolution in its approach to s 109 as it has in other constitutional dilemmas. The original approach was to seek out any direct inconsistency between the two laws; in simple terms, to find that it would not be possible for the subject to comply with both laws.
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The more substantial and appropriate test of inconsistency is to determine whether or not “a competent legislature expressly or impliedly evidences its intention to cover the whole field, that is, a conclusive test of inconsistency where another legislature assumes to enter to any extent upon the same field”: Clyde Engineering Co Ltd v Cowburn [1926] HCA 6 per Isaacs J.
Clyde Engineering Co Ltd v Cowburn (1926) 37 CLR 466; [1926] HCA 6 [1.900] In Clyde Engineering, a worker claimed an entitlement to a full week’s wages as prescribed in a federal award, although that award provided for a 48-hour week. He had in fact worked a 44-hour week pursuant to a New South Wales statute. The question for the High Court was whether the State Act was inconsistent with the Federal Act. In determining that it was inconsistent, Isaacs J stated at 489 that:
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The infallible test of whether … there is inconsistency is said for the respondent to be whether the two provisions … could both be obeyed. No doubt the employer could obey both, that is, physically … If an Act of parliament, for instance prescribed 25 lashes for robbery under arms and a later Act prescribed that such an offender should be punished with 20 lashes, it could, of course, with equal truth be said that both provisions could be obeyed and therefore, applying the suggested test, the offender must receive 45 lashes. But surely the vital question would be: Was the second Act on its true construction intended to cover the whole ground and, therefore, to supersede the first? If it was so intended, then the inconsistency would consist in giving any operative effect at all to the first Act, because the second was intended entirely to exclude it … If … a competent legislature expressly or impliedly evidences its intention to cover the whole field, that is a conclusive test of inconsistency where another legislature assumes to enter to any extent upon the same field.
The “covering the field” test has been applied since 1926 by the High Court with some consistency. It was expressed with absolute clarity by Dixon J (later Chief Justice of the High Court) in Ex parte McLean [1930] HCA 12 when he said that: The inconsistency does not lie in the mere coexistence of two laws which are susceptible of simultaneous obedience. It depends upon the intention of the paramount legislature to express by its enactment, completely, exhaustively, or exclusively, what shall be the law governing the particular conduct or matter to which its attention is directed. When a federal statute discloses such an intention, it is inconsistent with it for the law of a State to govern the same conduct or matter.
The simple fact is that whatever test is applied, it must give effect to s 109. The inquiries which might satisfy that section are varied. For the present, the “covering the field” test seems most applicable, but the court has indicated that all relevant matters will enter into its determination.
The Commonwealth v Australia Capital Territory [2013] HCA 55 [1.910] This case concerned the validity of the ACT’s Marriage Equality (Same Sex) Act 2013 (ACT) the object of which was to provide marriage equality for same sex couples. Section 51(xxi) of the Constitution gives the federal Parliament power to make laws with respect to “marriage”. The issue for the High Court was to determine whether s 51(xxi) permits the federal Parliament to make a law with respect to same sex marriage because the ACT Act would probably operate concurrently with the Marriage Act 1961 (Cth) if the federal
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Chapter 1 The Law, the Legal System and the Constitution Parliament had no power to make a national law providing for same sex marriage. If the federal Parliament did not have power to make a national law with respect to same sex marriage, the ACT Act would provide for a kind of union which the federal Parliament could not legislate to establish. By contrast, if the federal Parliament can make a national law providing for same sex marriage, and has provided that the only form of marriage shall be between a man and a woman, the two laws cannot operate concurrently. The High Court held that under the Constitution the federal Parliament’s legislative power in relation to “marriage” empowered it to provide for marriage between persons of the same sex. The ACT Act was not capable of operating concurrently with the Marriage Act and was therefore of no effect. That the Federal Parliament has not made a law permitting same sex marriage did not mean that the ACT legislature could make such a law: So long as the Marriage Act continues to define “marriage” as it now does and to provide, in effect, that only a marriage conforming to that definition may be formed or recognised in Australia, the provisions of the ACT Act providing for marriage under that Act remain inoperative. It is necessary to add a postscript to this case. In 2017 the government honoured an election pledge to put the issue of same-sex marriage to a national vote in the form of a plebiscite.
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Unlike a referendum which is required for constitutional amendments and which requires both a national majority of votes and a majority of votes in a majority of the states a plebiscite is non-binding simple national vote to test public opinion. However the government committed to support legislation recognising same- sex marriage if a plebiscite indicated public support for it. As a result of the “yes” vote the Marriage Act was amended to define marriage as the marriage of “two people” of marriageable age regardless of their gender. The Marriage Amendment (Definition and Religious Freedoms) Act 2017 legalised same-sex marriage in Australia.
The expansion of Commonwealth legislative competence through the “external affairs” power [1.920] Recent decades have seen a swing in favour of the Commonwealth in the allocation of legislative powers between it and the States. The High Court has allowed an evolution of constitutional legal thinking to facilitate this process. The best example is found in the use of the blunt device employed by the Commonwealth to stretch its legislative powers by reliance upon the external affairs power given to it in s 51(xxix). [1.930] The issue was raised squarely in Koowarta v Bjelke-Petersen (1982) 153 CLR 168, in which the Queensland government argued that the Racial Discrimination Act 1975 (Cth) was invalid. The High Court, by a four to three majority, upheld the Act as a law with respect to external affairs. There was in existence an international treaty, to which Australia was a signatory, proscribing racial discrimination. It followed, for the majority, that a law implementing the goals of that treaty was a law in furtherance of the external affairs power. The potential of the Koowarta decision was not lost on the politicians as is clearly illustrated by the Tasmanian Dams case:
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Commonwealth v Tasmania [1983] HCA 21 [1.940] In 1982 the Tasmanian Government decided to dam the Gordon River below the Franklin for the purpose of generating electricity. That decision was taken at the time of an impending federal election at which the existing government was defeated and RJL Hawke became Prime Minister with the not inconsiderable assistance of those implacably opposed to the Tasmanian scheme.
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The new government acted quickly to introduce a law prohibiting the action. That was also challenged before the High Court and again held valid pursuant to the external affairs power. The court indeed was at pains to emphasise that its decision was based solely on that constitutional argument and had no bearing on the issue of substance –whether or not the dam was desirable. This time the peg on which the Commonwealth could hang its environmental hat was the UNESCO Convention for the Protection of the World Cultural and Natural Heritage, which had been ratified by Australia in 1974. The argument that preoccupied the High Court was whether the simple fact of the treaty was sufficient to validate the Commonwealth law or whether, to earn inclusion within the external affairs power, it was necessary that the Act in dispute had some international flavour in its subject matter. The majority view was that it was not necessary and that, in any event, if an international aspect were sought it could be found in the treaty. The minority view was that the subject matter should be of significant international interest.
[1.950] The majority decision in the Tasmania Dam case contains within itself the seeds of virtually uninhibited growth of Commonwealth legislative authority, provided that, as a first step, some relevant international agreement is entered into. The minority view introduces the obstacle of subjectivity, the challenge of assigning to the High Court the right to decide whether there is genuinely the substance of a matter of international concern or whether there is simply the convenience of an international treaty. The issue involved is not entirely divorced from that considered in the Communist Party case. The words of Sir John Latham in South Australia v The Commonwealth [1942] HCA 14, that “a Parliament of limited powers cannot arrogate a power to itself by attaching a label to a statute”, remain relevant, whether that label is defence or external affairs.
See the inconveniences of these scrambling reports: they will make us appear to posterity as a parcel of blockheads. Slater v May (1704) 2 Ld Raym 1071 per Holt CJ.
IN CONTEXT
The external affairs power [1.960] The dangers to federalism inherent in this approach have been put forcefully by a Victorian QC, SEK Hulme, who has argued against constitutional change simply for the sake of change. “I’m a great admirer of modern stationery but I don’t want a loose-leaf Constitution”, says Hulme. His concern is to protect the integrity of a Constitution good enough to meet the challenges of the day. “I’m not going to have it buggered about by academics on government grants”, he says.
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Chapter 1 The Law, the Legal System and the Constitution Australian federalism is very ill indeed –the Constitution has been bent almost double by the High Court (and the two levels of government) in order to make it work, and the whole federal system is breaking down. The classical federal system might have been sensible and pragmatic in 1901 but it is a political liability now. R Cullen, Current Affairs Bulletin (May 1991).
On the misuse of the external affairs powers, he says that of the 31 requests federal governments have made for an amendment that would increase Commonwealth power, 29 have been refused by the people in a referendum. To achieve greater power by indirect means, federal governments had signed “something like 1400-1500 treaties”. The Australian people hadn’t been consulted, the treaties weren’t scrutinised by Parliament. “Nobody has read them all.” “We just don’t know what sleepers there are in them”, says Hulme. B Lane, “For the Good of the States”, The Weekend Australian (8-9 April 1995).
A further example of the scope of the external affairs power is provided by Minister for Immigration and Ethnic Affairs v Teoh [1995] HCA 20.
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Minister for Immigration and Ethnic Affairs v Teoh [1995] HCA 20 [1.970] The High Court held by a four to one majority that a United Nations Convention that had been ratified by Australia but had not been incorporated into Australian municipal law nevertheless created a legitimate expectation that administrative decision makers would act in conformity with it. Teoh, a Malaysian citizen in Australia under a temporary entry permit, married an Australian citizen who had been the de facto spouse of his deceased brother. While his application for permanent entry was pending he was convicted and sentenced to six years’ imprisonment, on charges of importing heroin. His application for resident status was rejected primarily because of his criminal record, this being departmental policy, and his deportation was ordered. The Immigration Review Panel confirmed that the seriousness of the crime warranted the deportation, although it noted that the family (seven children, including three of the marriage) faced a “very bleak and difficult future and will be deprived of a possible breadwinner as well as a father and a husband if resident status is not granted”. Teoh’s appeal to the High Court was successful, it being held that the departmental proceedings did not take account of the UN Convention, previously ratified by Australia. It was said, by Mason CJ and Deane J (at [26]), that: … the fact that the Convention has not been incorporated into Australian law does not mean that its ratification holds no significance for Australian law.
The expansion of Commonwealth legislative competence through the “corporations” power [1.980] Section 51(xx) of the Constitution gives the Parliament power with respect to “trading or financial corporations formed within the limits of the Commonwealth”. Acting in furtherance of that power the Commonwealth Parliament in 1989 passed several Acts, including the Corporations Act 1989 (Cth), which purported to cover the whole field of corporate legislation. A High Court challenge ensued (New South Wales v The Commonwealth
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Business and the Law It is by virtue of the corporations power that proposed Commonwealth legislation to ban the advertising of tobacco in newspapers is to take effect. What is to stop the Commonwealth then proceeding to ban advertising of liquor, and then other commodities? Or to ban political advertising, as it is already proposing to do on television? Or to ban the dissemination of facts and opinions which it on some ground or another feels are harmful? All this is a clear abuse of the corporations power, and quite contrary to the intentions of the framers of the Constitution. P P McGuinness, The Australian (10 February 1990).
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[1990] HCA 2) in which it was held that the words in s 51(xx) do not extend to cover the actual incorporation (the initial establishment) of companies, but rather only to control their behaviour once formed under other non-Commonwealth legislation. Following protracted negotiations in relation to the formation of corporations, the States agreed to refer their powers to the Commonwealth for a initial period of five years which has since been reviewed and the Corporations Act 2001 (Cth) now enshrines a comprehensive and national regime for both the formation and the regulation of corporations. Section 51(xx) nevertheless confers substantial power on the Commonwealth and provides the constitutional foundation for a range of significant laws impacting on business including the Competition and Consumer Act 2010 (Cth).
IN CONTEXT
The Development of Australia’s competition laws [1.990] The Constitution does not expressly confer power on the Federal Parliament to
regulate restrictive trade practices and the history of Australian trade practices law is largely a history of constitutional interpretation. Australia’s federal statute book is littered with a number of earlier, and largely unsuccessful, attempts to regulate competition prior to the Trade Practices Act 1974 (Cth). The early interpretations of the High Court jealously preserved State rights and it was not until the 1974 Act that the Commonwealth’s legislative authority in this area was confirmed.
Within five years of Federation, the Australian Industries Preservation Act 1906 (Cth) was enacted following concern about monopolistic practices in general and the International Harvester Corporation’s threat of dumping to capture the Australian agricultural implement market in particular. The effectiveness of the 1906 Act was nevertheless emasculated by constitutional limitations and judicial conservatism. In Huddart Parker & Co Pty Ltd v Moorehead [1909] HCA 34 and the Coal Vend case (Attorney-General v The Adelaide Steamship Co Ltd [1912] HCA 58) the High Court held that the “corporations power” did not extend to controlling the trading activities of corporations and that the “interstate trade and commerce power” did not extend to purely intrastate activities. The Coal Vend case further weakened the legislation by a lenient interpretation which, in that case, allowed reasonableness based on distressed economic conditions to be pleaded as a defence to collusive price fixing. The legislation never recovered from these blows and ceased to be used. Pressure for new and effective legislation mounted in the 1960s resulting in the Trade Practices Act 1965 (Cth). This Act was also unsuccessful. Not only did the legislation fail to provide an overall effective antitrust policy, it failed on constitutional grounds. In Strickland v Rocla Concrete Pipes Ltd [1971] HCA 40 the High Court held that the Federal Parliament had failed to use correctly the available sources of federal power and that the Act had no clear constitutional basis. However, the High Court indicated that the Huddart Parker case had been wrongly decided and acknowledged that the corporations power provided a sufficient constitutional base for laws governing the trading activities of corporations. The Restrictive Trade Practices Act 1971 (Cth), which replaced the 1965 Act, was essentially a re-enactment of the legislation
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Chapter 1 The Law, the Legal System and the Constitution
constitutionally based on the corporations power of s 51(xx). The acknowledged policy weaknesses of that legislation led to its repeal and replacement in 1974 by the Trade Practices Act 1974 (Cth) –which is also based on the corporations power and which survived its predictable constitutional challenges. In 2010 the Trade Practices Act was renamed the Competition and Consumer Act 2010 (Cth).
NSW v Commonwealth [2006] HCA 52 [1.1000] In 2006 the States challenged the use by the Commonwealth of the corporations power in the Constitution (s 51(xx)) to support its WorkChoices legislation (Workplace Relations Amendment (WorkChoices) Act 2006 (Cth)), a system of extensive industrial relations reform which had the effect, among other things, of making it easier for business to dismiss employees. Callinan J commented (at [619]) that:
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This is one of the most important cases with respect to the relationship between the Commonwealth and the States to come before the Court in all of the years of its existence. If the legislation is to be upheld the consequences for the future integrity of the federation as a federation, and the existence and powers of the States will be far- reaching. The Act in its present form is well beyond, and in contradiction of what was intended and expressed in the Constitution by the founders.
In a decision which will affect the future of federalism the High Court decided, by majority, that s 51(xx) extended to give the constitutional power to the Federal Government to enact the Workplace Relations Amendment (WorkChoices) Act 2006 (Cth). Callinan and Kirby JJ delivered strong dissenting judgments. Kirby J stated that “the view now endorsed by the majority effectively discards a century of constitutional doctrine” (at [611]): No one could contest the pervasive role of corporations in almost every activity of a modern society. However, the unnuanced interpretation of the corporations power now embraced by a majority of this Court, released from the previous check stated in the industrial disputes power (and other similar constitutional checks), has the potential greatly to alter the nation’s federal balance. It risks a destabilising intrusion of direct federal lawmaking into areas of legislation which, since federation, have been the subjects of State laws. It does so unchecked by any express provisions in such powers or by any implied features of the Constitution derived from the federal system that lies at its very heart.
Callinan J stated (at [779]) that: There is nothing in the text or the structure of the Constitution to suggest that the Commonwealth’s powers should be enlarged, by successive decisions of this Court, so that the Parliament of each State is progressively reduced until it becomes no more than an impotent debating society …
To give the Act the valid operation claimed by the Commonwealth would be to authorise it to trespass upon essential functions of the States … The validation of the legislation would constitute an unacceptable distortion of the federal balance intended by the founders, accepted on many occasions as a relevant and vital reality by Justices of this Court
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Business and the Law
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More than fifty years ago in Australia we issued clean from the press a beautiful Constitution. A choice bit of it was section 92 –and look what a mess we have made of it! I have been musing over the judgments in it, and frankly I want to burn the lot. Sir Robert Garran, First Commonwealth Solicitor- General, 1958.
1.13 FREEDOM OF INTERSTATE TRADE AND COMMERCE [1.1010] A principle fundamental to the establishment and operation of Australian Federation –that interstate trade and commerce should be free –found expression in s 92 of the Constitution. That section simply declares that “trade, commerce, and intercourse among the States … shall be absolutely free”. It was observed above that the meaning of s 92 has been debated frequently before the High Court. It is in fact the most litigated sector of the Constitution. The section has been said by Sir Owen Dixon, a former Chief Justice of the High Court, to be “a provision which apparently must forever be expounded but never explained” (“The Law of the Constitution”, in Jesting Pilate (Law Book Co, 1965) p 52). One clear analysis of the section was delivered by Rich J in James v Cowan [1930] HCA 48, when he said that: The rhetorical affirmation of section 92 that trade, commerce and intercourse between the States shall be absolutely free has a terseness and elevation of style which doubtless benefits the expression of a statement so inspiring But inspiring sentiments are often vague and grandiloquence is sometimes obscure … Some hint at least might have been dropped, some distant allusion made from which the nature of the immunity intended could afterwards have been deduced by those whose lot is to explain the elliptical and expound the unexpressed. As soon as the section was brought down from the lofty clouds whence constitutional precepts are fulminated and came to be applied to the everyday practice of trade and commerce and the sordid intercourse of human affairs, the necessity of knowing and so determining precisely what impediments and hindrances were no longer to obstruct interstate trade obliged this Court to attempt the impossible task of supplying an exclusive and inclusive definition of a conception to be discovered only in the silences of the Constitution.
[1.1020] In 1986, the quest for an established meaning was still described as “unsuccessful”. In Miller v TCN Channel Nine Pty Ltd [1986] HCA 60, Deane J noted (at [4]) that: the simple words of s 92 have, in an unsuccessful search for certainty in the law, been overlaid by formulae which have given rise to many problems while solving almost none. The section was, plainly enough, intended to serve the essential function of reinforcing the economic and social unity of an emerging nation by removing the barriers to commerce, trade and intercourse which the frontiers between the federating colonies had previously represented.
[1.1030] Shortly after this, in Cole v Whitfield, the Tasmanian lobster case, the full High Court adopted a construction of the section which solved many of the problems alluded to by Deane J.
Cole v Whitfield [1988] HCA 18 [1.1040] Whitfield was charged under Tasmanian law with the offence of possessing crayfish below the minimum legal size. The crayfish had come from South Australia, where they were of legal size, leading the defendant to claim that the Tasmanian law breached s 92 of the Constitution. The magistrate acquitted him. On appeal, the High Court confirmed that, although protectionist barriers could not be raised between the
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Chapter 1 The Law, the Legal System and the Constitution States, the section did not obliterate all attempts at regulation of activity that may have an interstate element. The fact that the application of a statute might have a restrictive effect on interstate trade is not of itself sufficient to render it invalid, and Whitfield was subject to the Tasmanian law: A law which has as its real object the prescription of a standard for a product or a service or a norm of commercial conduct will not ordinarily be grounded in protectionism and will not be prohibited by s 92. But if a law, which may be otherwise justified by reference to an object which is not protectionist, discriminates against interstate trade or commerce in pursuit of that object in a way or to an extent which warrants characterisation of the law as protectionist, a court will be justified in concluding that it nonetheless offends s 92.
What would henceforth be forbidden were laws that discriminated against interstate trade and commerce intended to have or having a protectionist effect.
State boundaries of course mean little in the e-commerce era. The application of s 92 of the Constitution in this context was first considered in the High Court in the context of an online betting exchange.
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Betfair Pty Ltd v Western Australia [2008] HCA 11 [1.1050] Betfair acted as an online intermediary through which racetrack punters placed bets with other racetrack punters. Betfair was licensed in Tasmania to operate a betting exchange under Tasmanian legislation. However Western Australia legislated to prohibit Betfair to operate in that State. The WA legislation was challenged under s 92 of the Constitution and it was held by the High Court, unanimously, to impose a discriminatory and protectionist burden that was not proportionate or appropriate. The joint judgement rejected Western Australia’s argument that its prohibition of Betfair was necessary to safe guard the integrity of the racing industry (at [110], [116]): What is involved here is an attempt at an evidentiary level to measure something of an imponderable. But, allowing for the presence to some degree of a threat of this nature, a method of countering it, which is an alternative to that offered by prohibition of betting exchanges, must be effective but non-discriminatory regulation. That was the legislative choice taken by Tasmania and it cannot be said that that taken by Western Australia is necessary for the protection of the integrity of the racing industry of that State. In other words, the prohibitory State law is not proportionate; it is not appropriate and adapted to the propounded legislative object … The effect of the legislation of Western Australia is to restrict what otherwise is the operation of competition in the stated national market by means dependent upon the geographical reach of its legislative power within and beyond the State borders. This engages s 92 of the Constitution.
1.14 THE CONTINUING DEVELOPMENT OF THE AUSTRALIAN LEGAL SYSTEM [1.1060] Law reform is an ongoing process. The legal environment is continually evolving as the law is developed by both Parliaments and the courts to accommodate the changing demands of the society it serves. Reform of the system itself as opposed to adjustments within the system –macro-reform as opposed to micro-reform –is obviously more fundamental and more difficult. Over the century since Federation there
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Business and the Law In order to keep our wits about us, as efficiency advocates an attempt of plastic surgery on the Constitution, we need to acquire, in a hurry, familiarity with the document itself. At present it is far too expensive. What this country needs is a 50c Constitution. F Devine, The Australian (November 1990).
have been significant developments in the meaning and operation of the Constitution. There have been formal changes through amendment (although the legal requirement under s 128 for constitutional change by way of referendum attracting the support of a majority of voters and a majority of States has restricted amendment to only eight of the 44 proposals submitted to the electorate since Federation). Other changes have been through judicial interpretation by the High Court, the arbiter of the meaning of the Constitution. It is not surprising that a Constitution drafted a century ago does not always accommodate the demands and realities of today but, until recently, little serious consideration has been given to this issue. There has been, and will continue to be, wide public debate about the contentious and emotive issues of republicanism, about whether Australia remains a constitutional monarchy or adopts a presidential head of state, and about the flag. The focus of public debate on the continuing evolution of the Australian legal system has been concentrated on the issues of the move to an Australian Republic and the adoption of a Bill of Rights. There are of course a number of other issues of lesser profile but, nevertheless, of great significance to the development of the legal system, some of which are addressed below.
The parliamentary system and the role of the Executive
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[1.1070] Two issues dominate this area –the role of upper houses and the dominance of the Executive. In relation to upper houses, their role, and the resolution of conflict between them and lower houses, and, increasingly, the voting system are contentious matters. In relation to the role of the Executive, it is argued that the dominance of executive government especially through the party system and uncertainty about the proper role of Parliaments is a universal concern. The Executive’s dominance is a by- product of the Westminster system of responsible government under which the ministry is drawn from and remains part of the legislature. Increasing attention is being given to the United States’ model of separation of powers under which not only is the judicature independent of government but the legislative and executive powers are clearly separated. Patrick O’Brien (“The Fatal Flaw: Has the Westminster System Produced a Form of Executive Dictatorship?”, Time Magazine (16 September 1991)) is particularly savage: The question of whether Australia should or should not be a republic is really a smokescreen to cover the perpetuation of the executive state or, as some might prefer to call it [executive], dictatorship.
The changing role of the High Court [1.1080] The Constitution confers on the High Court the role of final arbiter of disputes on interpretation of the Constitution and the validity of legislation enacted by the Commonwealth and State Parliaments. Over recent years a series of significant High Court judgments, in cases such as the terra nullius and political advertising cases
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Chapter 1 The Law, the Legal System and the Constitution
discussed elsewhere in this chapter, have clearly signalled that the High Court will not be confined to the traditional view of its role of simply applying the law as it exists, but will seek a greater role in the development of that law itself. Through High Court decisions, the Constitution, and the Australian legal system that derives its authority therefrom, are continually evolving to meet the current demands of the society they serve.
IN CONTEXT
The High Court and contemporary values
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[1.1090] In discharging its duty to declare the common law of Australia, this Court is not free to adopt rules that accord with contemporary notions of justice and human rights if their adoption would fracture the skeleton of principle which gives the body of our law its shape and internal consistency … The peace and order of Australian society is built on the legal system. It can be modified to bring it into conformity with contemporary notions of justice and human rights, but it cannot be destroyed. It is not possible, a priori, to distinguish between cases that express a skeletal principle and those which do not, but no case can command unquestioning adherence if the rule it expresses seriously offends the values of justice and human rights (especially equality before the law) which are aspirations of the contemporary Australian legal system. If a postulated rule of the common law expressed in earlier cases seriously offends those contemporary values, the question arises whether the rule should be maintained and applied. Whenever such a question arises, it is necessary to assess whether the particular rule is an essential doctrine of our legal system and whether, if the rule were to be overturned, the disturbance to be apprehended would be disproportionate to the benefit flowing from the overturning. Mabo v Queensland (No 2) [1992] HCA 23 at [29] per Brennan J.
The increasing Australianness of Australian law
While on the subject of s 92 of the Constitution, I am reminded of the eminent Victorian Supreme Court Judge, Sir Charles Lowe. He had been asked who knew most about the law, and he said, There are two classes of people who know all about the law. Number one is the university lecturer. From him there is scarcely a right of appeal. Number two is a High Court Judge; from him also there is scarcely a right of appeal. But in our Constitution is s 92, a section made up of plain, simple words, needing no interpretation. But if you ask a High Court Judge what those words mean, he will launch into a spate of millions of words, each contradicting what his brother Judges have to say on their meanings. A S Gillespie-Jones, The Lawyer Who Laughed Again (Hutchinson, 1980).
[1.1100] Patrick Parkinson has written in Tradition and Change in Australian Law (4th ed, Thomson Reuters, 2010) at p 3 that: [i]n its legal institutions, as in other aspects of its national life, Australia bears indelibly the marks of its birth. The legal and political institutions of Australia find their roots, not in the traditions of its native inhabitants, but in the traditions of a colonial power which imported its understanding of law and social organisation with the landing of the first white settlers in 1788.
Australia and the other, primarily Commonwealth, countries that adopt the English common law model of a legal system share values, institutions, principles and procedures. There are of course differences, sometimes significant differences, among the particular laws of these jurisdictions. In the case of legislation, such diversity is not particularly
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Business and the Law
A constitution should be short and obscure. Napoleon Bonaparte.
surprising. The Parliaments of the former colonies have legislative power limited only by their own constitutions and will seek to impose the regulatory regime that is appropriate to that society. In the case of the common law, the judge-made law, the concept of diversity is more complex. It has nevertheless been accepted that common law may develop differently throughout the common law world. Indeed, as Lord Lloyd stated in Invercargill City Council v Hamlin [1996] 1 All ER 756 at 764-765: The ability of the common law to adapt itself to the differing circumstances of the countries in which it has taken root, is not a weakness, but one of its great strengths. Were it not so, the common law would not have flourished as it has, with all the common law countries learning from each other.
Particularly over the last quarter of a century, and under the leadership of the High Court, legal scholars can trace the emergence of “Australian law”. In relation to contract law it has been suggested by Starke et al in Cheshire & Fifoots Law of Contract (6th Australian ed, Butterworths, 1992) that:
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If society is tolerant and rational, it does not need a Bill of Rights. If it is not, no Bill of Rights will preserve it. Former Australian High Court Chief Justice Sir Harry Gibbs, 1990 Reform 68.
Its uniqueness, or Australian character, lies not in specific doctrinal departures from any other system, although such departures have occurred. Rather it lies ultimately in the situations to which it is addressed, which are ineluctably local, and which have an effect largely on what may be called its “shape”.
Similar claims can be made for all aspects of the Australian legal system.
A Bill of Rights? [1.1110] The basic and fundamental rights of the citizens of a country such as Australia may be said to be well understood and well respected. It has to be said, however, that nowhere are they listed and given express constitutional protection. Many argue that there is no need for the enactment of a Bill of Rights, while others urge us to commit such essential rights as free speech and freedom of association to writing in an endeavour to put such matters beyond dispute. Sir Ninian Stephen in “Time to Take Stock”, Australian Financial Review (16 April 1992), explains that: The “founding fathers” of our Constitution took it for granted that individual rights were secure under common law. But the experience of many countries and the growing power of executive government and bureaucracies have led to greater interest in the notion of incorporating constitutional guarantees of individual rights and freedoms in some kind of “Bill of Rights”.
[1.1120] Australia is becoming increasingly isolated in not enshrining and guaranteeing basic and fundamental rights and liberties in a constitutional document. The United States provides the best-known example, the Bill of Rights being constituted by the first 10 amendments to the Constitution. Art 1, for example, provides that: Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; of the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.
[1.1130] Canada and New Zealand have also enacted legislative guarantees of individual rights. Indeed, it appears that Australia is now the only Western democracy that
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Chapter 1 The Law, the Legal System and the Constitution
does not have a national Bill of Rights, although the Australian Capital Territory (Human Rights Act 2004 (ACT)) and Victoria (Charter of Human Rights and Responsibilities Act 2006 (Vic)) have enacted limited protections which require governments and those exercising public functions to act consistently with reference to the human rights set out and for the courts to, as far as possible, interpret all laws in ways compatible with the rights set out in the charter.
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[1.1140] The contrary argument suggests that fundamental rights may be more valuable because they are not legislated for –that the traditions of the rule of law developed over centuries provide a greater safeguard. Professor Lauchlan Chipman (Institute of Public Affairs (NSW), 1984) has addressed this issue in a forthright manner: The first point to note [is] that the existence of a Bill of Rights is neither sufficient nor necessary to ensure the existence of the rights guaranteed. It is not necessary as, for all their warts, England and Australia, which do not have a Bill of Rights in the relevant sense, have been among the better protectors of fundamental human rights. It is not sufficient, as anyone who examines the 1977 Constitution of USSR, which contains a magnificent Bill of Rights guaranteeing inter alia freedom of religion, preservation of national culture, and freedom of movement, can verify. It is worth noting that the worst excesses of segregation in America, and indeed the McCarthyist movement, existed notwithstanding the Bill of Rights in that country. The best way to handle questions relating to fundamental rights is with specific legislation in relation to specific rights, where judged necessary by parliament. A general Bill of Rights, because of its very generality, grants tremendous power, as well as responsibility to those charged with interpreting it, and this means a shift of important powers away from elected representatives to appointed officials, something that pleases the government in power that has the power to make the appointments. I do not believe that Australians really want a third legislative chamber, whether that chamber be the Human Rights Commission, a new Federal Court, or the High Court.
Implied Rights under the Constitution [1.1150] An important function of the High Court is that with it rests the power of interpreting the Constitution. An emerging activism in High Court judgments has been witnessed in the last 25 years, of which Mabo is a well-known example. The matter of the fundamental rights of Australians has also been considered.
It is difficult to imagine an issue more likely to divide Australians than the Federal Government’s proposed enactment of a Bill of Rights. If Mr Hawke and Senator Evans achieve their objective, our political system, as well as our legal system, will be fundamentally changed. An enforceable code setting out the basic human rights of the citizen has many apparent attractions … The most powerful argument against a Bill of Rights is that if takes the power to decide on vital questions out of the hands of the people’s elected representatives in parliament and gives that power to judges who are appointed by politicians but are not answerable, as politicians are, to any electorate. Editorial, The Australian (12 July 1983).
In 1992, the High Court held that Commonwealth legislation prohibiting the broadcast of political material in the period prior to an election was unconstitutional (Australian Capital Television Pty Ltd v The Commonwealth [1992] HCA 45). Central to the decision was the question of whether there was to be implied in the Constitution a right or freedom of communication. A majority of justices held that some such implication should be made. Mason CJ, with reference to the question of whether fundamental rights should be so implied, said (at [31]): The adoption by the framers of the Constitution of the principle of responsible government was perhaps the major reason for their disinclination to incorporate in the Constitution comprehensive guarantees of individual rights … [They] accepted, in accordance with prevailing
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Business and the Law That is what the Victorian Charter of Rights and Responsibilities has always been about – changing the culture of government and public life so that human rights are brought from the periphery to the core. Rob Hulls, former Victorian Attorney- General, cited by The Australian (22 May 2015).
English thinking that the citizen’s rights were best left to the protection of the common law in association with the doctrine of parliamentary supremacy.
With respect to the implication of a specific guarantee of freedom of communication on matters relevant to public affairs and political discussion, he said (at [42]): Freedom of communication in the sense just discussed is so indispensable to the efficacy of the system of representative government for which the Constitution makes provision that it is necessarily implied in the making of that provision.
The Chief Justice concluded that “in the ultimate analysis, it is for the Court to determine whether the constitutional guarantee has been infringed in a given case”. The decision indicates a more creative High Court, willing to play a greater role in the constitutional protection of human rights.
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[1.1160] It is, however, a role that is not free from criticism. It raises the issue of the High Court taking over the democratic right of the people to have their liberties controlled by an elected Parliament, rather than by an unelected court. The debate continues between those who support the concept of an activist, progressive High Court and those who argue that the court is encroaching upon the sovereignty of Parliament. George Williams has observed in “Build Our Rights, Slowly”, Sydney Morning Herald (28 December 1998) that: There are two things wrong with almost all legal writing. One is its style. The other is its content … The average Law Review writer is peculiarly able to say nothing with an air of great importance. F Rodell, “Goodbye to Law Reviews” (1936) 23 Virginia LR 38 at 38.
The Federal Parliament must re-enter the fray. Despite its failures, it has recognised important rights in Federal legislation; most significantly, the Racial Discrimination Act, the Sex Discrimination Act and the Disability Discrimination Act. However, it should seek to protect fundamental rights on a more comprehensive basis. The need for greater rights protection is plain. The law does not adequately protect the rights of the most vulnerable and disadvantaged. The rights already in place are also unsatisfactory because they are largely unknown, and thus are not accessible and fail to serve an educative or symbolic function. The need to shield fundamental rights from the exercise of arbitrary government power makes the case for a bill of rights compelling. While Australian parliaments have been generally effective in protecting basic rights, the record is far from unblemished. The Stolen Generation, the attempt to suppress communism in the 1950s, and even the White Australia policy show the need for a greater check on government power.
This argument was bolstered by Justice Michael Kirby, of the High Court, when, delivering the 2001 Manning Clark lecture, he commented that: For most of my life, as a homosexual Australian, I have been oppressed by unjust laws. I do not doubt that had there been a constitutional bill of rights in this country, the reforms, slowly and sometimes reluctantly –and even apologetically –enacted from homosexual equality would have come more quickly from the courts.
The move to a republic? [1.1170] The role of the monarchy in the Commonwealth Constitution and the issue of republicanism have received widespread and rigorous public debate. The reality is that Australia is only a nominal monarchy as all the effective powers of the Head 66
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Chapter 1 The Law, the Legal System and the Constitution
of State are vested in the Governor-General. The Queen’s refusal to intervene at the Speaker’s request in the constitutional crisis of 1975 when the Governor-General, against the advice of his ministers, dismissed a Prime Minister with the majority support of the House of Representatives, vividly illustrates this reality. In a paper delivered to the Constitutional Centenary Conference of 1991, Mr Justice Pincus of the Federal Court noted that Australia effectively became a republic five years earlier, when the Federal and State Parliaments passed the Australia Act 1986. The Act was the mirror image of legislation passed in Britain to sever the last legal ties joining Australia to the mother- country’s “Imperial Parliament”. It removed British powers to legislate for Australia and it declared the High Court to be the final court of appeal on all judicial matters. He explained (Constitutional Centenary Conference 1991: Collected Papers, Center for Comparative Constitutional Studies) that:
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The imperial connection has largely become a legal fiction. We have found it convenient to continue to pretend for some purposes that the English monarch exercises power in Australia when in truth she does not.
As any observer will be aware, the debate on this issue is comprehensive and, at times, emotional. The conservative view, that change is not necessary, is supported by the successful operation, at least to date, of the Constitution as it stands. The other side points to the identity problem, the need for an Australian citizen as Head of State and the need for proper selection procedures for that person. In the words of Robert Hughes, to cling to the present system, “suggests a sentimentality we don’t have, a nostalgia we don’t need, and an uncertainty about ourselves that we don’t feel”: Republic (Summer 1996) p 4.
The States are always saying States’ rights this and States’ rights that, but as soon as there’s a problem they come running home to mama, back to the Commonwealth. Paul Keating, 1993.
After widespread debate the issue was put to the Australian people by way of referendum in 1997, at which time the proposal to change was defeated, undoubtedly in part because the proposal envisaged that the Head of State would be appointed rather than being elected by the people (to avoid a “popularity contest” between an elected Prime Minister as the head of government and an elected “president” as Head of State). At that time the Republic Advisory Committee advised (“An Australian republic: The options”, Report (1993)) that: the only constitutional change … required to make Australia a complete republican system of Government is to remove the Monarch. All the essential elements of our system of government –federalism, responsible parliamentary government, the separation of powers and judicial review of legislation and government action –would be unaffected by such a change.
Expanding Commonwealth jurisdiction [1.1180] The history of Federation is one of expanding Commonwealth power and influence. To some extent this is not surprising. Federation brought into being a new nation state that was obviously going to have a greater profile than its constituent elements, the States. A complex modern society also requires strong national government and there is increasing pressure across a range of commercial and social activities for national laws rather than frustratingly different laws operating at the State and Territory
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level, the extent of the Commonwealth’s supremacy would nevertheless surprise the founders of Federation. To a large extent the pre-eminent position of the Commonwealth has flowed from its financial strength and development examined in the next section (1.1220 and 1.1230). However, a significant factor has been the Commonwealth’s aggressive use of its concurrent s 51 powers that have, in relation to the corporations and the external affairs powers, been supported by a High Court which has been sympathetic to centralisation.
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[1.1190] The scene was set early for the steady growth of Commonwealth legislation by the 1920 decision of the High Court in the Engineers case (Amalgamated Society of Engineers v The Adelaide Steamship Co Ltd [1920] HCA 54). Justice Isaacs, who delivered the majority judgment, stated that: The federal government system clearly reflects the country’s colonial heritage. The sheer numbers of governments –the Commonwealth, six States, two Territories and about 800 local governments – strongly suggest that we are over- governed, and that some simplification is necessary. If there were the luxury of starting all over again, efficiency and effective management would argue for a much clearer and simpler definition of responsibility for determining standards and providing functions. Business Council of Australia, The Australian (10 July 1991).
It is undoubted that those who maintain the authority of the Commonwealth Parliament to pass a certain law should be able to point to some enumerated power containing the requisite authority. But we also hold that, where the affirmative terms of a stated power would justify an enactment, it rests upon those who rely on some limitation or restriction upon the power, to indicate it in the Constitution.
In other words, a broad and generous construction should be given to the powers vested in the Commonwealth. Although at different times there have been discernible shifts in emphasis in the approach of the High Court, a technical, restrictive approach has been resisted. [1.1200] Reference has been made in this chapter (see [1.890]) to the difficulties inherent in the Australian system of legislative power-sharing which at times leads to conflict between the Commonwealth and one or more States. What is readily apparent is that the 100 years since Federation have seen a significant shift in the balance and that Commonwealth (centralist) power has been allowed to grow at the expense of State power. A recent chief justice of the High Court (Sir Harry Gibbs) takes the view that true federalism is being eroded. He has said that there needs to be more public expression of the federalist view, and that the view expressed in the media tends to be centralist. Bernard Lane (“For the Good of the States”, The Weekend Australian (8-9 April 1995)) has commented that: In the federalist view, the pattern this century has been a steady flow of power one way from the States to the Commonwealth with the High Court directing the traffic. This despite the Constitution giving specific and limited powers to the Commonwealth and leaving the rest to the States which, as colonies, could not have begun to imagine how the new Federal Government would grow at their expense. Says Gibbs: “Legally it might be said that Australia is no longer a federation. There is literally no field of activity in which the Commonwealth cannot legislate, if it enters into an appropriate treaty”.
While the Constitutional power-sharing arrangements need some flexibility in their operation in order to provide for the exigencies of a rapidly developing society, the fundamental balance between the Commonwealth and the States must be preserved if federalism itself is to be preserved. 68
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Chapter 1 The Law, the Legal System and the Constitution
IN CONTEXT
For and against federation [1.1210] In the last analysis, it seems to me, our choices lie between two alternatives: Do we want the checks and balances, the democratic safeguard, of multiple governments against the monolithic few at the centre? Or do we want the economy and efficiency of centralism? The fundamental option of getting things done? And there it is… P H Lane, An Introduction to the Australian Constitution, (6th ed, Law Book Company, 1994).
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The financial strength of the Commonwealth [1.1220] The increasing influence of the Commonwealth is underwritten to a large extent by its financial strength. On Federation, the collection and control of customs and excise duties passed to the Commonwealth (s 86). The Constitution provided a formula for compensating the States for this significant loss of revenue which lasted “for a period of 10 years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides” (s 87). However, the Constitution provided no general rules governing the financial relationships between the Commonwealth and the States after the first 10 years of Federation and the Commonwealth has since that time emerged as the significantly strongest party in the Federation, to an extent not appreciated by the States at the time of Federation. This is because of the Commonwealth’s financial power over the States (whose revenue is sourced predominantly from federal funding). The Commonwealth’s financial power derives from its role as the primary authority and from s 96 grants (see [1.1270]). Dr Vince Fitzgerald, in a paper prepared for the Committee for Economic Development of Australia, has recently described the Commonwealth-State imbalance as creating an “extreme and dysfunctional vertical fiscal imbalance”. The levels of government at which the major components of the taxation system are administered are misaligned with government spending responsibilities. There was a celebrated declaration by Alfred Deakin in 1902 saying that the Constitution left the States legally free, but also left them “financially bound to the chariot wheels of the Central Government”, which displayed remarkable perspicacity.
The Uniform Tax Scheme [1.1230] The Commonwealth’s financial power has been strengthened by the Uniform Tax Scheme, which emerged during World War II (1939-45) in order to provide the Commonwealth with the revenue required to finance the war. Section 51 of the Constitution confers concurrent legislative power on the Commonwealth with respect to taxation (s 51(ii)). The Commonwealth first levied a federal income tax during the First
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Taxation without representation is tyranny. James Otis, Watchward of the American Revolution.
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World War (1914-1918) in order to fund the war effort, and until the Uniform Tax Scheme there were federal and State income taxes. Under the Uniform Tax Scheme, driven by the Commonwealth’s need for greater revenues, an agreement was reached that the States would not use their income tax powers and would be reimbursed by the Commonwealth. The Commonwealth’s position was strengthened not only by the spirit of cooperation engendered by war but also the defence power of s 51(vi) which the Commonwealth was able to invoke.
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Post-war Canberra … has been built on tied grants funded by the largess of a monopoly over income tax, wrested from the States by Chifley during World War II and kept in place by Robert Menzies and Malcolm Fraser. Brian Galligan, “Federalism Tests PM’s Fibre”, The Australian (4 April 1996).
[1.1240] The States have the power today to levy an income tax as this power was not removed by the Uniform Tax Scheme but was simply replaced by other arrangements. Its use is unlikely because of the political backlash that would be vented on a State government that imposed it. Professor P H Lane, in An Introduction to the Australian Constitutions (6th ed, Law Book Co, 1994) at [1.38]), comments that: It is not that the States ever lost their power to impose State income tax, although back in 1953 Prime Minister Menzies spoke (not quite accurately) of “returning State taxing powers”. The small States, Tasmania and Western Australia, retorted: “We do not want our taxing powers back.” Presumably they preferred to be subsidised, through Commonwealth tax collection, by New South Wales and Victoria. In January 1970 the States, unanimous for once, asked Prime Minister Gorton to quit a share of the income tax market for them. He said, “No”. In October 1991 Prime Minister Hawke conjured up a possible State income tax. This time it was the States who said, “No”. One may claim that the States are not really interested in an exercise of State accountability. Not even States of the same political colour as Canberra are prepared to take up the slack in State revenue by imposing the extra State income tax. Still, it may be politically unrealistic to expect the State to impose income tax when Canberra’s existing rates remain high. If Canberra is really anxious to expose State budgeting it should lower its tax rates to accommodate State income tax, as the Canadian Dominion Government did to accommodate Provincial income taxes. For the time being then, there is no “double taxation” in Australia. The Uniform Tax Scheme survives, followed by heavy general purpose grants and, in some matters, specific purpose grants to the States and Northern Territory.
[1.1250] Taxation measures have long been used as contrivances to achieve Commonwealth policies in situations where no actual legislative authority was specified in s 51 of the Constitution. This misuse of the taxation power was facilitated by the High Court as early as 1911 in Osborne v The Commonwealth [1911] HCA 19 when Griffith CJ observed that: Although it is a frequent result of taxation to bring about indirect consequences which could not practicably, or could not so easily, be brought about by other means, yet the circumstance that taxation has such a result is irrelevant to the question of the competence to impose the tax.
Indeed, the very first tax imposed by the Commonwealth was a land tax, levied, it was alleged, to encourage the subdivision of large holdings with the consequential resettlement bringing sufficient population increase to ensure the effective defence of the country. Nevertheless, there are constraints on the overuse of the taxation power to achieve extraneous ends. In the 1948 bank nationalisation case the then Chief Justice, Sir John
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Chapter 1 The Law, the Legal System and the Constitution
Latham, said that if the power were construed too widely (Bank of NSW v Commonwealth [1948] HCA 7 at [150]: the Commonwealth parliament might assume and exercise complete control over every act of every person in the Commonwealth by the simple method of imposing a pecuniary liability on everyone, who did not conform to specified rules of action, and calling that obligation a tax, not a penalty.
[1.1260] The introduction of a Goods and Services Tax on 1 July 2000 by the Commonwealth has enabled some rationalisation of the Federal-State taxation relationship. The reimbursement to the States of GST allowed the reduction or abolition of a number of State taxes.
Tied grants [1.1270] The reference at [1.1240] to general purpose grants and specific purpose grants is a reference to federal grants under s 96 of the Constitution, which provides that:
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During a period of ten years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides, the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit.
[1.1280] General purpose grants are the annual grants of money provided by the Commonwealth to the States. The grants are for general purposes and constitute the major proportion of a State’s revenue. They are granted without conditions attached “apart from the understanding that the States will keep out of the income tax field, and sometimes the grants are used as political leverage against a State (eg if a State persists with a tax which Canberra does not want, Canberra will threaten to cut back that State’s general purpose grant)” (Lane, An Introduction to the Australian Constitutions at 34). [1.1290] Specific purpose (or tied) grants are financial grants “on such terms and conditions as the Parliament thinks fit”. Tied grants enable the Commonwealth to dictate policy to the States and are widely used. The Commonwealth’s involvement in many areas (eg health, education and roads) has been facilitated by the use of tied grants.
Uniform legislation in a federal system [1.1300] The drafters of the Constitution could not have foreseen the complexity, commercial and otherwise, of society one century later. The need for some harmonisation of laws in Australia has become apparent but cannot always be satisfied by a reliance upon s 51 of the Constitution. There are, however, other approaches.
Ceding powers [1.1310] Section 51(xxxvii) of the Constitution authorises the Federal Parliament to pass laws on matters referred to it by any one or more States. It follows that where the States perceive that benefits will flow from national legislation this ability to refer their legislative powers to the Commonwealth may provide a practical solution. The Corporations Act 2001 (Cth) provides an example. The constitutional basis for the Act is the States ceding,
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or referring, their constitutional powers in relation to the formation of corporations to the Commonwealth (see ss 3 and 4). In relation to the Territories the constitutional basis for the Act is the legislative powers that the Commonwealth Parliament has under s 122 of the Constitution to make laws for the government of those Territories.
National cooperative schemes
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[1.1320] Another approach that has been used with success is to engage the legislative cooperation of the Federal and State Parliaments. The implementation of Australian competition policy provides an example. The effectiveness of the Trade Practices Act 1974 (Cth) was nevertheless impeded by the limitations imposed by the Constitution. The constitutional basis was the corporations power s 51(xx)), with the result that business enterprises which are not corporations were not subject to the Act. Complex negotiations by the Council of Australian Governments (COAG) representing the Commonwealth, States and Territories led to a cooperative agreement being signed by all the parties, the Conduct Code Agreement, under which the States and Territories agreed to implement the Competition Code as amended from time to time. The Competition Code, which was in effect a restatement of the Restrictive Trade Practices provisions of Pt IV of the then Trade Practices Act to catch individuals as well as corporations, was enacted by the Commonwealth in the Competition Policy Reform Act 1995. The Trade Practices Act has since been renamed to Competition and Consumer Act 2010 (Cth) (see [1.990]). The single national consumer law –the Australian Consumer Law –prescribed in this Act in place of disparate State and Territory scheme was introduced in the same manner that gave us national competition laws.
QUESTIONS 1.
What is the relationship between:
(a) law and morality and (b) law and justice?
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2.
What is meant by the concept of sovereignty of Parliament? What factors, if any, restrict the operation of the classic formulation of parliamentary sovereignty in Australia?
3.
Should a Bill of Rights be introduced in Australia? How would this be done? How would it affect current constitutional arrangements?
4.
The business of the Court is legality. Just as it is not known in human affairs for a noble objective to be pursued by ignoble means, so it sometimes happens that desirable ends are pursued by unlawful means. If the point is taken before them, courts have to rule on the legality of the means, whatever view individual judges may have about the desirability of the end. This is one aspect of the rule of law, a societal value that is at the heart of our system of government. It follows that this judgment
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Chapter 1 The Law, the Legal System and the Constitution
should be seen only as a judgment about legal issues, not a view about the social, economic, and political arguments Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] FCA 397 (23 April 1998) per Wilcox, von Doussa and Finkelstein JJ. Discuss this proposition.
WEB REFERENCES ComLaw http://www.comlaw.gov.au Australasian Legal Information Institute http://www.austlii.edu.au
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2
2
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The Courts and Common Law Andrew Terry THE BUSINESS CONTEXT The role of the courts in the development of the law through the application of the doctrine of binding precedent is a central feature of the Australian legal system as well as other legal systems which form part of the common law world. In Australia, as in any contemporary jurisdiction, the legislative content of the law is expanding rapidly and the courts possess the critical double function of interpreting and applying that legislation and of continuing the still important tradition of the common law. The understanding of the common law method, and the federal, State and Territory systems which administer the judicial function of government, is essential knowledge for an understanding of the development and application of business law. This chapter examines the nature of judicial method and the structure of the Australian court system.
2.1 [2.20]
THE COMMON LAW ................................................................................................................................................. 76 The common law ........................................................................................................................................... 76
[2.30] Equity .............................................................................................................................................................. 77 [2.40]
The fusion of common law and equity ...................................................................................................... 78
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2.2
THE DOCTRINE OF BINDING PRECEDENT ...................................................................................................... 78
[2.60]
Following prior authority ............................................................................................................................. 78
[2.80]
Ratio decidendi .............................................................................................................................................. 79
[2.100]
Obiter dicta ..................................................................................................................................................... 81
[2.110]
The judicial hierarchy ................................................................................................................................... 81
[2.130]
Distinguishing prior authority .................................................................................................................... 81
[2.150]
Rejecting prior authority .............................................................................................................................. 82
[2.160]
Where there is no prior authority .............................................................................................................. 83
[2.180]
“Every decision is a step in the process of legal growth” ...................................................................... 84
[2.230]
Contemporary judicial activism ................................................................................................................. 88
2.3
THE COURT SYSTEM ................................................................................................................................................ 91
[2.300]
Federal courts ................................................................................................................................................. 92
[2.350]
State courts ..................................................................................................................................................... 94
[2.410]
Jurisdictional conflicts .................................................................................................................................. 96
2.4 TRIBUNALS .................................................................................................................................................................. 97 2.5
TERMINOLOGY AND CITATION .......................................................................................................................... 98
[2.440]
Civil cases ....................................................................................................................................................... 98
[2.450]
Criminal cases ................................................................................................................................................ 98
[2.460]
The case report .............................................................................................................................................. 99
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2.1 THE COMMON LAW [2.10] As set out in Chapter 1 (see [1.120]), the expression “common law” is used, rather confusingly, in three different senses: • case law or judge-made law, that is, the law developed by the courts as distinct from the law enacted by Parliament. The common law in this sense owes its existence to generations of judges who have developed the law through decisions in individual cases; • a legal system based on the English model. Australia is a common law jurisdiction: it inherited the traditions and techniques of English law; and • the more restricted meaning, whereby it refers not to all case law but to case law developed in the courts of common law as opposed to case law developed in the courts of equity. The function of equity is described (at [2.30]) but the purpose of this chapter is to discuss the common law in its more general sense of all judge-made law.
The common law [2.20] After the Norman Conquest in 1066, the monarchs of England sent travelling judges around the country to administer royal justice. Parliament was not an important source of law in those days and there was little established law to guide the judges in their deliberations. Therefore, they applied local customs in deciding cases. The customs varied from one area to another but in time the judges began to have regard to earlier decisions, and rules developed in one part of the country were applied in other parts. Gradually the 76
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Chapter 2 The Courts and Common Law
rules and principles that evolved through previous decisions were regarded as authoritative and a complex body of law developed which replaced the local customary laws and was common to the whole kingdom. For this reason the law developed in this manner was known as the common law, and the courts in which it was administered were known as the common law courts. Although the common law displayed a capacity for growth and expansion, its development was restricted by procedural matters. Development could take place only within the confines of a limited number of “forms of action” recognised by the common law courts as giving rise to legal remedies. The courts were reluctant to recognise new forms of action as the creation of new remedies amounted to law making and this was regarded as the proper function of parliament and not the courts. After parliament intervened in 1285 (The Statute of Westminster II) new forms of action were recognised in circumstances that were similar to those for which remedies were already available but the judges proceeded cautiously and were guided by principles already accepted by the common law. The result was that the common law system became rigid and inflexible and was unable to provide remedies for claims which should have been recognised in the interests of justice. It became apparent that a more flexible means of administering justice was necessary as an adjunct to the courts of common law themselves. The courts of equity provided that solution.
Nobody can simply bring together a country that has 365 kinds of cheeses. Charles De Gaulle.
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Equity [2.30] In the Middle Ages the Monarch was technically the “fountain of justice”. A person who had suffered an injustice through the inadequacies of the common law could seek the Monarch’s intervention. Such petitions for relief were considered by the Lord Chancellor who was the Monarch’s chief adviser and, at that time, a leading cleric. The Chancellor would hear the dispute and give a decision in accordance with his own ideas of justice and fairness: he applied rules which in his opinion ought to be binding in conscience. In time petitions for relief were addressed directly to him for him to deal with. The court thus created was originally a court of conscience and cases were decided according to the particular Chancellor’s ideas of “equity and good conscience”. But the court gradually began to have regard to its previous decisions and eventually rules and principles which had been decided in earlier cases were treated as authoritative. In time a complex body of law known as “equity” developed in the courts of chancery to supplement the law developed in the common law courts. Although equity developed alongside the common law it was not a self-sufficient body of law. It assumed the existence of the common law and simply provided a remedy where the common law gave no remedy or offered an inadequate remedy. Equity’s most outstanding contribution to the development of the law was the institution known as the “trust”. A trust arises where one person (the legal owner) holds property on behalf and for the benefit of another person (the equitable owner). Although the common law recognised only the rights of the legal owner (ie the trustee), equity would recognise the rights of the equitable owner (ie the beneficiary). Equity would compel the trustee to deal with the property over which he or she had control for the benefit of the beneficiary (see Chapter 9).
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Now equity is no part of the law, but a moral virtue, which qualifies, moderates, and reforms the rigour, hardness, and edge of the law, and is an universal truth; it does also assist the law where it is defective and weak … and defends the law from crafty evasions, delusions, and new subtleties, invented and contrived to evade and delude the common law … Equity therefore does not destroy the law, nor create it, but assist it. Dudley v Dudley (1705) 24 ER 118 at 121 per Lord Cowper.
Another example is the treatment of fraud by the common law and by equity. At common law a fraudulent misrepresentation gave rise to an action for damages in the tort of deceit. To prove fraud in order to sustain an action of deceit the plaintiff had to establish that a false representation had been made either knowingly, without belief in its truth, or recklessly, careless whether it be true or false (Derry v Peek (1889) 14 App Cas 337). To succeed in an action for deceit at common law was therefore difficult. But equity did not insist on an “actual evil design” and gave relief where there had been a breach of “the sort of obligation which is enforced by a court that from the beginning regarded itself as a court of conscience”: Nocton v Lord Ashburton (1914) AC 932 at 954 per Lord Haldane LC). The doctrine of “constructive fraud” developed by equity enabled relief to be given over a wider range of circumstances than at common law. Equity gave relief because, in the words of Lord Denning in Lloyd’s Bank Ltd v Bundy [1974] 3 WLR 501 at 506, “as a matter of common fairness it is not right that the strong should be allowed to push the weak to the wall”.
The fusion of common law and equity [2.40] The position in England until the end of the nineteenth century was that the judge- made law consisted of two complex and settled bodies of law that had been developed in two separate streams in two separate courts. Common law remedies were obtained from the common law courts and equitable remedies were obtained from the courts of equity. The practical and procedural difficulties caused by the dual system of courts were removed by the Judicature Acts of 1873 and 1875. The main reform of the legislation was the abolition of these separate courts and the establishment of the High Court of Justice which in all its divisions administered common law and equity. Common law and equity still exist as separate branches of the law but the appropriate rules and principles, whether common law or equitable, can be applied in any case. This development has since been introduced into Australia: in some jurisdictions only relatively recently. Indeed, New South Wales was the last jurisdiction to adopt the reform, becoming effective on 1 July 1972.
2.2 THE DOCTRINE OF BINDING PRECEDENT Equity, in law, is the same that the spirit is in religion; what everyone pleases to make it. J Seiden, “Equity”, Table-talk (1689).
[2.50] The convenient practice of having regard to previous decisions –taking advantage of the accumulated wisdom of the past –had hardened into a rule of law by the nineteenth century. Today the essential characteristic of the common law is the binding nature of previous decisions.
Following prior authority [2.60] A court is bound to follow decisions of courts higher than itself in the same hierarchy of courts within the particular jurisdiction (eg New South Wales). The doctrine of binding precedent is sometimes referred to as stare decisis, meaning to follow previous decisions. The observance of this requirement is critical to the operation of the doctrine. Each lower tier in the hierarchy of courts must accept loyally the decisions of the
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Chapter 2 The Courts and Common Law
higher tiers. As Brennan J explained in the High Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44 at [11]: If an intermediate appellate court were free to disregard a fundamental doctrine settled by the final appellate court, an endemic uncertainty would infect the administration of justice.
The courts possess the critical double function of interpreting and applying legislation, and continuing the still important tradition of the common law. The doctrine of binding precedent applies to decisions interpreting legislation as well as to decisions where the relevant law is exclusively common law.
IN CONTEXT
Stare decisis –the doctrine of binding precedent
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[2.70] Constraint consciously observed by courts and enforced by higher courts which is critical to the stability and predictability of the legal system is known as the doctrine of precedent or by its Latin name, stare decisis. The operation of, and justification for, stare decisis was well explained in the Federal Court in Telstra Corporation Ltd v Treloar [2000] FCA 1170 in the following terms (at [23]):
It is unfortunate that the principle which I have enunciated was not drawn to the attention of the court in [an earlier case] but that was my fault, because I was counsel in the case. Cassidy v Ministry of Health [1951] 2 KB 343 at 363 per Denning LJ.
The doctrine of stare decisis takes its name from the Latin phrase … which translates as “stand by the thing decided and do not disturb the calm”. It is a doctrine based on policy. The rationale for the doctrine can be grouped into four categories: certainty, equality, efficiency and the appearance of justice. Stare decisis promotes certainty because the law is then able to furnish a clear guide for the conduct of individuals. Citizens are able to arrange their affairs with confidence knowing that the law that will be applied to them in future will be the same as is currently applied. The doctrine achieves equality by treating like cases alike. Stare decisis promotes efficiency. Once a court has determined an issue, subsequent courts need not expend the time and resources to reconsider it. Finally, stare decisis promotes the appearance of justice by creating impartial rules of law not dependent upon the personal views or biases of a particular judge. It achieves this result by impersonal and reasoned judgments. S Gageler, “Common Law Statutes and Judicial Legislation: Statutory Interpretation as a Common Law Process” (2011) 37(2) Monash University Law Review 1.
Ratio decidendi [2.80] The underlying idea is that every case which applies the law to a given set of facts arises from a legal principle which is necessary to the decision arrived at, and it is this principle which forms the binding element in the case. That part of the decision that is binding or persuasive is known as the ratio decidendi (the reason for decision). In O’Toole v Charles David Pty Ltd [1990] HCA 44 at [17], Brennan J in the High Court explained that: [T]he law is taken to have been in accordance with the principle which informs the new decision: the ratio decidendi. The ratio, which is expressed in or necessarily implied by reasons for judgment to which a majority of the participating judges assent, is the law. It is not merely a judicial opinion as to what the law is: it is a source of law.
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A judicial decision is based on reason and is known to be so because it is supported by reasons. An arbitrary decision … may be based on personal feelings, or even on whims, caprice or prejudice. Lord Denning, Freedom under the Law (Stevens & Sons, 1949).
It is the ratio decidendi that binds subsequent courts. In this way the common law acquires the certainty that is recognised as its greatest advantage. But the application of the doctrine of precedent is not a mechanical function, and extraction of the binding element of a relevant precedent is not a mechanical process: it is the ratio decidendi of an earlier case that must be applied by later courts, but there is not any universally accepted formula or method for identifying that ratio decidendi. The practices involved in arriving at the ratio seem in fact to combine several elements both of law and of fact. The ratio decidendi may be defined as the reason for the decision or the principle underlying the decision or that legal proposition which the court has applied to the material facts of the case in order to arrive at its decision. Glanville Williams’ introductory text Learning the Law (Stevens & Sons, 1973) explains that although in the flux of life all the facts of a case will never recur, the legally material facts may recur and it is with these that the doctrine of binding precedent is concerned. But the determination of the material facts is not a matter of formality and it is in this area that an element of flexibility arises within the common law. For present purposes the simplest way of defining the ratio decidendi is to say that it is the product of the material facts of the case and the decision on those facts. Materiality means legal materiality. There is no universal formula that can be applied for determining which facts are material. If a judge in deciding a case regards many facts as material the ratio decidendi of that case will be very narrow. Generally, for a later judge to be bound by the decision all those facts need to be present in the later case. If the judge regards few facts as being material it will be wide. It will not be necessary to find many equivalent facts in the succeeding case. If a later judge takes a narrower view of the facts considered material in the previous case the earlier decision has been restrictively distinguished. The earlier precedent is restricted to the extent of the boundaries imposed by the later decision.
… the tons of judicial pulp that must be squeezed for an ounce of pure judicial law. Diamond, “Codification in the Law of Contract” (1968) 31 Modern Law Review 361 at 362.
[2.90] The decision reached by the court in determining the case before it is, subject to any appeal, a final resolution of the issues raised in it, insofar as the parties to the proceedings are concerned. These matters cannot be raised again by them. This principle, res judicata, is based on the public interest in finality of litigation, and the law’s concern with the injustice involved in permitting a litigant to be twice vexed with the same claim (Murphy v Abi-Saab (1995) 37 NSWLR 280 per Gleeson CJ). The ratio decidendi of the decision, however, lives on to influence the development of the law in later cases. Examples of rationes decidendi abound throughout this book, but perhaps the best example is that of Donoghue v Stevenson [1932] AC 562 in which the House of Lords, the highest court in the English hierarchy, held that a soft drink manufacturer whose negligent processes allowed a snail to be bottled along with the ginger beer owed a duty of care to a consumer. The ratio decidendi of that case as expressed by Lord Atkin is based on material facts wider than snails and ginger beer (at 599): A manufacturer of products, which he sells in such a form as to show that he intends them to reach the ultimate consumer in the form in which they left him with no reasonable possibility of intermediate examination, [they were sold in opaque bottles] and with the knowledge that the absence of reasonable care in the preparation or putting up of the products will result in an injury to the consumer’s life or property, owes a duty to the consumer to take that reasonable care
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Chapter 2 The Courts and Common Law
Lord Atkin in fact expressed the basis for liability in negligence in even wider terms (at 580): That 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 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.
This general theory (the “neighbour principle”) has led to the evolution of liability for negligence well beyond the particular circumstances of the case itself, a development discussed in Chapter 8.
Obiter dicta
I believe that obiter dicta, like the proverbial chickens of destiny, come home to roost sooner or later in a very uncomfortable way to the Judges who have uttered them, and are a great source of embarrassment in future cases. Cooke v New River Company (1888) 38 Ch 56 at 71 per Bowen LJ.
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[2.100] Other legal argument and statements of principle found in judgments but not forming part of the ratio decidendi constitute obiter dicta (things otherwise said). These statements are not a part of the ratio and therefore are not binding on other courts. They may, however, be very persuasive depending on the status of the judge and the court. For example, the ratio decidendi of Donoghue v Stevenson set out above is expressed in terms of a “manufacturer” of products. Any reference in the case to the liability of a “repairer” of products is obiter dicta. The obiter in this case was, nevertheless, highly persuasive and Lord Atkin’s wider “neighbour” principle provided the foundation for the modern tort of negligence.
The judicial hierarchy [2.110] The characteristic of a binding precedent is that within any given judicial hierarchy (eg that of a particular State) a court is bound by the decision of a court above it in that hierarchy. Decisions from courts outside the particular hierarchy in which a case is being decided are not binding on the court. They are regarded as persuasive authorities and, depending on the status of the court, may be accorded great respect. Persuasive authorities are discussed in more detail later in this section. The decision of the highest court in the hierarchy is binding upon all the courts below it. In relation to previous decisions of a court at the same level, the general rule is that the decision is not binding but it will only be departed from if the earlier decision is regarded as wrongly decided. The High Court has “never regarded itself as bound by its own previous decisions” (Nguyen v Nguyen [1990] HCA 9 at [22]) and accepts that State Courts of Appeal, and the Full Federal Court, should not regard themselves as strictly bound by their own previous decisions either, as “rigid adherence to precedent is likely on occasions to perpetuate error without … significantly increasing the corresponding advantage of certainty” (at [22]).
In any field of law however, there may arise the rare landmark case in which a court, usually a final appellate court, concludes that the circumstances are such as to entitle and oblige it to reassess the content of some rule or set of rules in the context of current social conditions, standards and demands and to change or reverse the direction of the development of the law. Jaensch v Coffey [1984] HCA 52 at [29] per Deane J.
Distinguishing prior authority [2.130] The flexibility and room for growth in the common law is partly maintained by the accepted judicial process of distinguishing earlier decisions. This method involves the judge finding that the material facts of the two cases differ so significantly that the earlier
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decision is not a binding authority in resolving the later case. The process of legal research may reveal a number of prior decisions which at first glance may appear applicable but on analysis of the material facts are not truly relevant to the case in question. They are accordingly distinguished. In addition, distinguishing provides a mechanism by which an earlier, and perhaps embarrassing legal doctrine can be so severely restricted that it is virtually abolished. The procedure whereby an existing decision is distinguished is simple enough. For example, if in the aftermath of Donoghue v Stevenson it became apparent that the rule of law as stated by the House of Lords was wrong or too wide, then a subsequent court could distinguish it by restricting it to cases involving soft drinks, opaque bottles and snails. In that way, a just result may be achieved by a lower authority within the court hierarchy without the need to wait for the House of Lords to have an opportunity to correct its own prior decision. [2.140] A more complex example of the judicial practice of distinguishing earlier judgments is to be found in Castlemaine Tooheys Ltd v South Australia [1990] HCA 1, in which the High Court considered the ruling in Cole v Whitfield [1988] HCA 18 to the effect that s 92 of the Constitution, a provision to secure the freedom of interstate trade, requires that interstate trade and commerce should only be immune from discriminatory burdens of a protectionist kind. The court held that Cole v Whitfield established “that a law which imposes a burden … but does not give the domestic product … a competitive or market advantage over … the interstate [product], is not a law which discriminates”: at [26]. The court then proceeded to distinguish the present case factually: “the present case stands on a different footing because the facts … show that the Bond brewing companies were disadvantaged … which gave the South Australian brewers a competitive … advantage”: at [26]. The result was that although Cole v Whitfield was distinguished, its ruling as to protection from discriminatory protectionist burdens was applied. At the same time the High Court referred to its own earlier decision in Bath v Alston Holding Pty Ltd [1988] HCA 27 and summarily distinguished it with the words “Bath is an example of one form of discriminatory protectionism. But it does not touch the issues which arise for decision in this case”: at [28].
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Legal precedents are like statistics. If you manipulate them, you can prove anything. A Hailey, Airport (Doubleday, 1968).
Rejecting prior authority [2.150] It has been demonstrated that by the process of distinguishing prior decisions, a court may avoid having to apply some part of the law otherwise binding upon it which was decided by a court superior to it. That process is also adopted by the most superior courts in order to restrict the influence of their earlier decisions if they no longer reflect current legal theory and practice. Despite the scope offered by these procedures, there are times when a court must simply declare an existing statement of common law to be wrong and to correct it. In that event it will overrule or reverse the prior authority, a process properly reserved for the appeal courts. After all, it was observed as long ago as 1853 that “we must [not] consecrate the mere blunders of those who went before us, and stumble every time we come to the place where they have stumbled. A palpable mistake, violating justice, reason and law must be corrected, no matter by whom it may have been made” (McDowell v Oyer 21 Pa Sup 417 at 423 (1853)). The view was also refreshingly put by Baron Bramwell in 1872 (in Andrews v Styrap (1872) 26 LT 704 at 706), in overruling his 82
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Chapter 2 The Courts and Common Law
own prior decision when he said that “the matter does not appear to me now as it appears to have appeared to me then”. Contemporary authority as to the view that judges do not make or change the law, but simply apply it, is found in the comments of Sir Anthony Mason (a former Chief Justice of the High Court) in C Merritt, “Making Law is What the Judges of the High Court Do” Australian Financial Review (17 March 1994) who declared that such a view is a “fairytale” and that: It is no longer feasible for courts to decide cases by reference to obsolete or unsound rules which result in injustice and await future rules at the hands of the legislature … There is a growing expectation that courts will apply rules that are just, equitable and soundly based except in so far as the courts are constrained by statute to act otherwise. Nothing is more likely to bring about an erosion of public confidence in the administration of justice than the continued adherence by the courts to rules and doctrines which are unsound and lead to unjust outcomes.
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Where there is no prior authority [2.160] The pervasive growth of the common law owes a great deal to the ability of judges to use the accepted processes of legal reasoning, and to develop law by analogy and by methods of induction and deduction. To assist in this process, they may refer to useful prior decisions not only of courts within the Australian common law hierarchy but also those of courts of other common law countries. Reference is not restricted to analogous decisions and courts may take other matters, including policy decisions, into account. A recent example of the judicial approach to a previously unresolved situation was Bryan v Maloney [1995] HCA 17. The High Court had to determine whether the builder of a home owed a duty of care (not to construct it negligently) to subsequent owners of the home and not only to the client for whom it was built. In deciding that such a duty did exist, the High Court argued by analogy from other related situations, referred to relevant decisions from other common law jurisdictions, and applied considerations of policy relating to the issue of imposing such a liability. The consequences of this decision were limited by the subsequent case of Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16. Both decisions are discussed in more detail in Chapter 8.
What is the argument on the other side? Only this, that no case has been found in which it has been done before. That argument does not appeal to me in the least. If we never do anything which has not been done before, we shall never get anywhere. The law will stand still whilst the rest of the world goes on; and that will be bad for both. Packer v Packer [1953] 2 All ER 127 at 129 per Denning LJ.
Persuasive authorities [2.170] The reference above to decisions from other common law jurisdictions is a reference to persuasive authorities. Part of the complexity of the system of binding precedent arises from the number of judgments that may be referred to. Not only are the rationes decidendi of binding precedents to be considered but also there is the great mass of authority, which, although not binding is regarded as persuasive. The decisions of all superior courts in common law countries can be argued as persuasive, even although they do not fit strictly within the doctrine of binding precedent (because they come from outside the particular judicial hierarchy). In Australia, for example, decisions of the House of Lords and the English Court of Appeal are treated with great respect and in many cases reference is also made to American, Canadian and New Zealand judgments. In New South Wales, for example, the decisions of the Courts of Appeal of the other States are not binding but are nevertheless persuasive authorities, and will be treated with respect. Given the similarity
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Novelty of argument is not a reason for judicial inaction where the law permits action and justice requires it. X v Amalgamated Television Services Pty Ltd (1987) 9 NSWLR 575 per Kirby J.
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of State laws in most areas and similar policy considerations, decisions in other States are of particular interest. Indeed, as the High Court stated in The Queen v Falzon [2018] HCA 29, “Australian intermediate appellate courts are bound to follow the decisions of other Australian intermediate appellate courts in both matters of statutory interpretation and matters of common law unless persuaded that those decisions are plainly wrong”.
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“Every decision is a step in the process of legal growth” If, then, we find the law to be plainly in conflict with what we or any of our predecessors erroneously thought it to be, we have, as I conceive, no right to choose between giving effect to the law and maintaining an incorrect interpretation. It is not, in my opinion, better that the Court should be persistently wrong than that it should be ultimately right. Australian Agricultural Co v Federated Engine- Drivers Firemen’s Association of Australia [1913] HCA 41 per Isaacs J.
[2.180] Whereas a statute operates from the general to the particular, cases operate from the particular to the general. Goodhart’s statement that “every decision is a step in the process of legal growth” (from Essays in Jurisprudence and the Common Law (The University Press, 1931)) explains that the common law method is not simply the routine application of binding precedents. The quest for certainty in the law does not conflict with the continual development of the law by the judges. The common law has been described as “living law” because (D P Derham et al, An Introduction to Law (6th ed, Law Book Company, 1991)): the precise scope and application of a principle or rule established in one case … may be worked out through many subsequent cases. Experience of the value of the principle or rule, and further thoughts about it may well affect the way such subsequent working out proceeds.
[2.190] The common law’s ability to develop to meet the changing needs of society can be illustrated by reference to the law of contract. The principles of the law of contract have almost entirely arisen from judicial decisions and, until recently, the role of the legislature was very limited. It is a remarkable achievement of the common law that the complex body of contract law that exists today has developed over 200 years or so through decisions in individual cases. The demands of the late twentieth century are very different from the demands of the late eighteenth century when, as England changed from an agricultural society to an industrial society, the modern law of contract developed. But through the constant and continual re-examination of principles laid down in earlier cases the common law has adapted to the changed needs of society. Where parliament has intervened, the foundation of the law on which the statutory schemes are laid is found in the decisions of the courts. Some commentators have alleged that in the area of the law of contract the common law has not always reflected changing situations but it is remarkable that the rules and principles of the common law of contract today can be traced back hundreds of years to their beginnings in a vastly different marketplace. That the common law has a constant capacity for growth is elucidated by the statement that (D P Derham et al, An Introduction to Law (6th ed, Law Book Company, 1991)): a particular case can produce a rule of law which, on the one hand provides authoritative answers to some questions, and, on the other, provides a general principle which can be used as an authoritative starting point, for reasoning in similar cases.
[2.200] The doctrine of precedent provides certainty in the common law but does not preclude its capacity for continual development to meet the changing needs of society. Precisely because the law has been developed through decisions in individual cases it contains a wealth of detail and it is of a practical character –it is derived from the problems which have actually arisen on experience rather than on logic. Not surprisingly there are certain disadvantages. The advantage of certainty may have the corresponding 84
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Chapter 2 The Courts and Common Law
disadvantage of rigidity; the advantage of wealth of detail has the disadvantage of bulk and complexity; the advantage of practical character has the disadvantage that it lacks the capacity to prescribe a comprehensive set of rules.
IN CONTEXT
Judicial law-making [2.210] It has become evident from the previous discussion not only that judges make law but that their ability to do so is fundamental to the strength of the common law system. The clash between the traditional declaratory theory that clings to the fiction that judges do not make the common law but merely apply and declare it and the undoubted reality of judicial law-making simply has to be accepted.
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A paper by Justice McHugh (“The Law-making Function of the Judicial Process” (1988) 62 Australian Law Journal 15), then a member of the New South Wales Court of Appeal, later a Justice of the High Court, is remarkable for its plain speaking on a subject about which many judges are publicly reticent and its cogent argument for the need for and justification of judge-made law. Justice McHugh acknowledges the limitations on judicial law-making: “A judge does not have authority to remake law generally”. Some limitations are practical –the adjudicative process confines the area in which the judge can legislate and the judge in any event does not have the resources of parliament in assessing alternative law reform proposals. Other limitations are philosophical –“A judge-made rule must be systematically related to the whole class of rules, principles, concepts, standards and doctrines which make up the general body of the common law”. Any rule made by a judge must be integrated in the “often removed but always unbroken line with the past”. In a democracy, more radical reform as to how society should be ordered is properly the function of the legislature. Justice McHugh explains (at p 120) that judge-made law is incremental: The law is not a landscape containing gaps or crevices which the judge can fill. Common law and statute law are more like adjoining fields surrounded by uncleared growth. The boundaries of statute law are permitted to expand in all directions. Sometimes separate, new fields are opened, but the common law is restricted to re-working what remains of its existing field and occasionally to extend its area by clearing a part of the adjoining growth. Common law, unlike statute law, always retains its essential unity. New ground can only be claimed if it can be joined to the old.
There was a time when it was thought almost indecent to suggest that judges make law –they only declare it. Those with a taste for fairytales seem to have thought that in some Aladdin’s cave there is hidden the common law in all its splendour and that on a judge’s appointment there descends on him knowledge of the magic words “open sesame”. Bad decisions are given when the judges muddle their password and the wrong doors open. But we do not believe in fairytales any more. “The Judge as Lawmaker” (1972) The Journal of Public Teachers of Law 22 at 25 per Lord Reid.
A number of objections may be raised to the legitimacy of the model of judicial law-making. Justice McHugh acknowledges and answers the “anti-democratic” objection (that legislative power should be exercised, not by judges, but by popularly elected officials), the “retroactivity” objection (that the retrospective application of a new rule is unfair to the party affected and undermines the values of certainty and predictability in the law), and the “incompetence” objection (that judges are incompetent to make judgments about complicated social, economic and political problems). None of these objections are absolute or fatal to a theory of judicial lawmaking. In any event, the “ultimate limitation” on judicial law-making is legislative
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amendment. The reality of judicial law-making has long been apparent. Within the parameters laid down by Justice McHugh, the need for the legitimacy of this process is undeniable. Recent major decisions of the High Court have signalled its adoption of an increasingly activist role. The above discussion has focused on the role of the judges in developing the common law. However, in interpreting legislation the courts also make a significant contribution. In the blunt words of Lord Devlin (Samples of Lawmaking (1962) p 2): The law is what the judges say it is. If the House of Lords were to give to an Act of Parliament a meaning which no one else thought it would reasonably bear, it is their construction of the words used in preference to the words themselves that would become the law. Parliament of course has the option of amending legislation to overcome the effect of the interpretation of its legislative language (which amendments may, of course, in turn have to be interpreted).
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In some cases the role of the judge is simply one of directly applying the words of legislation to the specific facts. In other cases the legislature may leave policy matters for the consideration of the courts. There is a debate between those who prefer detailed “black letter” law which leaves little discretion to the judges and those who favour “fuzzy” law –drafting which incorporates general principles –which confer a more creative developmental role on the judges. The opponents of “fuzzy” law claim the general principles sacrifice legal certainty for the sake of simplicity. Its advocates counter by pointing out that black-letter law generates its own uncertainties by fostering the search for loopholes. The true role of the courts was described by Justice Michael Kirby, then President of the NSW Court of Appeal, when he said that: Especially in the highest court, there is a proper and legitimate role in creation and expansion of the common law and broad interpretation of the Constitution and statutes. It is only in this way that the Australian Constitution and the common law have been adapted to the vastly different society of today, when compared to the turn of the century. Eighth Sir Earle Page Memorial Lecture, reported in The Australian (26 November 1993).
IN CONTEXT
Legal analysis and problem solving [2.220] The researcher must first analyse the factual material, casting aside matters which
are not truly relevant to the problem. This procedure will be followed by the uncovering of the applicable legislation and the discovery of judicial decisions either binding or persuasive. Attention should then be focused on applying these to the issues as they have unfolded. This discipline fosters the isolation in the researcher’s mind of the important issues and subsidiary issues. Then the writing must begin. The writing process itself will again help concentrate the
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Chapter 2 The Courts and Common Law
mind on the essential things and it will show up gaps in the research or understanding of the problem and the appropriate law. The process just described is an established technique usually taught to students as the procedure for legal problem-solving in assignments and examinations where the facts are not in dispute. This method is known as the IRAC method. I, identify the issue; R, review the law; A, apply the law to the facts; and C, come to a conclusion. Simply put, the four steps are: (a)
identification of the relevant issues emerging from the problem;
(b)
ascertainment and review of the law applicable to those issues;
(c)
application of that law to those issues which have been isolated; and
(d)
come to a tentative conclusion about whether the rule applies to the situation and what the outcome is in the situation.
Step 1 is often a two-part process. In a complex problem it is first necessary to identify the broad problem areas. This process of subdividing into main headings facilities the second part which requires a precise formulation of the legal issue or issues arising.
The doctrine of precedent does not compel your Lordships to follow the wrong path until you fall over the edge of the cliff. As soon as you find that you are going in the wrong direction, you must at least be permitted to strike off in the right direction, even if you are not allowed to retrace your steps. And that is what I would ask your Lordships to do. Ostime v AMP Society [1960] AC 459 at 489 per Lord Denning.
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When the step 1 process is complete, part of step 2 will have been accomplished, as isolating the issues will involve identifying the relevant law. To complete step 2 then requires a comprehensive listing of the relevant statute and case law, including precedent, and any policy arguments that may apply. An understanding of why and how that law will determine the problem must be developed. Once again, at this stage the work required by step 3 has begun. To complete step 3 requires not only a statement of the important principles of law but also an application of that law to the significant facts. That requires precise and valid reasoning. Where an issue seems incapable of resolution it should be discussed and reasons for the difficulty put forward. Step 4 of the process requires the researcher to come to a tentative conclusion about whether the rule or law applies to this situation and what will be the likely outcome. It is important to remember to use the IRAC method for each issue identified in a legal problem. All tentative conclusions are then logically connected to come to a final conclusion. The rules associated with legal analysis are of critical importance, particularly in the determination and application of the relevant law. The law applicable to a solution may be found in legislation. There may be specific Acts drafted by parliament that cover the situation. Alternatively, the parliament may have delegated the rule-making power to another body and then the answer will be found in those rules and regulations –commonly referred to as delegated legislation. However, the answer may also be found in cases, and the method used to find the law in those cases is known as case analysis. Cases must be used either because there is no legislation on the relevant topic and it is the common law that is still relevant in that area or, alternatively, parliament may have left to the courts the task of solving a particular problem on a case-by-case approach. From the relevant cases, ratio decidendi and obiter dicta must be used used to extract principles for application in the current factual situation. The correlation of facts between the earlier cases and the case at hand, the status of the court
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determining the issue, and the jurisdiction will all then become relevant (see the rules associated with the doctrine of precedent at [2.250] ff). For the determination of the law found within legislation the “rules of statutory interpretation” must be applied, that is, the rules that govern how a court will view the words that make up legislation. Together with the primary sources, secondary sources will assist in that interpretation process.
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Contemporary judicial activism This is one of the cases in which His Majesty’s judges, through no fault of their own, are unable to do justice and can but gloomily enforce the law and respectfully condemn the Legislature. The Lord Chief Justice, R v Smith in Herbert AP, Wigs at Work. (Harmondsworth, 1966).
It is when the colours do not match, when the references in the index fail, when there is no decisive precedent, that the serious business of the judge begins. B N Cardozo, Nature of the Judicial Process (1921) p 21.
[2.230] Reference was made above to the reality of judicial law-making. While the common law traditionally develops in an incremental manner, there are occasions when more complete reform is affected. At those times the process is not so much one of evolution as of revolution. A changing society demands a changing law and, at times, a new law. While there is a judicial capacity to achieve this, it must respect the necessary balance between the need for change and the authority of the common law system itself. It is Parliament not the courts to which the responsibility to make law is allocated. Although the traditional proposition that judges merely apply the law and not make the law is today seen to be a fiction there does come a point where legal change is so radical that it should be left to Parliament. The argument has been put in these terms (Hyde, The Australian (4 August 1995)): Law-making is the province of democratically derived power, that is political power, and it ought to be unthinkable that those who make laws cannot readily be sacked. There is, thus, no place for philosopher kings and there ought to be no place for activists, unelected, unrepresentative, law-making judges. Law-making is controversial but, so long as it resides in the Parliament, the people are protected, albeit imperfectly, by their vote.
Justice Dyson Heydon prior to his appointment to the High Court expressed his disapproval of judicial activism in these terms in “Judicial Activism and the Death of the Rule of Law” (2003) 47(1) Quadrant 9: Radical Legal Change is best effected by professional politicians who have a lifetime’s experience of assessing the popular will. They might not be an ideal class, but they are fitter than the courts to make radical legal changes.
Jerrold Cripps expressed it this way (“Judicial Activism Rears its Ugly Head”, The Australian (6 June 2014)): The role of the judiciary in our constitutional arrangement is to administer justice according to law and that is a reference to what the law is and not what socially aware judges think it should be. Like most freedoms, freedom of communication is not absolute. So who should decide what are the exceptions? The popularly elected and accountable members of the legislature or seven non-elected and unaccountable members of the legal profession?
[2.240] Two of the most notorious examples of judicial activism in the High Court have already been referred to in Chapter 1 –Australian Capital Television Pty Ltd & New South Wales v Commonwealth [1992] HCA 45 (the Political Advertising case) and Mabo v Queensland 88
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Chapter 2 The Courts and Common Law
(No 2) [1992] HCA 23. They were both decided in 1992 by the High Court presided over by Mason CJ and gave rise to a sustained debate as to the proper limits of judicial law making. In the Political Advertising case, the validity of Commonwealth legislation prohibiting political advertising during certain periods was challenged. The challenge relied on an implied constitutional freedom of speech about matters of politics and government. The High Court upheld the challenge. In the words of Mason CJ at [16], [33]-[34]:
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The consequence is that Part IIID severely impairs the freedoms previously enjoyed by citizens to discuss public and political affairs and to criticise federal institutions … [It] is difficult, if not impossible, to establish a foundation for the implication of general guarantees of fundamental rights and freedoms. To make such an implication would run counter to the prevailing sentiment of the framers that there was no need to incorporate a comprehensive Bill of Rights in order to protect rights and freedoms of citizens. That sentiment was one of the unexpressed assumptions on which the Constitution was drafted. However, the existence of that sentiment when the Constitution was adopted and the influence which it had on the shaping of the Constitution are no answer to the case which the plaintiffs now present. Their case is that a guarantee of freedom of expression in relation to public and political affairs must necessarily be implied from the provision which the Constitution makes for a system of representative government. The plaintiffs say that, because such a freedom is an essential concomitant of representative government, it is necessarily implied in the prescription of that system.
After discussing at some length the concept of representative government and freedom of communication as an indispensable element in that government, the Chief Justice held at [42] that: Freedom of communication in the sense just discussed is so indispensable to the efficacy of the system of representative government for which the Constitution makes provision that it is necessarily implied in the making of that provision.
A great deal of comment followed the decision and the weight of public opinion fell behind the court. Editorials proclaimed the age of the activist High Court. The implication has arisen that the High Court will now, as cases provide opportunities, develop what is virtually a Bill of Rights.
Judge Willis: What do you suppose I am on the Bench for, Mr. Smith? Smith: It is not for me to attempt to fathom the inscrutable workings of Providence. F E Smith, Later Earl of Birkenhead.
If judges want to be politicians they should join the branch of government that does politics. Simon Breheny, Sydney Morning Herald (16 March 2018).
[2.250] The other example of this judicial law-making is the judgment of the High Court in Mabo v Queensland (No 2) [1992] HCA 23. In rejecting the continued application in Australia of the long-established doctrine of terra nullius, Brennan J (with whom Mason CJ and McHugh J agreed) observed (at [41], references omitted) that: If the international law notion that inhabited land may be classified as terra nullius no longer commands general support, the doctrines of common law which depend on this notion that native peoples may be “so low in the scale of social organization” that it is “idle to impute to such people some shadow of the rights known to our law” can hardly be retained … If it were permissible in past centuries to keep the common law in step with international law, it is imperative in today’s world that the common law should neither be, nor be seen to be, frozen in an age of racial discrimination.
He further declared (at [28]) that: According to the cases, the [English] common law itself took from indigenous inhabitants any right to occupy their traditional land, exposed them to deprivation of the religious, cultural and economic sustenance which the land provides, vested the land effectively in the
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control of the Imperial authorities without any right to compensation and made the indigenous inhabitants intruders in their own homes and mendicants for a place to live. Judged by any civilised standards, such a law is unjust and its claim to be part of the common law to be applied in contemporary Australia must be questioned.
It is important that the reality of judicial law reform and judicial law-making be recognised. However, it is equally important that the limits to this reality be recognised. The need for predictability in law requires that change should be a confined, gradual process and that only rarely should a change like that in Mabo (No 2) [1992] HCA 23 be effected. The right balance between the traditional view that a judgment of long standing should not be overturned and the alternative view that the common law must not be “frozen” in prior ages must be achieved. [2.260] On the occasion of his swearing in as Chief Justice of the High Court in 1995 Sir Gerald Brennan acknowledged that: It is inevitable … that the decision of this court would be seen by many to have a legislative flavor. But this court is not a parliament of policy; it is a court of law. Judicial method is not concerned with ephemeral opinions of the community.
A decade later a Justice Michael Kirby opined (in Judicial Activism: Authority, Principle, and Policy in the Judicial Method, The Hamlyn Lectures, Fifty-Fifth Series, Lecture 3 (2003) p 1) that, “we need a middle ground that reflects the pragmatic character of the common law in contemporary time”:
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The extremes of unbound judicial creativity and invention will be tamed. But so too will be the extreme of mechanical application of pre-existing law without considering the context in which it must operate and its justice and conformity to basic principle.
IN CONTEXT
Judicial activism and the death of the rule of law [2.270] [A]court faced with the choice of doing justice according to the existing law and
seeking to overcome injustice by effecting a significant change in the law should, apart from cases where no conflict with the legislature or the general legal and political order may arise, and no financial problem is likely to be created for public bodies, generally apply the existing law and leave it to parliament to make a new and more just law if it desires. If judicial law making does conflict with legislative policy, or the general legal and political order, or creates financial problems which the judicial branch cannot solve but must leave to others to grapple with, it intrudes into the true role of other arms of government. It conflicts with the separation of powers. In the words of Lord Devlin: “It is essential to the stability of society that those whom change hurts should be able to count on even-handed justice calmly dispensed, not driven forward by the agents of change”. Loyalty to precedent is important because it increases the chance of obtaining some certainty. The common law is not always clear, but in most fields it is reasonably ascertainable. It would have much less certainty if it were thought to be readily open to change … Disloyalty to precedent in effect gives judges uncontrolled discretionary power. Lord Camden said in Hindson v Kersey:
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Chapter 2 The Courts and Common Law
The discretion of a Judge is the law of tyrants: It is always unknown: It is different in different men: It is casual, and depends upon constitution, temper, passion –In the best it is often times caprice: In the worse it is every vice, folly and passion, to which human nature is liable. The doctrine of precedent is a safeguard against arbitrary, whimsical, capricious, unpredictable and autocratic decision making. It is of vital constitutional importance. It prevents the citizen from being at the mercy of an individual mind uncontrolled by due process of law. Justice Dyson Heydon, “Judicial Activism and the Death of the Rule of Law” (2003) XLVII(1-2) Quadrant Magazine.
2.3 THE COURT SYSTEM
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[2.280] The structure of courts within the Australian judicial system is complicated by the duality resulting from State, Territory and Federal courts having, to some extent, overlapping roles. That complexity is increased by the fact that most courts possess both original jurisdiction, that is, to hear and determine a matter for the first time (ie at “first instance”) and appellate jurisdiction, that is, to hear and determine an appeal from the decision of a lower court. Nevertheless the basic structure of our courts has retained the essential features of its English parent and has remained relatively constant since its inception.
IN CONTEXT
The role of the courts
Every unjust decision is a reproach to the law or the judge who administers. If the law should be in danger of doing injustice, then equity should be called in to remedy it. Equity was introduced to mitigate the rigour of the law. Re Vandervell’s Trust (No 2) [1974] 1 Ch 269 at 322 per Lord Denning MR.
[2.290] Courts are independent of the executive arm of government and determine disputes by conclusively declaring the state of law between the parties. The decisions of courts are enforceable. Courts have a role in resolving the most complex and entrenched disputes, and those where the amounts or issues at stake are significant and justify the high cost of litigation. However, the importance of the courts’ role is not just limited to commercial litigation. Only courts have the capacity, by a judge’s decision, to enforce the law irrespective of the power imbalance that might otherwise exist between the parties. In doing so courts provide the quintessential forum to achieve justice, and consequently have the capacity to not just declare the law in any particular matter before it but also change behaviour. Private informal mechanisms cannot do this: Sometimes nothing less than court orders are needed to protect minorities, stigmatised groups and people who suffer from discrimination. Settling disputes behind closed doors involving those who repeat harassment or discrimination may not serve the purpose of preventing breach of the law, redressing legitimate grievances and educating the offender and the community. Unfair outcomes can potentially arise through the use of informal mechanisms due to the private nature of negotiation and the settlement process. Inequalities may not be brought to
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light or questioned in a system that relies too heavily on informal processes. For this reason, litigation is not only concerned with dispute resolution but also fulfils the important function of dispute prevention and creates binding precedents, so that parties can predict the likely outcomes in their choice whether to pursue disputes. Access to Justice Taskforce, A Strategic Framework for Access to Justice in the Federal Civil Justice System (2009).
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Federal courts The silence awoke Mr Justice Stareleigh, who immediately wrote down something with a pen without any ink in it, and looked unusually profound to impress the jury with the belief that he always thought most deeply with his eyes shut. C Dickens, The Pickwick Papers (1837).
[2.300] Reference has already been made to the growing scope and complexity of federal law and to the existence of Federal courts alongside the State system. Federal courts derive their authority from the Australian Constitution.
Unelected, unrepresentative and substantially irremovable, it is no bad thing their function is not to legislate. Sir Ninian Stephen, on High Court Judges, The Age (15 May 1982).
For it must not be forgotten that the powers of the High Court are now in principle unchallengeable –not only is it the final court of appeal for all litigation in Australia, it is also the final and supreme arbiter on the meaning and scope of its own powers. It is not as if the court has been modest in its claims –its ascendancy, and even the meaning of the judicial power and the separation of powers, is arguably far greater than that originally envisaged by the Constitution.
High Court of Australia [2.310] The Constitution itself established the High Court of Australia. The original court of three was expanded to seven at an early date and has since remained at that number. It is the highest judicial tribunal in Australia and, since the abolition of Privy Council appeals, it is the final court of appeal from the decision of any Territory, State or Federal court, and from any High Court Justice exercising original jurisdiction. As Padraic McGuinness has pointed out (“Scrutiny of the Judiciary”, Sydney Morning Herald (30 March 1995)):
With the singular exception of certain appeals from the Family Court, since 1984 any appeal to the High Court requires special leave. An application must be made which establishes the importance of the issue in question before the High Court will proceed to hear the appeal itself. In the exercise of its appellate jurisdiction, the High Court can hear appeals from: a)
any justice exercising the original jurisdiction of the court;
b)
any federal court or court exercising federal jurisdiction; and
c)
the Supreme Court of any State.
This jurisdiction is granted by s 73 of the Constitution and is exercised by High Court benches, usually consisting of three, five or seven judges depending upon the nature and significance of the appeal. The process by which an applicant seeks special leave to appeal to the High Court gives to the court an opportunity to filter the cases coming before it and to hear those which will further the process of legal development and reform, rather than simply provide an opportunity to dispense justice in the particular instance. 92
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Chapter 2 The Courts and Common Law
In addition to its appellate jurisdiction, the High Court possesses original jurisdiction which is derived from the Constitution itself and is expandable as set out in s 76. It has been permanently located in Canberra since 1980, although occasionally it hears cases in other capital cities.
Family Court [2.320] Until the last quarter of the twentieth century, the High Court enjoyed virtually sole jurisdiction, industrial matters aside, within the federal court system. That situation changed with the Family Law Act 1975 (Cth) which created the Family Court of Australia to preside over the divorce process and the ancillary matters that arise as to property, maintenance and custody of children. In order to complete the power of this court to deal with ex-nuptial children, various States have referred their powers to the Commonwealth under s 51(xxxvii) of the Constitution. It is interesting to note that these references of power were necessary because the Constitution did not contemplate children born outside a marriage relationship. Section 51(xxii) grants power over custody issues only in relation to divorce and matrimonial powers.
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The Family Court exercises its appellate jurisdiction by sitting as the Full Family Court to hear appeals either from a single judge of the Family Court or from a magistrate in a State court exercising jurisdiction under the Family Law Act, that Act investing such jurisdiction in the lower courts (the local courts or magistrate’s courts) in matters relating to custody of and access to children and maintenance. The appeal from a single judge lies only on a question of law as opposed to a question of fact. The creation of the Family Court represents a shift in attitudes to family law matters, which resulted in continuing and often heated debate for the reason that the new law was conceptually ahead of community thinking. The Family Court is also associated with Australia’s first instances of fatal violence against judges and their families.
Federal Court
There has been some concern expressed that the judges of the High Court, rather than the Australian people and their elected parliamentary representatives, seem able, in effect, to bring about changes through interpretation of the Constitution in the light of what they regard as changing national circumstances. Yet this is a trend that is not only unavoidable but also desirable. It prevents our being bound irrevocably by the, in part, dead letter of the founding fathers, who can have had little perception of the complexities of our modern world. B Hawke, Adelaide Advertiser (12 July 1983). No judge writes on a wholly clean slate. F Frankfurter, The Commerce Clause (1937).
[2.330] The Family Court represents a major societal addition to the Australian court structure; however, from a legal standpoint, the most significant development has been the creation of the Federal Court in 1976 by the Federal Court of Australia Act 1976 (Cth). The Act provides for both original and appellate jurisdiction. The court’s original jurisdiction is conferred by over 150 statutes. In the conduct of its appellate work, the Federal Court sits as a full court to determine appeals from the decision of single Federal Court judges, from the territorial supreme courts and from single justices of State Supreme Courts in cases involving federal matters –in particular, income tax.
Federal Circuit Court [2.340] In 1999 the Federal Government established the Federal Magistrates Court as a lower-level federal court. In 2013 it became known as the Federal Circuit Court of Australia. The features of the court as explained by Daryl Williams QC, the then Attorney- General, are (Australian Financial Review (3 December 1999)): to provide a cheaper, faster and more efficient method of dealing with less complex civil and family law matters.
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In December 1902, after Oliver Wendell Holmes had been appointed and confirmed as associate justice of the US Supreme Court, the Middlesex Bar Association in his home state of Massachusetts honored him with a send-off banquet. At the end of the festivities, one of his supporters said: “Finally, justice will be done in Washington”. “Don’t be too sure”, replied Justice Holmes, “I am going there to administer the laws”. M Gilbert (ed), Oxford Book of Legal Anecdotes (Oxford University Press, 1986).
It is no longer appropriate to react with outraged dignity when a litigant propounds a novel theory judiciously constructed from elements of received doctrine. Champtaloup v Thomas [1976] 2 NSWLR 264 at 271 per Glass JA.
It will help ease the pressure on the Family Court and reduce waiting lists in family law matters. It will also allow Federal and Family Court judges to concentrate on more complex matters. The Government’s aim is to keep people out of courts where possible, encouraging them to use other dispute resolution processes to deal with their problems. The Federal Magistrates Service will strongly encourage the use of conciliation, counselling arbitration and mediation in appropriate cases. The Federal Magistrates Service will also encourage the use of community-based counselling and mediation services, to give clients as wide as possible a choice The Government does not want the Federal Magistrates Service to be an expensive new court with its own staff, buildings and infrastructure. It will therefore use the infrastructure of existing courts as much as possible. Accessibility is also crucial. As well as basing some federal magistrates in regional locations, they will also travel extensively on circuits to bring their services within reach of as much of the community as possible.
State courts [2.350] Each State and Territory has its own separate court system established pursuant to the constitution of each jurisdiction. Although the names and jurisdictional limits of the courts are not consistent, the basic features of the structure, hierarchy and operation of the court system within a jurisdiction are common to each. Each jurisdiction has a hierarchy comprising three levels –the superior court (the Supreme Court), an intermediate court (the District or County Court) and a lower court (the Local or Magistrates Court). For each of the States and Territories, the High Court of Australia is the highest court of appeal. In each jurisdiction, there are a number of tribunals that exist outside the court system. [2.360] Figure 2.1: The Structure of the Australian Court System Australian Courts High Court of Australia
The Family Court Full Court
Federal Court Full Court
Full Court/Court of Appeal
single judge
single judge
State Supreme Courts
Federal Circuit Court
Federal Circuit Court
State District or Country Courts
State Local or Magistrates Courts
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Chapter 2 The Courts and Common Law
Superior courts [2.370] The highest court in each State or Territory is the Supreme Court. The first of such courts, the Supreme Court of New South Wales, has its origin in the 1824 Charter of Justice. The court comprises the Chief Justice of New South Wales, the President of the Court of Appeal, the other judges of appeal and ordinary judges. The court is separated into divisions exercising original and appellate jurisdictions. Its original jurisdiction is exercised by a single judge. Where an appeal is taken from a decision of such a judge, the Court of Appeal is constituted by three judges. (Appeals from lower courts are normally disposed of by a single judge of the Supreme Court.) Criminal appeals are dealt with in the Court of Criminal Appeal which is usually constituted by any three judges, sometimes including the Chief Justice. In terms of judicial hierarchy, it should be noted that there is the office of Chief Justice of the Supreme Court and the separate office of President of the Court of Appeal.
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In other Australian States and Territories, appeals from single judges of the Supreme Court are heard by a Full Court of the Supreme Court, usually comprising three members of that court, except Queensland, which since 1991 has a Court of Appeal as a separately constituted division of its Supreme Court, similar to the New South Wales structure.
I do not doubt that there are some cases in which an ultimate court of appeal can and should vary or modify what has been thought to be a settled rule or principle of the common law on the ground that it is ill- adapted to modern circumstances ... [But] the court is neither a legislature nor a law reform agency. Its responsibility is to decide cases by applying the law to the facts as found. The court’s facilities, techniques and procedures are adapted to that responsibility; they are not adapted to legislative functions or to law reform activities. State Government Insurance Commission v Trigwell [1979] HCA 40 at [19] per Mason J.
These courts have the power to supervise the proceedings and review the decisions of inferior courts, and also exercise supervision over the admission into and subsequent conduct of members of the legal profession. With respect to State law, the Supreme Courts have inherent jurisdiction unlimited as to amount and type of crime. In addition to State jurisdiction, these courts have had their authority extended to cover some areas of federal jurisdiction, granted specifically by federal law. [2.380] There are, however, limits to the authority of Supreme Courts. The first category of limitation is territorial. Generally speaking, it is necessary for the defendant to be able to be served within the State and for those against whom an order may be made either to be physically present or own property within the State so that effect may be given to an order. The other category of limitation is more specific. At times, the efficient administration of justice may require a statutory transfer of jurisdiction to another court. Thus specialist courts are encountered in each jurisdiction to deal, for example, with land and environment matters, or industrial matters.
Intermediate courts [2.390] On the next tier below the Supreme Courts one encounters the District Court. On its establishment in 1853, courts were allocated to geographical districts within New South Wales. In 1973 the District Court Act 1973 (NSW) created one statewide court replacing both the earlier district courts (for civil matters) and the courts of quarter sessions (for criminal matters). The civil jurisdiction of the court is limited to $750,000 unless the restriction is waived by consent of the parties. In its criminal jurisdiction the court hears most matters committed for trial by the local court with the exception of the most serious crimes such as murder, which are dealt with by the Supreme Court. Equivalent District Courts are established in Queensland, South Australia and Western Australia, while in Victoria they are known as County Courts. They do not exist in
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Tasmania, the Australian Capital Territory and the Northern Territory. The monetary limits on claims vary only slightly, with the exception of South Australia where there is no limitation on the amount of claim that may be made.
Lower courts [2.400] At the lowest level in the State Court hierarchy are those courts presided over by magistrates and known as local courts (in New South Wales, South Australia and Western Australia), courts of petty sessions (for the criminal jurisdiction of Western Australia and Tasmania), courts of summary jurisdiction (for the criminal jurisdiction of South Australia), courts of requests (in Tasmania) and magistrates courts (in Victoria and Queensland). The civil jurisdiction of these courts is limited to claims below a certain amount (ranging throughout Australia from $10,000 to $100,000), the point being that such courts should deal primarily with issues of fact, rather than law, and for modest amounts of money. In the exercise of their criminal jurisdiction, these courts deal with committal proceedings, sometimes in cases of serious crime, in which they decide whether the accused person should face a full trial for the matter charged or whether, there being insufficient evidence, the charges should be dismissed. They also possess the jurisdiction to hear and determine charges alleging offences of a minor nature.
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Jurisdictional conflicts In times of social change and tensions in the world, great are the demands upon the courts and the challenge to them in reconciling competing interests and in accommodating traditional rules to new circumstances. HM The Queen, opening of the High Court, Canberra, 26 May 1980.
[2.410] Nine discrete but related legal systems exist within Australia –Federal, State and Territory. Each system has its own court structure and it is hardly surprising that there is, from time to time, jurisdictional conflict as to which legal system and which court is the appropriate point of reference. A number of mechanisms exist to minimise the inconvenience and scope for disputation. Federal legislation may confer authority on State courts in relation to particular matters (ss 71 and 77 of the Constitution) and, pursuant to what is referred to as the accrued jurisdiction, the Federal courts may decide issues arising under State laws when such issues form part of the matter in respect of which jurisdiction is specifically conferred on the Federal Court. A common example of accrued jurisdiction occurs under the Competition and Consumer Act 2010 (Cth). The jurisdiction of the Federal Court granted by that Act in relation to, for example, misleading or deceptive conduct (under s 18 of the Australian Consumer Law) extends to associated issues of contract law and torts law that fall within State rather than Federal jurisdiction. The most significant development for some time was nevertheless the cross-vesting procedure. Consultation between Federal and State governments finally led to the enactment by each jurisdiction in 1987 of the Jurisdiction of Courts (cross-vesting) Acts which, together, provide for State and Territory courts to be vested with federal civil jurisdiction (except in certain industrial and trade practices matters) and for the Federal Court to be vested with the jurisdiction of the State and Territory Supreme Courts. In Re Wakim; Ex parte McNally [1999] HCA 27 it was held that the Acts providing for the conferring of jurisdiction in State matters in federal courts were invalid.
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Chapter 2 The Courts and Common Law
2.4 TRIBUNALS [2.420] In addition to the federal courts, the Commonwealth has also created tribunals that exercise non-judicial but nonetheless significant powers. These various tribunals are not courts: the High Court determined in 1956 that the “judicial power of the Commonwealth” could not be granted to an administrative (ie non-judicial) body, and that the power to punish for contempt of court was reserved to the courts: R v Kirby; Ex parte The Boilermakers’ Society [1956] HCA 10. This consequence flows from the separation of powers under the Constitution –federal tribunals can review decisions and mediate resolutions but do not have the power to make and enter orders. The Australian Law Reform Commission Report, “For your information: Australian privacy law and practice”, Report No 108 (2008) explains (at [35.35]) that:
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Since federal tribunals are part of the executive arm of government, they are prohibited from exercising the judicial power of the Commonwealth under s 71 of the Australian Constitution. They lack the power to make determinative findings of law, and their decisions are subject to scrutiny by the courts, either through judicial review or statutory appeal on questions of law. The decisions-making powers of tribunals are drawn from, and cannot exceed, those of the primary decision maker. Tribunals only may interpret law incidentally in the course of their proceedings, and such interpretations are not binding on the parties as a declaration of right and obligations. They also have no power to enforce their own decisions.
One of the most important federal tribunals is the Administrative Appeals Tribunal (AAT) which conducts independent merit reviews of administrative decisions made under more than 400 Commonwealth laws (see [4.310]). On 1 July 2015 the Migration Review Tribunal, Refugee Review Tribunal and the Social Security Appeals Tribunal were merged with the AAT. As there is no strict separation of powers under State constitutions there is not the same restriction on State and Territory tribunals exercising adjudicating functions in the determination of civil disputes. The High Court has nevertheless recently held that state civil and administrative tribunals that do not have status of a court cannot resolve disputes between people from different states (Burns v Corbett [2018] HCA 15) –a decision which is likely to result in such cases having to be resolved by state courts rather than state tribunals. A range of tribunals exercising specialist jurisdiction in relation to particular areas of law have been established. A more recent development has been the establishment of “super tribunals” –multi-jurisdictional tribunals with the power to review administrative decisions under State legislation and resolve consumer and commercial disputes.
Courts of justice do not pretend to furnish cures for all the miseries of human life. They redress or punish gross violations of duty, but they go no farther; they cannot make men virtuous; and, as the happiness of the world depends upon its virtue, there may be much unhappiness in it which human laws cannot undertake to remove. Evans v Evans (1790) 161 ER 466 Sir William Scott.
In New South Wales the “super tribunal” is the NSW Civil and Administrative Tribunal which was established in 2014 and which consolidates the work of 22 former tribunals into a single point of access for specialist tribunal services in NSW that operates through four divisions – Administrative and Equal Opportunity Division, which reviews administrative decisions made by NSW Government agencies and resolves discrimination matters. Consumer and Commercial Division, which resolves a wide range of everyday disputes such as tenancy and other residential property issues, and disputes about the supply of goods and services.
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Guardianship Division, which determines applications about people with a decision- making disability and who may require a legally appointed substitute decision maker. Occupational Division, which reviews decisions by government agencies about licensing and complaints concerning professional conduct and discipline.
2.5 TERMINOLOGY AND CITATION [2.430] The existence of the doctrine of precedent depends upon the relevant decisions being recorded and being available for subsequent reference. It was not possible to commence the common law tradition in any meaningful way until the development of printing, thus allowing the creation and reproduction of the necessary judgements and the reasons supporting them. Electronic publishing now assists that process. Because of the breadth of scope of cases making up the common law system in Australia (federal, State and Territory), and of the persuasive authority of decisions comprising comparative common law jurisdictions, for example, the United Kingdom, Canada, the United States and New Zealand, it is necessary to adhere to an established system for the identification and citation of cases of various courts at various times, thus enabling their easy location.
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Civil cases To give judgment privately, is to put an end to Reports. And to put an end to Reports is to put an end to the law of England. Burke, Impeachment of Warren Hastings: Report on the Lords’ Journals (1794).
[2.440] A case is reported in the names of the parties, for example, Terry v Giugni. That citation means that the matter before the court has been brought by Terry against Giugni. If this action is before a State court, Terry will be the plaintiff and Giugni the defendant. In the Federal Court, Terry is the applicant and Giugni is the respondent. On appeal, the party appealing (the appellant in both State and federal courts) is named first so the case may now be reported as Giugni v Terry if Giugni was dissatisfied with the original decision and has appealed against it. In appellate proceedings, the party defending the appeal is known as the respondent in both State and federal courts. The “v” of course stands for versus, but is always spoken as “and”, that is, Terry and Giugni not Terry versus Giugni. The convention is always that the case name be italicised. In some cases there may be a number of plaintiffs/applicants and defendants/respondents. The citation Terry & Ors or Terry et al (abbreviations for Terry and others) means that Terry is simply the first of a number of plaintiffs. The brief citation often disguises a more complex citation. The litigation in the Federal Court surrounding the establishment of the Super League is simply reported in the CCH service a News Limited v Australian Rugby Football League Limited & Ors [1996] FCA 1256, but the transcript of the judgment discloses two entire pages of details of the applicant and 19 respondents, as well as these parties in various combinations as cross-claimants and cross-respondents.
Criminal cases [2.450] Criminal actions are usually instituted by the Crown on behalf of the State. The citation of a criminal case may thus be R v Terry, “R” being an abbreviation of regina, Latin for queen (or, rex, Latin for king), and Terry being the person accused and known as such. However, in some instances the proceedings may be instituted by the Director of Public Prosecutions for the Commonwealth, a State or Territory and may be cited as Director of 98
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Chapter 2 The Courts and Common Law
Public Prosecutions (or DPP) v Terry. Conventionally the case R v Terry will subsequently be referred to as Crown and Terry or simply as Terry.
The case report [2.460] Technology has impacted on the reporting of judgments as it has on all other aspects of contemporary life. Cases continue to be published in the volumes of the official reports for each court and jurisdiction –for example, the Commonwealth Law Reports for decisions of the High Court –as well as the unofficial reports of commercial publishers – in relation to particular areas of law –but this text has adopted medium neutral citation which has evolved as a result of increased use of electronic law research and reliance on the various electronic databases. A medium neutral citation allows a resource such as a decision of a court to be citied irrespective of its publication medium, namely, in print form, or in electronic form available on the Web. In essence, a medium neutral citation consists of three main components: [] . Further, if paragraph numbers have been incorporated into the resource, a specific location within the resource can be identified using the paragraph numbers.
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For example, the official citation for Thomas v Mowbray is (2002) 233 CLR 307. The medium neutral citation is [2007] HCA 33. This text adopts, where possible, medium neutral citation to facilitate access via austlii.edu.au or jade.io or another legal database. Readers are nevertheless advised that, if arguing a case before a superior court, reported cases must be cited with reference to the relevant authorised official report.
QUESTIONS 1.
“The role of the judges is simply to apply the law –whether legislative or judge- made –and they have no role in developing the law beyond its current boundaries”.
To what extent does this proposition reflect the constitutional scheme and practical reality?
2.
The doctrine of stare decisis means that judges are bound by the decisions of a court higher in the hierarchy. Explain the operation of the doctrine. What are its advantages and disadvantages?
3.
How does judicial law making balance flexibility and certainty?
4.
What is the difference between a court and a tribunal?
WEB REFERENCES Federal Circuit Court of Australia http://www.federalcircuitcourt.gov.au Federal Court of Australia http://www.fedcourt.gov.au High Court of Australia http://www.highcourt.gov.au
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3
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The Parliament and Statute Law Andrew Terry THE BUSINESS CONTEXT Statute law (legislation) now constitutes that part of the law which most dominates our social and commercial lives. The words of French CJ (“Bending Words” (20 March 2014)) spoken to an audience of law graduates are also applicable to business students given the significance of statutes in all business activities: It is of fundamental importance that all law graduates, whether going into practice or other forms of law job, should be aware of the central significance of statutes in the Australian legal system. They should be aware of the interactions between the common law and statue law. There are very few problems which are purely common law problems … They should be able to apply the provisions of a statute to a particular fact situation and be able to make inferences about rights, powers, duties and liabilities which may arise out of that application.
3.1
THE NATURE AND SIGNIFICANCE OF LEGISLATION ................................................................................ 102
3.2
THE MODERN INSTITUTION OF PARLIAMENT ............................................................................................ 106
[3.90]
The House of Representatives .................................................................................................................. 107
[3.110]
The Senate .................................................................................................................................................... 108
[3.140]
The Crown .................................................................................................................................................... 111
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3.3
THE LEGISLATIVE PROCESS ................................................................................................................................ 111
[3.155]
From Bill to Act ............................................................................................................................................ 112
[3.210]
Disagreement between the Houses ......................................................................................................... 113
[3.220]
The date of operation ................................................................................................................................. 113
[3.230]
Parliamentary privilege .............................................................................................................................. 114
3.4
THE INTERPRETATION OF LEGISLATION ....................................................................................................... 114
[3.240]
The role of the courts .................................................................................................................................. 114
[3.260]
The approach to the interpretative role .................................................................................................. 116
[3.270]
Techniques of interpretation ..................................................................................................................... 117
[3.310]
A purposive approach to interpretation ................................................................................................. 119
[3.340]
The use of extrinsic materials ................................................................................................................... 120
3.5
PROBLEMS AND PROSPECTS .............................................................................................................................. 121
[3.360]
An uncodified system ................................................................................................................................. 121
[3.380]
A bewildering array of legislation ............................................................................................................ 122
[3.400]
Legal “gobbledygook” ................................................................................................................................ 123
[3.410]
Drafting techniques .................................................................................................................................... 124
[3.420]
The legislative process ............................................................................................................................... 125
[3.440] Deregulation ................................................................................................................................................ 126
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[3.450]
Reforming the process ............................................................................................................................... 126
3.1 THE NATURE AND SIGNIFICANCE OF LEGISLATION [3.10] Legislation is the formal declaration of legal rules by parliament and people or bodies authorised by parliament. The legal rules made by parliament are known as enacted law, or statute law, and take the form of Acts of Parliament or statutes. Legal rules made by others empowered by parliament to make laws are known as subordinate legislation or delegated legislation and take the form of regulations, rules, orders or by-laws. As a collection our statute book might be summed up as beyond the average citizen’s pocket to purchase, beyond his bookshelves to accommodate, beyond his leisure to study and beyond his intellect to comprehend. C T Carr, Delegated Legislation (Cambridge University Press, 1921).
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Reference has been made (at [1.660]) to the principle of parliamentary supremacy –that if legislation is underpinned by a constitutional head of power it cannot be overridden or set aside. The court’s interpretative role does not infringe on parliamentary supremacy. Although Parliament in fact may be frustrated by the courts in their interpretation of legislation the Parliament can of course always amend the legislation to clarify or reframe the legislative provision. The power of the High Court to invalidate legislation made beyond the legislative powers expressly conferred on it by the Constitution similarly does not challenge the principle of parliamentary supremacy. In the Australian context where the Constitution allocates legislative power between the Commonwealth and the States, legislation is valid only if constitutionally valued.
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Chapter 3 The Parliament and Statute Law
IN CONTEXT Pages of commonwealth legislation passed per year 10,000
8000
6000
4000
2000
0
1901–02
1916
1926
1936
1946
1956
1966
1976
1986
1996
2006
2016
Source: IPA
[3.20] Greg Brown, “Cull Needed to Free Firms from Red Tape”, The Australian (7 November 2017) Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
IN CONTEXT
Australia’s legal landscape is dominated by statutes [3.30] Australia’s legal landscape is dominated by statutes. The Constitution of the
Commonwealth is s 9 of the Commonwealth of Australia Constitution Act 1900, a statute of the British Parliament. The Constitutions of the States are statutes which originally derived their legal effect from Imperial Acts and were continued in force by the Commonwealth Constitution. The legislative, executive and judicial powers of the Northern Territory and the Australian Capital Territory are derived from Self-government Acts enacted for each of them by the Commonwealth Parliament. Statutes enacted under the legislative power of Commonwealth, State or Territory Parliaments take their place in a common law environment and tradition which informs the way in which they are interpreted, the meaning of terms used in them and underlying assumptions upon which they may rest …
The science of legislation is like that of medicine in one respect; that it is far more easy to point out what will do harm than what will do good. C C Colton, Lacon (1820).
There are few, if any, cases decided by the High Court today that do not involve the interpretation of one or more statutes or are not resolved within some statutory framework. What is true for the High Court is true for the courts throughout the country. So too for law school examinations. There are few, if any, questions which one could conceive that could realistically propose a problem defined purely in terms of the common law and able to be answered entirely by reference to its principles and doctrines. French CJ in “Bending Words: The Fine Art of Interpretation”, Lecture (20 March 2014).
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[3.40] The growth in the importance of legislation in regulating contemporary society is both necessary and inevitable. The common law may have evolved into an intellectual system of great integrity but this has been a product of centuries of development. The judicial process is not equipped for an immediate response to changed circumstances. It is dependent on an appropriate case being brought before the court. It cannot lay down a new set of detailed rules to cover a broad range of activities. It cannot alter or repeal large areas of pre-existing common law or legislation. It cannot create new legal institutions to implement a new regime. It does not have the resources of parliament in formulating policy.
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There is of course a more basic philosophical argument –the reluctance of the courts to usurp functions that properly fall within the province of parliament. Law making is a matter for the political process rather than the courts. It is a consequence of the hard- fought struggle for democracy enshrined in what is today the Constitution that the legislature consisting of elected representatives is the institution of government entrusted with the role of lawmaking. People say that moving the law forward should be left to Parliament, and not the judges. Of course, when you look at some of the judges they may be right. Lord Denning, Sunday Times (1 August 1982).
In State Government Insurance Commissioner v Trigwell [1979] HCA 40, Mason J explained that there are powerful reasons why a court should be reluctant to modify a settled rule or principle of the common law (at [19]): The court is neither a legislature nor a law reform agency. Its responsibility is to decide cases by applying the law to the facts as found. The court’s facilities, techniques and procedures are adapted to that responsibility; they are not adapted to legislative functions or to law reform activities. The court does not, and cannot, carry out investigations or inquiries with a view to ascertaining whether particular common law rules are working well, whether they are adjusted to the needs of the community and whether they command popular assent. Nor can the court call for, and examine, submissions from groups and individuals who may be vitally interested in the making of changes to the law. In short, the court cannot, and does not, engage in the wide-ranging inquiries and assessments which are made by governments and law reform agencies as a desirable, if not essential, preliminary to the enactment of legislation by an elected legislature.
Similarly, courts are powerless to prescribe detailed regulations that may be required or to construct the necessary administrative machinery.
IN CONTEXT
Common law and legislation [3.50] Until relatively recent times the main body of law was common law developed through the decisions of the courts. Today legislation is the predominant source of law and the courts’ time is increasingly devoted to its interpretation. Traditionalists regret this trend while at the same time acknowledging that the demands of contemporary society require increasing reliance on legislation. The regret is understandable and never better expressed than by Fitzgerald who states that “cases are interesting and statutes dull”. Fitzgerald suggests six reasons for this difference between the two sources of law: (i)
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A case is about real living people: a statute is abstract and disembodied, and it is only human to prefer a story to a formula.
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Chapter 3 The Parliament and Statute Law
(ii)
A law case contains that prime ingredient of the play, novel or story – conflict. Here again a statute differs: it may provide a solution to a conflict but the conflict itself is not apparent on the face of the statute.
(iii)
The judgment in a decided case provides the reader with what is one of the most attractive and appealing features of the legal process – the feature which above all others makes law an attractive thing to study – I mean the judge’s reasoning. Much of the fascination of legal study lies in examining how far a court’s reasons justify its conclusions. With statutes it is otherwise. Here we have no reasons, only provisions –no justifications, only conclusions. Reasons and justifications can often be found, but never inside the statute itself.
(iv)
There is the time dimension. Cases can be looked on as points on a line of development, and by working through a line of cases we can trace the growth, extension and continuous development of a doctrine; we can extract general principles. Statutes too have a time dimension, but the statute book presents us with a series of discrete jumps rather than the continuous growth which we find in case law. And new statutes, when they supersede their predecessors, make us overlook the importance of examining the statutes that have been superseded. As a result statute law provides no general principles, and a subject without principles is one of very little interest.
(v)
Common law cases evidence a fascinating counterpoint or dialectic between the individual disputants’ requirement for a particular decision and the society’s need of a general rule, resulting in a tension wholly absent from statute law.
(vi)
Finally of course the judgments in the law reports are not only easily readable but also at times contain prose of very high quality indeed. The same can’t be said of statutes.
Fitzgerald PJ, “Are the Statutes Fit for Academic Treatment?”(1970-1971) Journal of the Society of Public Teachers of Law 144.
IN CONTEXT
Citing legislation [3.60] The law made by parliament (which is referred to as legislation, statutes, Acts, writ-
ten law or enacted law) in effect simply consists of words giving expression to the legislature’s scheme. Legislation sometimes has a formal title (eg “An Act relating to competition, fair trading and consumer protection and other purpose”) but is invariably referred to by its “short title”, the form of which is usually the subject of one of the earliest sections of the Act. In the case of the legislation referred to above, s 1 (headed “Short title”) simply provides that “This Act may be cited as the Competition and Consumer Act 2010”. In referring to legislation the relevant jurisdiction (or an abbreviation thereof) should be added after the year, to indicate its source. The correct citation of the legislation referred to above is the Competition and Consumer Act 2010 (Cth) indicating that it is an Act of the Federal Parliament. This short title includes by implication reference to later legislation amending the principal Act. A reference to the Competition and Consumer Act 2010 (Cth) is taken to mean the Act as it stands today –complete with the amendments to it.
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No new right in the law, fully-fledged with all the appropriate safeguards, can spring from the head of a judge deciding a particular case; only Parliament can create such a right. Malone v Metropolitan Police Commissioner [1979] 2 WLR 700 at 725 per V C Megarry. [A statute] is general and comprehensive in form, precedent particular and limited. A decision, whatever implications may be read into it by subsequent comparison and interpretation, exists primarily for the settling of a particular dispute. A statute purports to lay down a universal rule. C K Allen, Law in the Making (1958).
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The operative provisions of an Act are known as sections, which may be divided into subsections, which in turn may be divided into paragraphs, which in turn may be divided into subparagraphs. Depending on the complexity of the provision, further divisions may be necessary. The standard abbreviation for a subparagraph of a paragraph of a subsection of a section is eg s 52(1)(a)(i). If reference is being made to paragraph (a), the convention now adopted in federal legislation is to refer to paragraph 52(1)(a). To arrange sections into convenient groupings, an Act may be divided into Parts which may in turn be divided into Divisions and, if necessary, subdivisions. An Act may have one or more Schedules –The Australian Consumer Law (see Chapter 17) is eg enacted as Sch 2 to the Competition and Consumer Act 2010 (Cth). In the case of legislation such as the Income Tax Assessment Act 1936 (Cth), which has massively increased in volume (at least 20-fold) as amendments are constantly introduced to protect, extend and vary the tax base, the legislation can become very unwieldy and distinctly unfriendly. When new sections are added, they are inserted where appropriate and, rather than renumber all the sections which follow (which would obviously cause great confusion), the convention used is to add a capital letter or letters to the relevant section number. If a new section is to be added between s 160 and s 161, it will be introduced as s 160A. Indeed, in the case of the Income Tax Assessment Act 1936 (Cth) the introduction of the capital gains tax regime added over 200 pages of sections between s 160 and s 161. Nevertheless, the most impressive section in that Act, perhaps any Act, is s 159GZZZIA (headed “Application of Division to non-share dividends”). Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
3.2 THE MODERN INSTITUTION OF PARLIAMENT [3.70] The institution and procedures of Australian parliaments (ie the parliaments of the Commonwealth and of the States) are closely based on the English (Westminster) system which evolved over centuries. The origins of parliament are “hidden in the dark ages of antiquity” (Blackstone, 1765) but can be traced to Anglo-Saxon England when the Great Councils, or witans –assemblies of the king’s thanes, bishops, abbots and other leaders –met to discuss and debate important matters of state and to advise the king. The origins of the name “parliament” reflect this heritage. It is derived via the French from a Latin word meaning “to speak” or “to discuss”. A Parliament is nothing less than a big meeting of more or less idle people. W Bagehot, English Constitution (1867).
The Norman kings continued the Council, now called the Curia Regis or King’s Council, and widened its membership to include the King’s tenants-in-chief –people granted interests in land in return for certain dues owed to the King under the feudal system introduced by the Normans. In practical terms it was difficult for the King to carry on the government of the country without the advice and assistance of his Council. Blackstone (1765) suggests that the basic constitution of parliament was put in place by King John’s granting of the Magna Carta in 1215, under which the barons’ demands for a charter of liberties included obtaining the “common counsel of the kingdom” by a requirement to summon the Council to a stated place at 40 days’ notice. Of more significance to the development of parliament as a representative body was the summoning by
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Chapter 3 The Parliament and Statute Law
Edward I in 1295 not only of the King’s Council but also of two knights from each county, two citizens from each city and two burgesses from each borough. Edward I was at war with Scotland and France and raising funds to continue the campaign required the support of the kingdom generally and not just the support of the unrepresentative Council. The transformation of this rudimentary assembly to the parliament of today required another 500 years of development. However, by the time of Australian Federation the Westminster model of parliamentary government was well in place. [3.80] The legislative (or law-making) power of the Commonwealth of Australia is conferred by s 1 of the Constitution on the Federal Parliament (or “the Parliament of the Commonwealth” as it is referred to in s 1). Although the term “parliament” is commonly used to refer to the two elected houses of parliament –the Senate or upper house and the House of Representatives or lower house –under the Constitution, Parliament, the legislature, consists of the two elected houses and the Monarch (represented by the Governor- General and acting on the advice of the Executive Council –the ministers of the Crown).
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Throughout 2017 the High Court, sitting in its capacity as the Court of Disputed Returns, was required to review the eligibility of several members of the House of Representatives and Senate under s 44 of the Constitution which disqualifies, inter alia, persons with dual citizenship who have not taken “reasonable steps” to renounce their citizenship of the other country (s 44(i)), persons employed by the Crown, even if they would have had to resign from that position if elected (s 44(iv)), and to prevent corruption of members by the Executive and to avoid a conflict of interest, that person having a direct or indirect pecuniary interest on any agreement with the Commonwealth public service (s 44(v)). The discussion of the constituent elements of the Parliament at [3.90]-[3.140] is directed to the Commonwealth Parliament. However, the modern institution of parliament is similar throughout Australia (with the obvious qualification that Queensland is a unicameral rather than a bicameral legislature –it has not had an upper house since 1922).
The House of Representatives
Is not our government as busy still as though the work of law making commenced but yesterday? … Nearly every parliamentary proceeding is a tacit confession of incompetency. There is scarcely a bill introduced but is entitled An Act to amend an Act. The Whereas of almost every preamble heralds an account of the miscarriage of previous legislation. H Spencer, Social Statistics (1870).
[3.90] The House of Representatives, the lower house, was designed by the Constitution’s founders to be a legislative body providing equal representation for the people of Australia (consequently, it is sometimes called the “people’s house”). This aim is achieved by Australia being divided into electorates (currently 150) which contain roughly equal numbers of voters, each of which elects its representative or member of parliament. In practice the electorates vary in size because of the constitutional safeguard that guarantees a minimum of five members in each of the original six States regardless of population (thus protecting smaller States) and the practical realities such as distance and population concentration. The number of members should be as nearly as practicable twice the number of the senators (Constitution, s 24 –the “nexus” provision). The House of Representatives is the house in which governments are made and unmade. Its most vital role is in supplying the members of the Executive, which administers the laws made by parliament. The political party or coalition of political parties with the majority of members in the House of Representatives forms the government, the ministers of which form the Federal Executive Council which, with the Governor-General,
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is entrusted with the executive function of government. Senators may be ministers and therefore formally part of the executive government but the head of government, the Prime Minister, is traditionally a member of the lower house.
IN CONTEXT
Voting –House of Representatives [3.100] Each Member of the House of Representatives is elected to represent an area known as an electoral division. Each electoral division within a State or Territory contains about the same number of people on the electoral roll. The electors in each division elect one person to represent them in the House of Representatives. The order of the candidates on the ballot paper for each electoral division is determined by a random draw conducted in the office of the Divisional Returning Officer immediately after the declaration of nominations. The House of Representatives ballot papers are green in colour. To vote for a Member of the House of Representatives, a voter is required to write the number “1” in the box next to the candidate who is their first choice, and the numbers “2”, “3” and so on against all the other candidates until all the boxes have been numbered, in order of the voter’s preference. Ballot papers must be marked according to the rules for voting so that they do not create informal votes. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
… Counting the votes for the House of Representatives A House of Representatives candidate is elected if they gain more than 50 per cent of the formal vote. First, all of the number “1” votes are counted for each candidate. If a candidate gets more than half the total first preference votes, that candidate will be elected. If no candidate has more than half of the votes, the candidate with the fewest votes is excluded. This candidate’s votes are transferred to the other candidates according to the second preferences of voters on the ballot papers for the excluded candidate. If still no candidate has more than half the votes, the candidate who now has the fewest votes is excluded and the votes are transferred according to the next preference shown. This process continues until one candidate has more than half the total number of formal votes and is elected. Australian Electoral Commission (http://www.aec.gov.au)
The Senate [3.110] The Senate has been described as the symbol of the union and equality of the States. For this reason it is often known as the “States’ house”. There are 76 senators – an equal number of representatives (Senators) from each State (currently 12) in order 108
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Chapter 3 The Parliament and Statute Law
to protect the interests of the less populous States. Since 1975 the Territories have also been represented (two Senators each). The main functions of the Senate are to protect the rights of the States and to act as a house of review. The Senate provides a time for “sober contemplation” and a safeguard against hasty and ill-considered legislation. In practice, the Senate operates on political lines. It retains its power and authority by virtue of its constitutional role in the legislative process but the reality of contemporary political practice is that pressures of party politics are a real factor in its operation. Governments which do not have a majority in the Senate may have difficulty in consummating their reform agenda and the circumstance of a “hostile” Senate has set the scene for some of Australia’s greatest political battles. The root cause of the events which culminated in the dismissal of the Whitlam government by the Governor-General on 11 November 1975 was the intransigence of the opposition-controlled Senate (see [1.540]). Irrespective of political party, the Senate nevertheless takes its “review” role seriously and has developed a comprehensive committee system to carry out this function effectively. Senate committees of inquiry have made a substantial contribution to public administration in Australia.
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The Senate has the same powers in relation to legislation as the House of Representatives, with the exception of the initiation of money bills and the power of amendment of certain of them. As mentioned above, by refusing to pass legislative proposals initiated in the lower house it effectively has the power to veto any proposed law.
It is the job of the legislature to follow the spirit of the nation, provided it is not contrary to the principles of government. C De Secondat, The Spirit of the Laws (1748).
[3.120] Section 53 of the Constitution provides that proposed laws “appropriating revenues or money, or imposing taxation” (commonly referred to as “money bills”) shall not originate in the Senate. It is the prerogative of the government, which is based in the lower house, to initiate such measures. Section 53 also provides that the Senate cannot amend any proposed law “so as to increase any proposed charge or burden on the people” nor can it amend proposed laws imposing taxation or appropriating revenues or money “for the ordinary annual services of the government”. The Senate may return to the House of Representatives any proposed law which it may not amend, requesting amendments to be made. Section 53 aims to preserve for the House of Representatives the right to initiate and alter money Bills while reserving to the Senate a right of veto. It is in effect a compromise which recognises the principles of responsible government within a federal system.
IN CONTEXT
Voting –The Senate [3.130] Senators are elected by a preferential voting system known as proportional representation. Candidates for the Senate stand for a state or territory. It is a Constitutional requirement that each state be equally represented regardless of its population. There are a total of 76 Senators: 12 for each state and two for each territory. Senators for each state are elected for a six-year term. Senators for each territory are elected for a term equivalent to the duration of
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the House of Representatives. When a House of Representatives and half Senate election are held at the same time, 40 Senate vacancies are contested. When a Double Dissolution is declared, as there was in 1987, all 76 Senate positions are made vacant. The order of the candidates on the ballot paper is determined by a random draw conducted in the office of the Australian Electoral Officer for that state or territory, following the public declaration of nominations. Senate ballot papers are white in colour. The ballot paper is divided into two sections. Voters have a choice of two methods when voting for Senators; “above the line” and “below the line”.
Above the line Until 2016 a voter could vote for a political party or group by putting the number “1” in one box only above the black line. The rest of the ballot paper had to be left blank. But in voting rule changes introduced in 2016 at least six boxes must be numbered in order of preference.
Below the line A voter can choose to fill in every box below the line in the order of their preference by putting the number “1” in the box of the candidate they want as their first choice, number “2” in the box of the candidate they want as their second choice (until at least 12 boxes have been numbered in order of preference). The top part of the ballot paper must be left blank.
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If a voter chooses to vote below the line, they must number every box below the line for their vote to count.
Counting the votes for the senate The Senate count is more complicated than the count for the House of Representatives. To be elected to the Senate, a candidate needs to gain a quota of the formal votes. The quota is calculated by dividing the total number of formal ballot papers by the number of senators to be elected plus one, and then adding one to the result (ignoring any remainder).
Formula for determining a Senate quota: (Number of formal ballot papers/ (Number of senators to be elected + 1)) + 1 = Senate quota.
Counting the first preference votes Ballot papers are sorted according to which candidate or group has received the number “1” preference on each ballot paper. Candidates who receive the quota, or more, of first preference votes are elected immediately. As a general rule, when a candidate is elected with a surplus of votes, that surplus is transferred before any exclusion is undertaken.
Example of determining a Senate quota: This is how the quota for NSW was calculated at the 2013 Senate election. (4,376,143/(6 + 1)) + 1 = 625,164. Therefore the quota, or number of votes required to be elected, in NSW at the 2013 federal election was 625,164.
Transferring the surplus Any surplus votes from elected candidates (votes in excess of the quota they need) are transferred to the candidates who were the second choice of voters. Because it is not possible to determine which votes actually elected the candidate and which votes are surplus, all the elected candidate’s ballot papers are transferred at a reduced rate. As surplus votes are transferred, other candidates may be elected. However, if all surplus votes from elected candidates are transferred and there are still unfilled positions, further counting is undertaken as explained below. 110
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Chapter 3 The Parliament and Statute Law
Exclusion of unsuccessful candidates Starting with the candidate who has the lowest number of votes, unelected candidates are excluded from the count. Their ballot papers are distributed to the remaining candidates based on preferences. If any of the remaining candidates obtain a quota through this process of distribution, they are elected. Their surplus (if any) is transferred before any other candidates are excluded. The above process continues until all Senate positions are filled.
Formula for calculating the transfer value: Surplus/Number of votes for candidate = Transfer value.
Australian Electoral Commission (http://www.aec.gov.au)
The Crown [3.140] The Crown is the third element in the Australian legislative process although its role is of reduced significance because the Crown’s representative, the Governor-General, acts on the advice of the responsible ministers. This is the basis of responsible government (see [1.450]).
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3.3 THE LEGISLATIVE PROCESS [3.150] The procedure for enacting legislation in Australia is closely based on the procedure evolved in the Westminster Parliament. In summary, if a Bill (that is, a legislative proposal) passes three readings in each house and receives the royal assent, it becomes an Act of Parliament, or statute, and forms part of the law of the land. Although legislative power is vested in parliament it is the majority party in the House of Representatives, the government, that controls the legislative process. Bills introduced by the government (at least a government with a majority in both houses) are unlikely to be defeated, as the party system ensures that members vote on party lines. It is rare for a member of the government to “cross the floor” and vote with the opposition, although on particular contentious issues involving moral judgment and matters of conscience, the political parties may allow their members a “free” vote. Although each house of each parliament in Australia has its rules (“standing orders”) which regulate its procedures, the fundamental stages in the passage of a Bill through both houses of parliament in the case of those parliaments with bicameral legislatures (or through the lower house in the case of Queensland’s unicameral legislature) are virtually identical. The original idea for legislative change may come from a range of sources. It may have been part of a political party’s policy, which on assuming government it has a mandate to carry out. It may come from within the government departments responsible for administering the legislation which requires amendment. It may originate from a parliamentary committee, a law reform body or criticism of legislation in a judgment. It may result from lobbying by a pressure group seeking a change in the law. Lobbying is an important adjunct to the political process. The reality of the political process is that as the government controls the agenda of Parliament, unless a proposal is adopted by the government it is unlikely to have an opportunity to proceed through the legislative process. Private members’ Bills (those Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:03:29.
Example of transferring the surplus: Candidate A gains 1,000,000 votes. If the required quota was 600,000 the surplus would be 400,000. The transfer value for candidate A’s votes would be: 400,000/ 1,000,000 = 0.4 Candidate A’s ballot papers (1,000,000) are then re-examined in order to determine the number of votes for second choice candidates. If candidate A’s ballot papers gave 900,000 second preferences to candidate B, then candidate B would receive 360,000 votes (900,000 multiplied by the transfer value). These votes would be added to the votes candidate B received in the first count. If candidate B has reached the quota, they are elected. If candidate B has any surplus votes a transfer value would be calculated and votes would be transferred in the same way.
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Business and the Law No one should see how laws or sausages are made. Otto Von Bismarck.
introduced by a member of parliament outside the ministry) will not succeed without government support.
From Bill to Act [3.155] The embryonic idea is translated by parliamentary law-drafters into the form of draft legislation and its journey through Parliament can begin.
First reading stage
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If the public thinks members of Parliament are silly, they ought to have a look at us at 2 o’clock in the morning when we are trying to deliberate on great national issues. Daly FM, MP, Sydney Morning Herald (5 September 1964).
I often think it is a pity that God did not have a committee stage before he drafted the Ten Commandments. A Herbert, quoted in Pass the Port Again (1981).
[3.160] The first reading is simply a formal reading of the Bill’s long title by the Clerk of the House on the proposer’s motion that “the Bill be read a first time”. It simply places the Bill on the agenda of the house –there is no debate but the Bill can be circulated and its contents can become known.
Second reading stage [3.170] The minister responsible delivers the second reading speech that outlines the general principles of the Bill. At this stage these principles are debated and affirmed.
Committee stage [3.180] This is the most important stage in the legislative process because the details of the Bill are debated clause-by-clause and may be amended. When the house sits as a committee (the committee of the whole) the Speaker of the lower house or the President of the upper house vacates the chair and the Chair of Committees presides. Much of the work of parliament does not take place in the chamber. Bills requiring detailed examination may be referred to select committees or standing committees before they are debated by the committee of the whole. Committees have become an essential feature of Australian Parliaments, and both Houses of Parliament regularly empower committees of members representing all parties, but controlled by the party controlling that house, to inquire into matters to ascertain the facts before legislation is introduced. Scrutiny of draft legislation is an important role of the committees. Committees can give specialised and detailed consideration of proposals, develop expertise by concentrating on particular areas, receive expert advice from a range of sources, promote public debate and generally support parliament in carrying out its constitutional responsibilities through the opportunity to consider matters in a less formal atmosphere than prevails in the chamber of the house.
Third reading stage [3.190] Debate is restricted at the third reading stage. If the motion that the Bill be read a third time is passed the clerk reads the long title of the Bill. The Bill is then transmitted to the other house of parliament where it passes through the same stages. The other house may make amendments to the Bill, in which case it is returned to the originating house asking concurrence in such amendments. If, despite procedures set out in standing orders to facilitate agreement between the houses on the final form of the Bill, there is a continuing disagreement the “deadlock” provisions of s 57 of the Constitution may provide the basis for a double dissolution. 112
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Chapter 3 The Parliament and Statute Law
The royal assent
One of the great pleasures of private life is that I need no longer be polite to nincompoops, bigots, curmudgeons and twerps who infest local government bodies and committees such as yours. In the particular case of your committee, that pleasure is acute. Former federal Labor minister Gordon Bilney to a South Australian local government committee member, Business Review Weekly (8 April 1996).
[3.200] When a Bill has passed both houses it is presented to the Governor-General (or Governor in the case of a State) for assent. Upon being assented to, the Bill becomes an Act of Parliament. Section 58 of the Constitution provides that: When a proposed law passed by both Houses of the Parliament is presented to the Governor- General for the Queen’s assent, he shall declare, according to his discretion, but subject to this Constitution, that he assents in the Queen’s name, or that he withholds, or that he reserves the law for the Queen’s pleasure.
A Bill that has passed three readings in the house is not law until it receives the royal assent but the Governor-General’s function in the legislative process is purely formal. The conventions of the Constitution demand that the Governor-General act on the advice of the Executive Council. For these reasons it has been said that “most of the time … Parliamentary debate is not a process of decision, except in a formal sense. It is one of registering, defending, and publicising decisions already taken by the majority party” (Sawer, Australian Government Today (1977), p 45).
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Disagreement between the Houses [3.210] Reference was made above to a “deadlock” between the Houses of Parliament and the rule for breaking the deadlock under s 57 of the Constitution. If the Senate rejects a Bill passed by the House of Representatives (or fails to pass it, or passes it with amendments unacceptable to the lower house) the Bill can be reintroduced in the lower house after three months. If it is again passed by the lower house but rejected by the Senate, s 57 empowers the Governor-General to dissolve both houses (a procedure known as a “double dissolution”) and call an election. If the deadlock continues with the new Parliament, the Governor-General can convene a joint sitting of both houses. If the Bill receives a majority vote it is presented to the Governor-General for assent. If not, it fails. Machinery to resolve deadlocks exists under the Constitutions of New South Wales, South Australia and Victoria, but in Western Australia and Tasmania there are no special provisions and if a compromise cannot be worked out the Bill can never become law. Deadlock provisions are obviously not necessary in Queensland, which has a unicameral legislature. While the deadlock provisions of s 57 are designed for use in situations of constitutional crisis –the best-known example being the double dissolution of the 1975 Parliament on the failure of a hostile Senate to pass the government’s money supply legislation –it can be employed in other situations as a political ploy to allow the Prime Minister of the day to hold an election at the government’s preferred time. A government confronted by an uncooperative Senate may, on the Senate refusing to pass legislation, have it re-passed in the House of Representatives, thus establishing the “trigger” for a double dissolution.
The date of operation [3.220] The Act will operate from the date specified in the Act (if the Act so specifies) or a date to be fixed by proclamation (by the Governor-General in the case of Commonwealth legislation or the Governor in the case of State legislation), which date will be announced in the Government Gazette. If the Act is silent as to its commencement, it commences from the date of the Governor’s assent in the case of a State Act, or 28 days after the
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I am not like the Leader of the Opposition. I did not slither out of the Cabinet room like a mangy maggot. Paul Keating, Hansard.
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Business and the Law Wilson Tuckey: All you have done is finance growth with debt. Paul Keating: You boxhead, you would not know. You are flat-out counting past 10. Tuckey: You are an idiot. You are just a hopeless nong … Keating: Shut up! Sit down and shut up, you pig. Tuckey: You could not even deliver Christmas presents to Warren Anderson. Keating: Why do you not shut up, you clown? … This man has a criminal intellect … this clown continues to interject in perpetuity. Hansard.
Governor-General’s assent in the case of a Federal Act. It follows from the sovereignty of Parliament that the Act may even take effect retrospectively (ie, from a date in the past). This practice has been used frequently in the area of amendments to tax legislation, when the date of operation is the date of the Press announcement by the Treasurer, outlining the proposal to legislate to close a loophole in the legislation. Retrospective legislation can be criticised as undermining individual rights and for political reasons should be used sparingly. Unless a statute contains a provision within it that it will “expire” on a certain date, it remains in force until it is repealed. It is an inevitable reality that the statute book is cluttered with legislation that has long passed its “use-by” date but which, until repealed, remains law.
Parliamentary privilege [3.230] Members of Parliament have absolute privilege in respect of speeches made in Parliament. In the words of the House of Lords in Stockdale v Hansard (1839) 112 ER 1112: “For speeches made in parliament by a member to the prejudice of any other person, or hazardous to the public peace, that member enjoys complete immunity”. Parliamentary privilege exists because it is the public interest to allow free and frank debate on matters of government but the complete immunity granted, which means that members cannot be sued for defamation, explains why Parliament is often called the “Coward’s Castle”.
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3.4 THE INTERPRETATION OF LEGISLATION The role of the courts Statutory interpretation is about a lot more than working out the meaning of words or collections of words. It lies at the centre of the administration of justice and marks off constitutional boundaries between the judiciary, the legislature and the executive. The law cannot be interpreted by executive fear. The authorised interpreters of the law are the courts.
[3.240] French CJ, “Bending Words”, Lecture (20 March 2014). The courts have conclusive authority to determine the meaning of legislation. Michael Kirby, the former justice of the High Court, has observed that (“Statutory Interpretation: The Meaning of Meanings” (2011) 35 Melbourne University Law Review 113 at 113): Statutory interpretation has replaced the analysis of judicial reasons about the common law as the most important task ordinarily performed by Australian lawyers. This was inevitable as the amount of law made by, or under, legislation increased and the room for the residual common law narrowed.
Legislation has replaced the common law as the major source of law today and as the volume and scope of legislation expands, an increasing proportion of the courts’ time is devoted to what an eminent judge (Lord Evershed, The Judicial Process in Twentieth Century England (1961), p 763) has described as the “intellectually exacting but spiritually sterilizing duty of interpret[ing] the enacted law”. It is unlikely that legislation will ever be drafted with such precision, foresight and clarity that the need for interpretation will not arise. Imperfections are inevitable –the English language is not an “instrument of 114
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Chapter 3 The Parliament and Statute Law
mathematical precision”, and drafters are not gifted with “divine prescience” (Seaford Court Estates Ltd v Asher [1949] 2 KB 481 at 498 per Denning LJ) that enables them to foresee and account for all contingencies. Translating political desires into a legislative scheme is a difficult and unenviable task and the resolution of competing interests cannot always be expressed with perfect clarity. In a symposium on statutory interpretation in 1983 Justice Lionel Murphy noted some of the “excuses” for drafting not always being what it should be: that the drafters work under great pressure; that the instructions are not always as clear as they ought to be; that the courts in the past have taken negative attitudes to the more liberal approaches to drafting and so deterred the drafters from drafting in more general terms.
[3.250] What is clear is that the courts’ interpretive role is not simply a sterile grammatical analysis. Although the courts are not legislators and have no power to override or refuse to give effect to validly enacted legislation, they have a discretion in interpreting legislation which can never be entirely removed. Their role has been explained by an English judge in this way (Corocraft Ltd v Pan American Airways Inc [1968] 3 WLR 714 at 732 per Donaldson J):
We must not be too unkind to the Judges. Reading the entrails of an Act of Parliament, pondering the inner meaning of the blood alcohol legislation for example is an occupation that no doubt soon begins to pall and one can readily understand the operation of the power imperative, the mad urge to push someone around in the administrative division or the insane temptation to rush out and invent a brand new tort. But judges seized with a yen for creativity really would be far better advised to enrol for night classes in macrame or cake decoration and leave the reform of the law to the parliamentarians and those who advise them. D Dugdale, “The Absurd Pretensions of the Law of Torts” (1982) NZ Recent Law.
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The duty of the courts is to ascertain and give effect to the will of Parliament as expressed in its enactments. In the performance of this duty the Judges do not act as computers into which are fed the statutes and the rules for the construction of statutes and from whom issue forth the mathematically correct answer … They are not legislators, but finishers, refiners and polishers of legislation which comes to them in a state requiring varying degrees of further processing.
The courts’ role in developing the common law is very different from their role in interpreting legislation. When a judge seeks to discover a rule of the common law the precise words chosen by other judges to express that rule are not the law itself: the common law is to be found in the ideas and principles underlying a particular combination of words that other judges have used to formulate the law. In the case of legislation, the words used by the legislator are the law. The courts cannot give effect to an intention or policy or idea or principle underlying the legislation if it cannot be accommodated within the language used by the legislator. The courts’ task is to determine the legislative intention within that language. The ratio decidendi of a decision interpreting a legislative provision of course sets a precedent for future cases. Stare decisis applies to decisions interpreting legislation as it does to decisions developing the common law. In this way statutes accumulate a body of case law with reference to which they must be read. The courts interpretative task can of course vary quite considerably depending on the legislative provision to be interpreted and applied. In many cases the interpretative role is quite narrow –is the onset of deep vein thrombosis an “accident” for which air carriers may be liable under Art 17 of the Convention for the Unification of Certain Rules Relating to International Carriage by Air (12 October 1929) (Warsaw Convention)? (No –see Re Deep Vein Thrombosis and Air Travel Group Litigation [2006] 1 All ER (Comm) 313). Or is the driver of a vehicle observed by the police holding a mobile phone to the ear (and who claims she was simply turning it off and holding it to her ear to ensure it was off) guilty of the offence of using a hand-held mobile phone while the vehicle is in motion or while it is stationary but not parked under the Australian Road Rules? (Yes –see DPP v Chresta [2005]
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Unhappily, however, for the power-hungry occupant of the Judicial Bench the days have long since vanished when the law was thought to reside in the bosoms of the judges … today by far the greatest majority of judicial decisions on points of law are essentially decisions on the construction of statutes and by and large the role of the judge has been downgraded from that of law-maker to that of interpreter. Few would regard this as other than a welcome development. D Dugdale, “The Absurd Pretensions of the Law of Torts” (1982) NZ Recent Law 260.
NSWSC 233). Or is mini ciabatta –Italian flat bread –“bread”, and therefore exempt from GST or a “cracker” and subject to GST? (Presumably to the bewilderment of and horror of Italians –a cracker and subject to GST –see Lansell House Pty Ltd v Commissioner of Taxation [2011] FCAFC 6). In other cases the interpretative role is not so much the interpretation of words but the application of community norms in determining whether conduct offends an open-ended standard. Is a shopper who calls a store employee a “fucking bitch” when challenged in relation to theft of a confectionary item guilty of the offence of using indecent language? (Yes, in the circumstances of this case –although “there are undoubtedly many occasions when a person might say the words ‘fucking bitch’ in a public place or within the hearing of a person in a public place without committing any offence” –see Gul v Creed [2010] VSC 185). In yet other cases where the Parliament legislates in very broad terms, the interpretative role closely resembles the traditional development of the common law on a case-by-case basis. An obvious example is the prohibition of misleading or deceptive conduct under the Australian Consumer Law. The statutory prohibition is only 23 words and the central concept of when conduct is “misleading or deceptive” is not defined. The interpretative function transcends traditional interpretative function. In the words of the Chief Justice of the High Court, French CJ, “There have been thousands of cases since that prohibition first entered the Australian legal universe. They have developed principles for its application in a variety of settings not imagined by those who enacted it” (“Bending Words”, Lecture (20 March 2014)).
The approach to the interpretative role [3.260] It is not surprising that there are differing approaches to the interpretation of legislation and the search for legislative intention. Attitudes to statutory interpretation may be liberal or literal. The difference of opinion between Denning LJ and Lord Simonds is well documented. In the Court of Appeal in Magor & St Mellons Rural District Council v Newport Corporation [1950] 2 All ER 1226 Denning LJ stated (at 1236) that: We do not sit here to pull the language of Parliament and of ministers to pieces and make nonsense of it. That is an easy thing to do, and it is a thing to which lawyers are too often prone. We sit here to find out the intention of Parliament and of Ministers and carry it out, and we do this better by filling in the gaps and making sense of the enactment than by opening it up to destructive analysis.
On appeal, Lord Simonds in the House of Lords (Magor & St Mellons Rural District Council v Newport Corporation [1952] AC 189) expressed his disapproval of this approach (at 191): the general proposition that it is the duty of the court to find out the intention of Parliament – and not only of Parliament but of ministers also –cannot by any means be supported. The duty of the court is to interpret the words that the legislature has used; those words may be ambiguous, but, even if they are, the power and duty of the court to travel outside them on a voyage of discovery are strictly limited …
Lord Simonds expressly stated that the proposition of Denning LJ –that “what the legislature has not written, the court must write” –could not be supported (at 191): 116
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Chapter 3 The Parliament and Statute Law It appears to me to be a naked usurpation of the legislative function under the thin disguise of interpretation. And it is the less justifiable when it is guesswork with what material the legislature would, if it had discovered the gap, have filled it in. If a gap is disclosed, the remedy lies in an amending Act.
Techniques of interpretation [3.270] Each jurisdiction in Australia has an Acts Interpretation Act which establishes some ground rules for the interpretation of that jurisdiction’s legislation. They shorten the content of other Acts by, for example, prescribing meanings for terms frequently appearing in legislation, and providing directions to resolve possible confusion. With an important exception noted later in this section they do not lay down general principles of, or approaches to, interpretation. However, centuries of statutory interpretation have produced a number of judicial rules, maxims and presumptions of interpretation.
[W]hile it is an exercise of the legislative power of the State to make the written law, it is an exercise of the judicial power of the State, and consequently a function of the judiciary alone, to interpret the written law when made. Chokolingo v Attorney-General [1981] 1 WLR 106 at 110 per Lord Diplock.
“Rules” of interpretation
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[3.280] There are four “rules” of interpretation: • The literal rule, as the name suggests, requires the court to give literal effect to the legislative language. The literal rule has never been interpreted to require words to be read in isolation. In the words of Viscount Simonds, “words, and particularly general words, cannot be read in isolation: their colour and content is derived from their context” (Attorney-General v Prince Ernest Augustus of Hanover [1957] AC 436). The “context” includes the Act as a whole. • The mischief rule laid down in Heydon’s case (1584) 76 ER 637 allows the court to interpret the legislation so as to overcome the defect, or mischief, which the legislation was passed to overcome. The words used could be enlarged or diminished to advance the remedy and suppress the mischief. Because Heydon’s case predates parliamentary sovereignty, modern courts have been reluctant to apply it and in any event the courts’ self-imposed restriction on referring to materials outside the legislation itself has limited their search for the “mischief”. Today the mischief rule is generally regarded as having merged into the golden rule. • The golden rule as described by Lord Wensleydale provides that in construing statutes “the grammatical and ordinary sense of the words is to be adhered to, unless this would lead to some absurdity, or some repugnance or inconsistency … in which case the grammatical and ordinary sense of the words may be modified so as to avoid that absurdity and inconsistency, but no further” (Gray v Pearson (1857) 6 HLC 61). The golden rule modifies the severity of the literal rule but opens up uncertainties in interpretation.
Few words possess the precision of mathematical symbols. Boyce Motor Lines Inc v United States, 342 US 337 (1952) at 340 per Clarke J.
• The purposive approach (see [3.310]), which has been given legislative recognition in Australia.
Techniques of interpretation [3.290] There are a number of techniques of interpretation –simple technical devices with grand Latin names. The most important are:
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• Ejusdem generis –general matter are constrained by specific matters so that where general words follow a number of specific words, the general words are read as applying to other items in a similar category as the specific words.
IN CONTEXT The principle of noscitur a sociis does not in my judgment entitle one to overlook self-evident facts. If you meet seven men with black hair and one with red hair, you are not entitled to say that here are eight men with black hair. Buckley J.
The Ejusdem generis rule [3.300] A drafter may well not wish to spell out at length all the kinds of things or types
of contract to which an Act may apply. He or she may rest on the assumption that, having indicated the main specific matters or conduct within a broad category to which it is to apply, any general words will be read down to embrace only things or conduct falling within that category. So in specifying the animals that may be carried on a ferry, the drafter may refer to “horses, cows, sheep and other animals”. It would be regarded as an improper reading of the Act if I were suggested that a tiger fell within the words “other animals”. This is the classic example of the ejusdem generis rule –the general words are limited to apply only to animals of the same kind as those specifically mentioned. It is another way of saying that words derive meaning from the context in which they appear.
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Contrast the position, however, if, in an Act to prohibit fights between animals, the prohibition applies to “bears, pigs, bulls, dogs, cocks, quail and other animals”. The drafter here is obviously anxious to prohibit all such contests and “other animals” is included to avoid listing the whole of the animal kingdom. Again, context indicates this to be the case but also the animals specifically mentioned do not fall within any particular category. The very name of the rule indicates the necessity to establish a genus before it can be applied and the courts have made it clear that this will be their first inquiry. Pearce and Geddes, Statutory Interpretation in Australia (5th ed, Butterworths, 2011) p 104 at [4.19].
• Noscitur a sociis –the meaning of an ambiguous word or phrase is to be derived from its context. Whereas the ejudem generis rule is used for general words, the noscitur a sociis rule is used for particular words. In Pengelly v Bell Punch Co Ltd [1964] 1 WLR 1055 the court had to decide whether a floor used for storage came under the Factories Act 1961 (UK), whereby “floors, steps, stairs, passageways and gangways” had to be kept free from obstruction. The court held that as all the other words were used to indicate passage, a floor used exclusively for storage did not fall within the Act. • Expressio unius est exclusio alterius –literally the express mention of one thing excludes all others. If there is a list of words not followed by general words the Act applies only to the words used in the list and not to any others. If, for example, a legislative provision refers to “Holden and Ford V8 road cars” it will not include Toyotas or other competitive vehicles. However, the use of a term such as “includes” or “such as” will indicate that the list is illustrative. • Generalia specialibus non derogant –where there is a conflict between general and specific provisions, the specific provisions prevail. 118
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Chapter 3 The Parliament and Statute Law
A purposive approach to interpretation
To reach a conclusion on this matter involved the court in wading through a monstrous legislative morass, staggering from stone to stone and ignoring the marsh gas exhaling from the forest of schedules lining the way on each side. I regarded it at one time, I must confess, as a slough of despond through which the court would never drag its feet but I have, by leaping from tussock to tussock as best I might, eventually, pale and exhausted, reached the other side where I find myself, I am glad to say, at the same point as that arrived at with more agility by Lord Denning MR. Davy v Leeds Corporation [1964] 1 WLR 1218 at 1224 per Harman LJ.
[3.310] For some time the literal rule has been the dominant principle of interpretation, with unfortunate consequences which are discussed below. The decision of the High Court in Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation [1981] HCA 26 may be regarded as a watershed in statutory interpretation in Australia. The High Court was faced with a situation where the plain meaning of a provision of the Income Tax Assessment Act 1936 (Cth) was opposed to the apparent intention of the legislature. The court rejected a literal interpretation of the provision which would on its face have operated in favour of the taxpayer. The High Court considered that other parts of the legislation made it quite clear that parliament never intended the taxpayer to recover the deductions sought. The court was prepared to depart from the literal meaning of the section because it believed that the history of drafting changes made to neighbouring sections clearly showed that parliament had intended to alter the particular provision, but by oversight had simply failed to do so. Stephen J stated (at [8]) that:
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If literal meaning is to be departed from, it must be clear beyond question both that literal meaning does not give effect to the intention of the legislature and that some departure from literal meaning will fulfil that intent.
In other words, if the intention of parliament was clear then the High Court would not defeat that intention simply because parliament had not been exact in its legislative language. The decision signalled not only the end of the artificial tax avoidance schemes of the 1970s which thrived on literal interpretations of the legislation but also the beginning of a new era of purposive interpretation more closely attuned to attaining the object of the legislation. [3.320] The thrust of the purposive approach was vindicated later that year. In 1981 the Federal Parliament amended the Acts Interpretation Act 1901 (Cth) by the addition of s 15AA(1), with the express purpose of countering unrealistically literal interpretations: In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote purpose or object.
Where the words of the statute are clear and unambiguous, effect must be given to them by the court which “is not at liberty to mangle them to the point where they no longer mean what they say” (Turner v Moreland Finance Corp (Vic) Pty Ltd (1990) ASC 56-006 per Meagher JA). However, as McHugh JA has observed in Bermingham v Corrective Services Commission of New South Wales (1988) 15 NSWLR 292 at 302, the effect of applying a “purposive” construction is that: [T]he grammatical meaning of a provision is not to be taken to represent Parliament’s intention as to its meaning when the context or the purpose of the provision raises a real doubt about the applicability of the grammatical meaning. If purpose or context do raise real doubt as to whether Parliament intended the grammatical meaning to apply, a court is entitled to depart from that meaning. Moreover, if the grammatical meaning gives rise to injustice or anomaly, it may strengthen the conclusion that the Parliament did not intend the grammatical or literal meaning to apply.
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[3.330] A provision similar to s 15AA is now contained in the Acts Interpretation Acts of the States. The judges are too often inclined to fold their hands and blame the legislature, when really they ought to set to work and give the words a reasonable meaning, even if this does involve a departure from the letter of them. By so doing they are more likely to find the truth. Lord Denning, The Changing Law (1953).
There has been some criticism of s 15AA in that it is the function of an independent judiciary to interpret the law and any attempt to undermine this freedom is, if not unconstitutional, then at least inappropriate. The argument is that because judicial power is vested in the courts by the Constitution, interpretation is a judicial function and it is not open to the legislature to direct a court as to how to do it. Nevertheless, “purposive” interpretation is widely accepted today irrespective of any statutory direction to that effect. The process is facilitated by parliaments increasingly adopting the practice of including an “objects” clause in the context of a legislative scheme or part thereof.
The use of extrinsic materials [3.340] The 1981 amendment referred to above included in s 15AA(2) a provision that restricted courts having access to materials other than the legislation itself, in the process of interpreting that legislation.
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This was basically a codification of the common law position that “extrinsic materials” were generally off-limits to judges in determining legislative intention. Historically, the role of the courts has been to determine the intention of parliament as disclosed in the legislative language. Material that may seem useful in this quest (such as explanatory memoranda, second reading speeches and ministerial press releases) has been beyond the scope of the search for the legislative intention for the very reason that these extrinsic materials are not the expression of parliament’s intention. They may express what parliament intended to say; they do not necessarily express what parliament said. [3.350] In 1984 the Federal Parliament repealed the provision referred to above to allow consideration of extrinsic material. Section 15AB(2) of the Acts Interpretation Act 1901 (Cth) provides that materials to which the courts may refer include the following:
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(a)
all matters not forming part of the Act that are set out in the document containing the text of the Act as printed by the Government Printer;
(b)
any relevant report of a Royal Commission, Law Reform Commission, committee of inquiry or other similar body that was laid before either House of the Parliament before the time when the provision was enacted;
(c)
any relevant report of a committee of the Parliament or of either House of the Parliament before the provision was enacted;
(d)
any treaty or other international agreement that is referred to in the Act;
(e)
any explanatory memorandum relating to the Bill containing the provision, or any other relevant document that was laid before, or furnished to the members of either house of the parliament by a minister before the time when the provision was enacted;
(f)
the speech made to a House of the Parliament by a minister on the occasion of the moving by that minister of a motion that the Bill containing the provision be read a second time in that house;
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Chapter 3 The Parliament and Statute Law
(g)
any document (whether or not a document to which a preceding paragraph applies) that is declared by the Act to be a relevant document for the purposes of this section;
(h)
any relevant material in the Journals of the Senate, in the votes and proceedings of the House of Representatives or in any official record of debates in the Parliament or either House of the Parliament.
This amendment is significant. Although the court is not required to look at extrinsic material it may do so and the search for the legislative intent is clearly facilitated. The likelihood of corresponding with the parliament’s intention is enhanced. Lawyers are not necessarily unanimous in their approval of this initiative. There is some discomfort in moving beyond the precise words of the legislation.
3.5 PROBLEMS AND PROSPECTS
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An uncodified system [3.360] Most of the legal systems of continental Europe are civil law systems in which the concepts and principles of Roman law have a powerful influence. A characteristic of civil law systems is codification –the legislative statement of all the law in a particular area expressed in fairly general terms. Civil law codes are exemplified by the French Civil Code promulgated in 1804. The code was established by Napoleon I (and indeed is often referred to as the “Code Napoleon”) –it was the device Napoleon used to unify the differing local laws and to rationalise and revamp the basis of French civil law. The Code does not contain narrow rules but broad principles stated at a high level of abstraction which are thus able to tie together concepts sharing only the most general characteristics. In only 2,281 generally expressed and extremely brief articles (frequently only a single sentence), the code covers marriage and divorce, property, contract, torts, wills, sale and partnership. The brevity and generality of the code leaves a need for judicial interpretation in the application of its provisions to specific cases but there is a less strict regard for judicial precedent and no doctrine of stare decisis or binding precedent. Although the Code has been amended and developed by interpretation and many matters are regulated by laws outside the code, Napoleon’s Code of 1804 still forms the basis of French civil law. The concept of codification has never been enthusiastically embraced by common law jurisdictions. Codes are not unknown and are a useful method of overhauling the law and organising an untidy mass of customary law, statute law and case law into a single source, making the law clearer and more ascertainable. However, unlike the civil law codes, common law codes do not use broad principles but rules of relatively defined scope, and thus can cover only limited fields. The Sale of Goods Act 1893 (UK) (which forms the model for the legislation of the Australian States) may be regarded as a “code” –but it is of limited scope and is meaningless without reference to a mass of law lying outside the “code” –in particular the general law of contract, which remains almost exclusively judge-made.
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This case is a simple one. The Act means what it says, and, what is more important, it does not mean what it does not say. Secretary of Department of Health v Harvey (1990) 21 ALD 393, 393 (NSW Court of Appeal, October 1990) per Meagher JA.
“Then you should say what you mean”, the March Hare went on. “I do”, Alice hastily replied; “at least –at least I mean what I say –that’s the same thing you know”. “Not the same thing a bit”, said the Hatter. “Why, you might just as well say that ‘I see what I eat’ is the same thing as ‘I eat what I see!’ ”. Lewis Carroll, Alice’s Adventures in Wonderland.
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IN CONTEXT
A draft Australian Contract Code [3.370] In March 2012 the Attorney-General released a Discussion Paper to Explore the Scope for Reforming Australian Contract Law. Three professors of law from the University of Newcastle Law School – MP Ellinghaus, D St L Kelly and EW Wright –prepared a Draft Australian Law of Contract (ALC) which is a code of the general rules of contract law that are currently to be found only in case law. The authors state that: The most important reform of Australian contract law that would be accomplished by enacting the ALC is the replacement of a voluminous and highly complex body of case law rules expressed in the fluctuating forms of judicial doctrine, by a finite number of rules in a fixed form, expressed as simply and concisely as possible. The general rules of Australian contract law would become available in a definite form accessible to all interested parties, not just to lawyers and specialists. The effect is to do away with an indefinitely large number of technical and antiquated rules, distinctions and definitions that clutter up the law and make its application uncertain. The authors believe that enacting the ALC “would greatly increase the accessibility of contract law to ordinary Australians and reduce the cost of legal services, especially to business”. It comprises 109 Articles.
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A bewildering array of legislation [3.380] Business today is faced with a bewildering array of legislation. Business is confronted on all sides by legislation and regulations and the accretion of case law interpreting the provisions. Despite the deregulatory environment which is said to prevail, few would argue that there has been any significant change in legislative bulk and complexity, both of which provide a challenge to the legislators of the future. To some extent the problems of legislative bulk and complexity are inherent in the legal system Australia inherited from England. Under this system a section of an Act is approached in a complete different manner to a judicial precedent. Many years ago the English courts put it out of their power to give effect to the principle underlying a section of an Act in the same manner as they gave effect to a principle underlying a judgment. In interpreting legislation the courts are concerned with words and not ideas. Although legislation is the main source of law today, this was not always so. For hundreds of years the development of English law was entrusted to the judges and it has been suggested that they did not welcome the intrusion of legislation. It has been suggested (in H M Hart and A M Sacks, The Legal Process: Basic Problems in the Making and Replication of Law (Cambridge, 1958)) that: the Common Law recognised the legislative supremacy of Parliament. But to the words of the Parliament whose literal authority it recognised it accorded none of that aura of respect and generosity of interpretation with which it surrounded its own doctrines … By repercussion 122
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Chapter 3 The Parliament and Statute Law draftsmen tend to concern themselves with minutiae, so that their intention may be manifest in every particular instance.
Therefore, from an early date in the development of legislation, the courts and parliament were locked in a vicious circle. Detailed drafting was a response to strict interpretation. The courts interpreted legislation narrowly, giving effect to the words used rather than the principles underlying those words and refusing to fill gaps in the legislation where a particular case fell outside the actual wording. The drafters’ response to this hostile attitude was to draft legislation in the fullest detail to seek to “anticipate the restrictive interpretations of the courts by inserting the most elaborately detailed provisions to ensure that particular situations are covered” (Lloyd, Introduction to Jurisprudence, p 389).
IN CONTEXT
The expanding volume of regulation [3.390] The volume of regulation has grown dramatically in recent years. For example,
since 1990, the Australian Parliament has passed more pages of legislation than were passed during the first 90 years of federation. 60000
Total Pages Passed
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50000
40000
30000
20000
10000
0 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s
Rethinking Regulation: Report of the Taskforce on Reducing Regulatory Burdens on Business (January 2006).
Legal “gobbledygook” [3.400] For centuries lawyers have been criticised for their obscure and pretentious language in expounding the law. Over recent decades the movement for simpler language has accelerated but the reality of course is that complex laws cannot always be drafted so that the ordinary person can understand them. Drafting is an exercise in precision which
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It cannot be pretended that the principles of statutory interpretation form the most stable, consistent, or logically satisfying part of our jurisprudence … we are driven, in the end, to the unsatisfying conclusion that the whole matter ultimately turns on impalpable and indefinable elements of judicial spirit or attitude. C Allen, Law in the Making (Oxford University Press, 1927).
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Business and the Law If I am asked whether I have arrived at the meaning of the words which Parliament intended, I say frankly I have not the slightest idea. Scrutton LJ.
rarely goes hand in hand with simplicity. The drafting of legislation is not an exercise in pure English. For example, in 1963 Harold Macmillan, the then British prime minister, had to answer the question of why legislation could not be drafted in simple terms. He quoted the following sentence: “when John met his uncle in the street he took off his hat” and pointed out that this “clear” sentence was capable of at least six different meanings. Nevertheless, the move to plain-English drafting is gathering a head of steam which has already carried it to the hallowed halls of the parliamentary drafting office.
Drafting techniques [3.410] In his evidence to the Committee on the Preparation of Legislation, Lord Denning (in Preparation of Legislation, Cmnd 6053 (May 1975) at [19.1]) pointed the way: It is because the judges have not felt it right to fill in the gaps and have been giving a literal interpretation for many years that the draftsman has felt he has had to try and think of every conceivable thing and put it insofar as he can so that even the person unwilling to understand will follow it. I think the rules of interpretation which the judges have applied have been one of the primary causes why draftsmen have felt that they must have a system of over-detail, over-long sentences, and obscurity. If the draftsmen could make acts simpler, the judges could alter their approach to them … It could be done by breaking up the form of the statutes, by making them simpler, sticking more to the principles, and not going into so much detail.
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It has been suggested that the ideal legislation will contain “neither a generalisation too vague nor a particularity too minute” (Diamond, “The Codification of the Law of Contract” (1968), p 379). The main criticism of Australian legislation is that it errs on the side of particularities too small, which leads to bulk and complexity. The tradition of literal interpretation of legislation which has characterised the common law until recently has had its inevitable consequence in drafters over-refining the legislative scheme so that the parliamentary intention is apparent. The drafters’ search for exactness often produces complexities which in turn create their own difficulties in interpretation. In response to the growing pattern of legislative elaboration and proliferation it is frequently suggested that more discretion should be left to the courts. To leave a matter entirely to the discretion of the court –“throwing everything into the lap of the judge” to use the phrase of a past President of the New Zealand Court of Appeal, Sir Alexander Turner (“Changing the Law” (1969), p 420) –is not desirable. But to lay down a general principle and allow the courts scope within the statutory framework to develop the law in cases falling outside the general rule is not to sacrifice certainty for flexibility. The majority of cases will always fall within the general principle but it is desirable that judges are left some scope to exercise a creative function which they cannot do if legislation is drafted with the fullest detail. As the courts develop a more purposive approach to legislation, it is likely that legislation will begin to be drafted more generally. It should no longer be necessary for legislation to be drafted to “a degree of precision which a person reading in bad faith cannot misunderstand” (In Re Castioni [1891] 1 QB 149 at 167 per Stephen J). Recent proposed reforms in the field of commercial law have polarised the commercial world into those who prefer voluminous “black letter” law reform in which specific rules are prescribed in fine detail –and those who advocate “fuzzy” law reform via simple clear drafting of statements of general principle –which leaves greater discretion to the 124
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Chapter 3 The Parliament and Statute Law
courts in applying the principle to particular sets of circumstances. This debate is likely to intensify in the future.
The legislative process [3.420] Although law making is a “solemn and deliberate business” which should allow time for “reflection and sober second thought” (G Palmer, Unbridled Power (2nd ed, Oxford University Press, 1987), p 159) the reality is often somewhat different. Under Standing Orders, the government has a variety of devices available to it to curtail debate and push legislation through parliament. The spectre of a government pushing its legislative program through parliament is a familiar one in Australia particularly as the end of the budget session (and Christmas) approaches. Hasty legislation, unrealistic deadlines, cutting corners and curtailed debate do not make for considered lawmaking. The degradation of the parliamentary process in this way is a cause for real concern and does little to inspire confidence in the institution.
It is never safe to construe an Act of Parliament by paying undue attention to the meaning of the words. Roxburgh J.
ISSUES WITH THE SENATE VOTING SYSTEM
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“How Micro-parties Put Motor Fan Ricky Muir on the Power Grid”, The Australian (4 October 2013).
[3.430] Recent elections have ignited debate as to the fairness of the Senate preferential voting system which has seen candidates from small parties with very low primary votes elected to the Senate. In the 2013 federal election the sixth Victorian Senate seat went to Ricky Muir representing the Australian Motoring Enthusiasts Party who received only 17,083 first preference votes ahead of the Liberal Party’s candidate who received 388,178 first preference votes. This improbable result is explained by Rachel Baxendale and Liam Quinn: The improbable rise of Ricky Muir to senator-elect has been revealed, with the Australian Motoring Enthusiast Party candidate receiving more than 85 per cent of preferences from other micro-parties such as the Australian Fishing and Lifestyle Party, the Help End Marijuana Prohibition Party and the Shooters and Fishers Party to stay in the race. Mr Muir also received the overwhelming majority of preferences from the Palmer United Party and the Australian Sex Party late in the count, to beat the Liberals’ Helen Kroger to the sixth Senate seat in Victoria. Mr Muir, a 32-year-old father of five, received only 17,083 first-preference votes –a tiny proportion of the
483,076 quota required. By contrast Senator Kroger had 388,178 votes after receiving surplus votes from the two Liberals elected early in the count, Mitch Fifield and Scott Ryan. Courtesy of preference deals negotiated on the advice of political consultant Glen Druery, Mr Muir, third last about three-quarters of the way through the count, was kept in the race –and ultimately propelled over the line. Australian Electoral Commission figures released on Wednesday reveal his first big gain came from the Fishing and Lifestyle Party’s elimination, giving Mr Muir 97 per cent of its 16,404 votes and taking him from 15th to 11th, resulting in candidates from the Katter, HEMP and Shooters and Fishers parties to be eliminated before the AMEP man. Mr Muir then got 88.1 per cent of HEMP’s 21,679 votes, taking him to seventh, past the Animal Justice, WikiLeaks and Rise Up Australia candidates. He picked up 94.8 per cent of the Shooters and Fishers’ 29,009 votes, moving him to fifth. A 71.3 per cent share of Family First’s 70,379 votes propelled him to third. After the Greens’ Janet Rice secured fifth spot, Mr Muir received 97.7 per cent of the Palmer Party’s 165,092 votes, and 86.6 per cent of the Sex Party’s 202,741 votes to reach the quota ahead of Senator Kroger.
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Business and the Law
Deregulation
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[3.440] The highly regulated business environment of the late twentieth century bears little resemblance to the vision of society propounded by the eighteenth-century economist and philosopher Adam Smith. In The Wealth of Nations (1776) Smith’s thesis was the desirability of reducing the economic intervention of the State:
Having once more groped my way about that chaos of verbal darkness, I have come to the conclusion, with all becoming diffidence, that the county court judge was wrong in this case. My diffidence is increased by finding that my brother Luxmoore has groped his way to the contrary conclusion. MacKinnon CJ.
According to the system of natural liberty, the Sovereign has only three duties to attend to: Three duties of great importance, first the duty of protecting the society from the violence and invasion of other independent societies; secondly the duty of protecting as far as possible, every member of the society from the injustice or oppression of every other member of it, and thirdly, the duty of erecting and maintaining certain public institutions, which can never be for the interests of any individual … to erect and maintain; (because the profit could never repay the expense) though it may frequently do much more than repay it to a great society.
Reference has been made elsewhere to the scope, bulk and complexity of legislation regulating the contemporary marketplace and it is not surprising that “deregulation” is a popular catch-cry today. There is little argument today with the proposition that even if the limited role of the state as envisaged by Adam Smith was appropriate for the eighteenth century, it is not appropriate for the twentieth century. There is similarly little argument with the proposition that the pendulum has swung too far in favour of regulation. The problem is one of achieving the appropriate balance. On the basis that the issues in the deregulation debate transcend specific areas of law, the comments of Henry Bosch when Chairman of the National Companies and Securities Commission (NCSC) (the predecessor of the Australian Securities and Investments Commission) are instructive. Bosch recognised that the critical issue is one of achieving balance. In the case of a regulatory body like the NCSC the balance had to be achieved between the competing concepts of competition, entrepreneurial freedom and free markets on the one hand and social values (such as equal opportunity and equal access to information) on the other (H Bosch, “The De-regulation of Business”, Professional Administrator (October-November 1985)): Too much regulation in the interests of investor protection by emphasising these social values may stifle initiative and development, while too little may undermine investor confidence in the market and result in an inefficient allocation of resources.
Ultimately, despite the lure of deregulation, it necessarily remains a fact of modern life that economic and social growth “depend on a highly complex economy which requires sophisticated rules and enforcement procedures across a wide range of activities” (Bosch, 1985). Bosch is undoubtedly correct. Deregulation may be better regarded as a demand for increasing the quality of regulation through better-considered and more carefully drafted legislation. In practical terms there is need for a great deal of regulation.
Reforming the process [3.450] The problems referred to above are not susceptible to simple solutions. It is nevertheless encouraging that governments are aware of the community’s concerns and have taken steps to introduce greater consultation and clearer legislation. 126
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Chapter 3 The Parliament and Statute Law
The 2006 Report of the Taskforce on Reducing Regulatory Burdens on Business, Rethinking Regulation recommended that where it is: determined that the introduction of black-letter laws is the only way to achieve the desired policy outcome, the legislation must be carefully drafted to ensure it is: • Simple; • Targeted at achieving the relevant policy objective;
I have very little notion of what the section is intended to convey, and particularly the sentence of 253 words. MacKinnon CJ.
• Proportional to the problem being addressed; • Designed to minimise compliance burdens; • Not unduly prescriptive or restrictive; • Transparently and clearly communicated; • Consistent with existing laws and regulations; and • Readily enforceable.
The report stated that principles of good regulatory process require governments to apply the following six principles: • Governments should not act to address “problems” through regulation unless a case for action has been clearly established. This should include evaluating and explaining why existing measures are not sufficient to deal with the issues.
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• A range of feasible policy options –including self- regulatory and co- regulatory approaches –need to be assessed within a cost-benefit framework (including analysis of compliance costs and, where relevant, risk). • Only the option that generates the greatest net benefits for the community, taking into account all the impacts, should be adopted. • Effective guidance should be provided to regulators and regulated parties to ensure that the policy intent of the regulation is clear, as well as what is needed to be compliant. • Mechanisms such as sunset clauses or periodic reviews need to be built in to legislation to ensure that regulation remains relevant and effective over time. • There needs to be effective consultation with regulated parties at the key stages of regulation-making and administration. One of the mechanisms employed in the Australian government’s best practice regulation process is a Regulation Impact Statement (RIS) which contains seven elements setting out: • The problem or issues that give rise to the need for action. • The desired objectives. • A range of options that may achieve the desired objectives (at a minimum a regulatory option, a non-regulatory or light-handed regulatory option, or a do-nothing option). • An assessment of the impact (costs, benefits and, where relevant, levels of risk) of a range of feasible options for consumers, business, government and the community. • Consultation. • A recommended option. • A strategy to implement and review the preferred option. Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:03:29.
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The Australian Government’s Best Practice Regulation Handbook (July 2013) explains that a RIS, “is mandatory for all decisions made by the Australian Government and its agencies that are likely to have a regulatory impact on business or the not-for-profit sector, [but] is not required if the regulatory impact is of a minor or machinery nature and does not substantially alter existing arrangements”. The RIS process is intended to facilitate accurate and meaningful assessment of the impact of options on business and other stakeholders. The process is designed to provide sufficient information for a decision on whether to change or introduce regulation. A RIS is intended as an aid for the decision-maker and ultimately, the decision-maker determines whether to accept the recommendations contained in the RIS.
QUESTIONS 1.
“The Senate is the greatest impediment to efficient federal law making”. Discuss this proposition.
2.
Discuss the approach a contemporary Australian court should take to statutory interpretation.
3.
Discuss the differences between statute law and common law.
4.
To what extent does the court’s interpretation role provide the opportunity for judicial law making? In your answer consider provisions such as s 18 of the Australian Consumer Law which prohibits misleading conduct in business.
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WEB REFERENCES Federal Parliament http://www.aph.gov.au
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4
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4
The Executive and Law-making by Administrative Agencies Andrew Terry THE BUSINESS CONTEXT The function of the executive branch of government is to administer and enforce the laws enacted by parliament. In a complex society such as Australia where the law impacts on virtually all aspects of our lives, the executive branch of government wields considerable power in administering these laws. However, the executive’s function extends beyond administering the law. The range and detail of legal regulation in modern society makes it impracticable for parliament. A range of legislative power is delegated by the parliament to the executive. “Delegated legislation” –the laws made by those to whom limited legislative powers are delegated by parliament –impacts heavily on all citizens. These regulations are extensive and far-reaching and have a significant impact on the conduct of business. They form a significant part of business law. It is therefore important to understand both how they come into existence and how they are subject to control.
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4.1
THE EXECUTIVE GOVERNMENT ....................................................................................................................... 130
[4.50]
The Monarch and the Governor-General ............................................................................................... 132
[4.70]
The Federal Executive Council ................................................................................................................. 132
[4.80]
The Cabinet .................................................................................................................................................. 132
[4.90]
The Prime Minister and the ministers .................................................................................................... 133
[4.100]
The public service ....................................................................................................................................... 133
[4.110]
Statutory authorities ................................................................................................................................... 133
[4.130] Quangos ........................................................................................................................................................ 134 4.2
THE INCREASING POWER OF THE EXECUTIVE ........................................................................................... 137
4.3
DELEGATED LEGISLATION ................................................................................................................................. 138
[4.180]
Cartloads of regulatory manure ............................................................................................................... 138
[4.200]
Delegated legislation .................................................................................................................................. 140
[4.230]
Reforming the process of delegated legislation .................................................................................... 141
4.4
THE EXERCISE OF ADMINISTRATIVE DISCRETION AND THE REVIEW OF ADMINISTRATIVE DECISIONS ........................................................................................................................... 144
[4.300]
The Ombudsman ........................................................................................................................................ 146
[4.310]
Freedom of information laws .................................................................................................................... 147
[4.320] Whistleblowing ............................................................................................................................................ 148 Merit review: The Administrative Appeals Tribunal ............................................................................ 150
[4.340]
Judicial review of administrative decisions ............................................................................................ 151
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[4.330]
4.1 THE EXECUTIVE GOVERNMENT [4.10] In all systems of government a distinction may be drawn between the legislative function, the executive function and the judicial function. This chapter deals with the executive function of government –the carrying out, administration and enforcement (the “execution”) of the law. The body entrusted with this function is known as “the Executive” or “the executive government”. Under the Commonwealth Constitution, executive power is conferred on the Governor-General (who represents the Queen) and the Ministers of the Crown appointed by the Governor-General who form the Executive Council and whose function it is to advise the Governor-General on the government of the Commonwealth. The term “Crown” is frequently used to mean the executive government –the Governor-General acting as Head of State on the advice of the Executive Council. Constitutional arrangements are very similar at State level, with executive power residing in the Governor.
IN CONTEXT
Responsible government [4.20] One of the most important characteristics of the system Australia inherited from Britain is that of responsible government. The Prime Minister and the other ministers 130
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Chapter 4 The Executive and Law-making by Administrative Agencies
entrusted with the role of executive government are responsible to parliament. The ministers are members of parliament and hold office only so long as the government from which they are drawn has the confidence or support of the House of Representatives –the house which directly represents the people. Under the long established conventions of responsible government (which are not expressly included in the Constitution), the government of the day need not resign if defeated in the lower house on a minor matter but if, for example, it loses a vote of no confidence it must resign or seek a dissolution.
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[4.30] The organisation and system of executive government is a matter of some complexity. The bare bones of the Constitution provide an incomplete picture of the process and reliance must be placed on the unwritten conventions –practices which have developed over centuries in the case of the Westminster Parliament –which are recognised as obligatory but which are not expressly contained in the Constitution. The bald proposition that the “executive power of the Commonwealth is vested in the Queen and is exercisable by the Governor-General … advised by the Federal Executive Council” (a summary of ss 61 and 62 of the Constitution) may be thought quite unhelpful in explaining the system as it actually works. Similarly, the Constitution makes no reference to the Prime Minister or the Cabinet –the parties who in practice are most central to executive power. A fuller account of executive government requires consideration of a number of institutions.
IN CONTEXT
The Constitution: Chapter II Executive Government [4.40] s 61 The executive power of the Commonwealth is vested in the Queen and is exercisable by the Governor-General as the Queen’s representative and extends to the execution and maintenance of this Constitution, and of the laws of the Commonwealth. s 62 There shall be a Federal Executive Council to advise the Governor-General in the government of the Commonwealth, and the members of the Council shall be chosen and summoned by the Governor-General and sworn as Executive Councillors, and shall hold office during his pleasure. s 63 The provisions of this Constitution referring to the Governor-General in Council shall be construed as referring to the Governor-General acting with the advice of the Federal Executive Council. s 64 The Governor-General may appoint officers to administer such departments of State of the Commonwealth as the Governor-General in Council may establish.
What is the Crown? One of those fogs of ambiguity so dear to the laws of England surrounds our usage of the words “King” and “Crown”. The “Crown” in this country is the symbol not only of Royalty but of the State, and distinguishes not only the palace but the village post office and police station. When we speak of the Crown we sometimes mean the Monarch himself; but more often we mean the Government or some Department of it, or some department of some Department, and sometimes in practice, it is to be feared, some subordinate clerk in some department of some Department. Bold v The Attorney- General in Herbert AP, Uncommon Law (Methuen, 1935).
Such officers shall hold office during the pleasure of the Governor-General. They shall be members of the Federal Executive Council, and shall be the Queen’s Ministers of State for the Commonwealth.
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After the first general election no Minister of State shall hold office for a longer period than three months unless he is or becomes a senator or a member of the House of Representatives.
The Monarch and the Governor-General [4.50] A Commonwealth Parliament booklet, Parliament and the Executive Government (1987) p 20, explains that: Australia is a constitutional monarchy. The Queen of Australia is nominally its Head of State, but her head of state functions are actually performed by her representative, the Governor- General. The Head of State of a country is the person who is the formal head of the Executive Government. The head of government is the principal administrator of the Government –in Australia this person is the Prime Minister.
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Although the Constitution makes the Governor-General head of the executive government it provides little opportunity for the Governor-General to exercise powers independently of the government of the day acting through its formal instrument, the Federal Executive Council. [4.60] Under the Constitution, certain powers are vested in the Governor-General in Council –that is, the Governor-General acting on the advice of the ministers who are members of the Executive Council (eg s 32 in relation to issuing writs for general elections and s 72 in relation to the appointment of judges to federal courts). Other powers are vested in the Governor-General alone (eg ss 5 and 57 in relation to proroguing (discontinuing) and summoning parliament and dissolving the House of Representatives and/or the Senate, s 58 in relation to assenting to or withholding assent to legislation, s 64 in relation to appointing and dismissing ministers). Constitutional convention nevertheless demands that governors-general will generally act only on the advice of their ministers in the exercise of these powers. The extent and nature of powers that may be exercised by governors-general independently of the advice of their ministers – their reserve, discretionary or prerogative powers –are not clearly settled. However, the situation of 11 November 1975 when the Governor-General dismissed the government against the advice of its ministers is a powerful, albeit debatable, example of their powers. The Governor- General should be put in his proper place –as a ceremonial figure on leave from The Merry Widow. Bill Hayden, subsequently Governor-General of Australia, The Age (14 November 1981).
132
The Federal Executive Council [4.70] The Federal Executive Council established by s 62 of the Constitution comprises all the ministers of the government. It is a formal advisory body which also has substantial powers to make laws under powers delegated to it by parliament.
The Cabinet [4.80] The Federal Executive Council constitutes the formal power of the government of the day. The actual power is wielded by the Cabinet. Whereas the Executive Council
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Chapter 4 The Executive and Law-making by Administrative Agencies
comprises all the ministers, the Cabinet comprises only the senior ministers. It is the centre of the government’s decision-making process and is vital to the practical operation of government. However, the significance of the Cabinet is not referred to in the Constitution. Parliament and the Executive Government (1987) p 24 explains that: Despite its importance as the decision-making centre of government, the Cabinet is not mentioned in the Constitution. Nor is the position of Prime Minister, the Prime Minister being the “chairman” of Cabinet. The institution of Cabinet and the position of Prime Minister are part of the conventions of responsible government, reflecting the fact that the Government is drawn from the Parliament and that it is responsible to the Parliament for its administration and its decisions. At the time of Federation these conventions were firmly established in Britain and in the Australian colonies; the constitution-makers thus took for granted their application in the Commonwealth and considered it necessary to write into the Constitution only the formal mechanisms for decision-making. There can be said, then, to be two structures of government –the structure set out in the Constitution, comprising the Governor-General and the Federal Executive Council, which provides the formal or legal framework for government decision making and implementation, and the political structure based on the conventions of responsible government, comprising the Prime Minister and Cabinet, which provides the actual or practical framework. The two come together through the fact that the ministers who are members of Cabinet are also the members of the Federal Executive Council, and through the convention that the Governor-General acts only on the advice of his ministers, with some exceptions.
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The Prime Minister and the ministers [4.90] Ministers are appointed by the Governor-General, on the advice of the Prime Minister. Although the institution of Prime Minister is not mentioned in the Constitution, the conventions of responsible government demand that the Governor- General appoints a person who can form a government enjoying the confidence of the House of Representatives (ie, the leader of the party or coalition of parties with the majority in the House of Representatives).
The public service [4.100] Although the executive power of the Commonwealth is entrusted to the Governor-General and the Executive Council, the ministers obviously cannot carry out the complex and varied operations involved in the administration of government. This is the role of the Australian Public Service which is divided into departments each having functions in a particular policy area. The minister is the parliamentary head of the department (the public servant who heads the department is known as the permanent head) and is responsible both to the parliament and to the government of which he or she is a member for the department’s activities.
If a traveller were informed that such a man was leader of the House of Commons, he may begin to comprehend how the Egyptians worshipped an insect. Benjamin Disraeli.
Statutory authorities [4.110] Unlike departments which are established by the government of the day through the formal machinery of the Governor-General appointing a minister for each department
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on the advice of the Prime Minister, statutory authorities are established by Acts of Parliament of the government of the day. The Australian Broadcasting Corporation is just one of the hundreds of statutory authorities that exist at the federal level, although it may not be a typical example. The vast majority of statutory authorities have a lesser public profile and few employees. Statutory authorities have a degree of independence from government control which varies according to their function. The debate as to the need for and the number of authorities has a large heritage. In Parliament and the Executive Government (1987, p 34) it is noted that: While all statutory authorities are in theory accountable to Parliament, the Parliament in practice cannot adequately oversee them all. A partial solution which has been suggested is to return the functions of a number of the authorities to departments. This would place them under direct ministerial control, with accountability to Parliament then being achieved through the relevant Minister. The Senate Standing Committee on Finance and Government Operations, for example, found that a number of authorities had ceased to perform any really useful function, or performed mainly residual functions which could be more efficiently performed within departments. On a broader front, the committee suggested that Parliament make greater use of “sunset clauses” in legislation creating new authorities (a “sunset clause” provides that an authority will automatically go out of existence after a certain period unless the Parliament makes a positive decision at that time to continue it).
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Do We Need so Many Agencies? David Coleman (Federal Member of Parliament and Chairman of the House Economics Committee), Sydney Morning Herald (26 June 2017).
[4.120] Often the best questions are the simple ones. When it comes to government, we should start with a basic inquiry: do we really need all this? Currently, there are 18 federal government agencies –192 of them in fact. That’s one agency for about every 125,000 people –which seems
like a lot of agencies. When assessing these bodies, we should always ensure that the noble goal of addressing policy problems isn’t allowed to morph into the less noble goal of protecting someone’s patch.
Quangos I do not rule Russia; ten thousand clerks do. Nicholas 11, Emperor of Russia.
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[4.130] The term quango (quasi-autonomous non-government organisation) refers to “the hazy world of non-government bodies, statutory authorities and government companies, often lumped together as quangos” (N Richardson, The Bulletin (28 November 1995) p 15). Federal Government statutory bodies, non-statutory bodies and companies number many hundreds. All of these bodies have the capacity to affect the rights of individuals.
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Chapter 4 The Executive and Law-making by Administrative Agencies
[4.140] The executive government of Australia
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How achieved
Sovereign
Inherited.
Governor- General
Selected by the Prime Minister.
Formal appointment pursuant to Constitution
By the Sovereign, as her representative in Australia.
Constitutional functions
Conventions pplying/funca tions in practice
Head of Executive Government and one of constituent parts of the Parliament, but these functions are delegated to the Governor- General. Appoints the Governor- General. May disallow an Act of Parliament (but this has never been done). Represents the Queen as head of Executive Government and one of constituent parts of the Parliament. In most matters must act as advised by the Federal Executive Council.
Head of State. Only necessary personal function is to appoint the Governor-General. May on occasion perform acts normally carried out by the Governor- General, such as opening a session of Parliament or assenting to an Act of Parliament. Acts as advised by the Prime Minister.
Performs functions of Head of State. Normally in all matters acts as advised by the Prime Minister and Ministers. Has reserve powers to act independently in emergencies. The extent of these and way they should be exercised are not agreed on.
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How achieved
Leader of the party which has the support of the most Members of the House of Representatives. Is elected leader through internal party processes.
Ministers
Selected by the Prime Minister from Members of the House of Representatives and Senators from the party or coalition of parties in government. The Prime Minister’s selection may be constrained by internal party processes.
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Prime Minister
136
Formal appointment pursuant to Constitution By the Governor- General as a Minister of State. By the Governor- General as a member of the Federal Executive Council.
By the Governor- General as Ministers of State. By the Governor- General as members of the Federal Executive Council. (Ministers must be appointed to the Federal Executive Council. Ministers must be Members of the House of Representatives or Senators, or become so within three months of appointment).
Constitutional functions
Conventions pplying/funca tions in practice
As for Ministers. The position of Prime Minister is not recognised by the Constitution.
The Governor- General commissions the leader of the party (or coalition) with the largest number of Members of the House of Representatives to form a Government. The Prime Minister chairs Cabinet and is in p ractice the Head of the Executive Government. Senior Ministers are in charge of larger or more important departments, and are normally members of the Cabinet. Junior Ministers may be in charge of a small department, or assist another Minister in the administration of a larger department. The Cabinet is, in practice, the heart of the Executive Government. All major policy and legislative proposals are decided by the Cabinet.
As Ministers, to administer Departments of State. As Executive Councillors, to advise the Governor- General. The Cabinet is not recognised by the Constitution.
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Chapter 4 The Executive and Law-making by Administrative Agencies
How achieved
Parliamentary Secretaries
As for Ministers.
Formal Constitutional appointment functions pursuant to Constitution As for Ministers As for (Parliamentary Ministers. Secretaries are a class of Ministers designated as Parliamentary Secretaries).
Conventions pplying/funca tions in practice Parliamentary Secretaries assist Ministers in the administration of their departments.
Source: http://www.aph.gov.au/About_Parliament/House_of_Representatives.
4.2 THE INCREASING POWER OF THE EXECUTIVE
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[4.150] The following words of Professor Geoffrey Palmer (then a law professor and later New Zealand’s Prime Minister) provide a challenging start to this section (Palmer G, Unbridled Power (2nd ed, Oxford University Press, 1987)): I suggest that it is a fundamental truth of our existing constitutional arrangements that the executive has got out of control, and Parliament, the traditional check on the powers of the executive, is not performing that function in a satisfactory manner … Too often the paramount reason for introducing the regulation is the convenience of the administering department not the welfare of the citizen … The regulation is one of the most fearful instruments of executive domination. For sheer speed, lack of warning, absence of consultation and debate, nothing beats regulations … We have witnessed the eclipse of Parliament. We should try to restore its supremacy as a law-making body.
New Zealand is not alone in this trend. Under the Westminster system of parliamentary government, the essential purity of the doctrine of separation of powers is diluted because the executive is drawn from Parliament. The members of the Federal Executive Council are required to be Members of Parliament, if not when appointed then at least within three months of taking office. Indeed, Parliament is under the substantial control of the executive because the government in power holds the necessary majority to secure such control. Many are critical of the “seriously flawed” system Australia inherited from England. In “The fatal flaw: Has the Westminster system produced a form of executive dictatorship?” Time Magazine (16 September 1991), Patrick O’Brien said: In Australia [the Westminster system] is labelled “parliamentary democracy” and “responsible government” by its supporters. But it has grave deficiencies as far as democracy is concerned. In theory, Parliament is supposed to be master and the executive the servant. The system no longer works that way, and hasn’t for a long time. In reality, premiers and their cabinets –not to mention prime ministers and theirs –now form a sort of “elective dictatorship”, with vast, and often unchecked powers.
As an ordinary Australian, he was naturally suspicious of authority. P Grainger, Solicitor, Defending man in court in Wollongong, NSW, 1970, cited by B Hornadge, The Ugly Australian (Kangaroo Press, 1985).
[4.160] The Westminster system stands in stark contrast to the US model. O’Brien is not alone in arguing that the current debate as to Australian republicanism lacks real substance if the power of the executive is not addressed. Although Queensland may be regarded as a special case because of its unicameral legislature –a situation in which the
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executive always dominates the Parliament –it is interesting to note that the Fitzgerald corruption inquiry in that State placed at least some of the blame for the unfortunate state of affairs disclosed by the inquiry on the politicised system of government dominated by the executive under which Parliament was a compliant, powerless and largely irrelevant institution.
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In Germany, under the law everything is prohibited except that which is permitted. In France … everything is permitted except that which is prohibited. In the Soviet Union, everything is prohibited, including that which is permitted. And in Italy … everything is permitted, especially that which is prohibited. Newton Minow.
Many consequences flow from the political reality that executive government is increasingly powerful. The two most obvious manifestations –the conferring of substantial law-making powers on the executive through the device of delegated legislation and the conferring of administrative discretion of the executive –are discussed below.
IN CONTEXT
Executive power in action [4.170] A Department of Water representative stopped at a Canberra farm and talked with
an old farmer. He told the farmer, “I need to inspect your farm for your water allocation.” The farmer said, “OK, but don’t go in that field over there.”
The water representative said, “Mister, I have the authority of the Federal Government with me. See this card? THIS CARD MEANS I AM ALLOWED TO GO WHEREVER I WISH on any agricultural land. No questions asked or answered. Have I made myself clear? Do you understand?” The farmer nodded politely and went about his farm chores. Later, he heard loud screams and saw the water rep running for the fence and close behind was the farmer’s huge-horned prize bull. The bull was gaining on the water rep with every step. The rep was clearly terrified, so the old farmer threw down his tools, ran to the fence and shouted out. “Your card! Your card! Show him your card!”
4.3 DELEGATED LEGISLATION Cartloads of regulatory manure [4.180] In a well-publicised speech in 1984 attacking Australian government processes, John Stone, then secretary of the treasury and later a Queensland senator, referred to the: cartloads of regulatory manure which have been spread upon those labour-market fields … to produce a great flourishing of weeds while retarding the growth of the crop of jobs which those fields might otherwise furnish.
The “weeds” included: 138
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Chapter 4 The Executive and Law-making by Administrative Agencies the arbitral regulators themselves, their bureaucracies, the trade union and employer negotiators and their bureaucracies, the swollen and unbelievably bureaucratic departments of Labour at state and federal levels and so on.
Despite undoubted political motivation, the “cartloads of regulatory manure” metaphor is apt. The staggering mass of regulation that characterises Australia at the start of the twenty-first century and the equally staggering mass of authorities, corporations and other statutory bodies spawned by government permits the reach of the executive arm of government into all commercial conduct, hinders its efficiency and costs billions of dollars in compliance costs.
Australians have a characteristic talent for bureaucracy. Jim Davidson, Australian Democracy.
Cull Needed to Free Firms from Red Tape Greg Brown, The Australian (7 November 2017)
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[4.190] Unelected regulators are hampering business with red tape, according to the Institute of Public Affairs, which is calling for a cull of government bodies to return power to the parliament. The IPA, a right-wing think tank, has warned the growth of red tape in Australia is at a “crisis point” and puts much of the blame on regulators that impose rules on business with little public accountability. “Urgent action is needed from policymakers to reduce the burden of red tape on businesses, individuals and community groups,” said IPA research fellow Daniel Wild. “Red tape is the key cause of low and declining business investment, which is currently lower as a percentage of gross domestic product than under the Whitlam government. Low business investment is the central cause of low labour productivity and slow wages growth.” An IPA report, released today, finds red tape is caused by regulatory bodies and the overlap of state and federal regulations. The institute previously has estimated that red tape reduces economic output by $176 billion a year, the equivalent of 11 per cent of gross domestic product. “This means each Australian household would be $19,300 better off each … year (if there were no red tape),” the report says. It argues unelected regulatory bodies are bad for democracy, with 497 public bodies involved in the design or enforcement of the federal regulatory
system. “Regulatory agencies are increasingly able to implement regulation and impose red tape without requiring the approval of parliament, and, therefore, the Australian people,” the report says. “Australian governments have vested increasing decision-making power outside parliament and into ‘independent’ bureaucratic agencies … These undemocratic, unelected officials have enough discretionary power to effectively make government policy.” The report labelled the banking, corporate and competition regulators as “monolithic organisations” that are “statutorily independent from parliament”. “The idealised notion of independent regulatory authorities operating in a democratic system doesn’t match reality … . The consequence is an increasing amount of public policy is determined outside of the Australian parliament by unelected regulators. Regardless of one’s thoughts about the policy implemented by these regulators, this undermines the Australia’s democratic policy process.” The research noted surveys showing 69 per cent of small and medium businesses say dealing with red tape takes “a lot of effort”, whole 68 per cent think their industry is overregulated. It found 55 per cent of company directors think red tape the biggest impediment to growth.
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Delegated legislation [4.200] By way of justification for this mass of regulation, it is said that the activities of modern government are so varied and complex and the dilemmas facing parliament so technical that it has neither the time nor the ability to complete a comprehensive and detailed legislative program. It is for these reasons that a significant proportion of our law is contained in “delegated” or “subordinate” legislation –legislation made not by parliament itself but by a delegate upon whom, in the exercise of its sovereign power, parliament has conferred legislative power. Through delegation of legislative power a body other than parliament may make law. The identity of a delegate, the nature of the power conferred and the manner in which that power is to be exercised are prescribed in an “empowering” or “enabling” Act of Parliament. The most common recipient of legislative power –the most common delegate of parliament –is the executive government. Most Acts of Parliament today confer on the Governor, Governor-General or the minister whose department is charged with the administration of the legislation, power to make regulations for the purpose of giving full effect to the Act. The following empowering provision is frequently used in Commonwealth Legislation:
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The Governor-General may make regulations, not inconsistent with this Act, prescribing all matters required or permitted by this Act to be prescribed or necessary or convenient to be prescribed for carrying on or giving effect to this Act.
On one side of the argument sit those described by the opponents as the minimalists who believe councils should stick to the three Rs of local government –roads, rats and rubbish. Daily Telegraph (New Zealand) (24 August 1996).
[4.210] Although the courts cannot question the validity of legislation constitutionally enacted by Parliament they can question the validity of delegated legislation. However, if the delegated legislation is within the authority of the empowering Act (ie intra vires), the laws so made are as valid and enforceable as any Act of Parliament. The court’s interpretative function remains unaffected. But if the delegated legislation goes beyond the scope of the authority conferred by the empowering Act (ie ultra vires), it is unenforceable. Delegated legislation can be invalidated on the ground of “unreasonableness” but this power has rarely been exercised. The High Court has clearly expressed the view that it is the function of the court to determine whether the regulation (if otherwise valid) was (South Australia v Tanner [1989] HCA 3 at [12] per Wilson, Dawson, Toohey and Gaudron JJ): reasonably proportionate to the end to be achieved … a court must exercise care not to impose its untutored judgment on the legislator. It is not enough that the court thinks the regulation inexpedient or misguided. It must be so lacking in reasonable proportionality as not to be a real exercise of the power.
Evans v State of New South Wales [2008] FCAFC 130 [4.220] The World Youth Day Act 2006 (NSW) was enacted in connection with the visit of the Pope to
Sydney in 2008 for World Youth Day – a major annual gathering of young members of the Catholic Church. Clause 7 of the World Youth Day Regulation 2008 (NSW) made under the Act empowered authorised persons to direct that conduct causing “annoyance or inconvenience” to participants should cease. A challenge to the validity of the regulation was made by the applicants who proposed to, inter alia, dispute stickers and badges with slogans such as: • I know that condoms saves lives –Is that annoying? • I am not a Catholic! –Is that annoying? 140
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Chapter 4 The Executive and Law-making by Administrative Agencies • I know Gays are great –Is that annoying? • I had premarital sex! Is that annoying? • I don’t believe Mary was a virgin! Is that annoying? • I don’t believe the Pope is infallible! Is that annoying? • I have a condom on me! Is that annoying? • I am gay! Is that annoying? It was held that the regulation was not a valid exercise of the regulation making power under the Act, which in s 58(1) conferred on the Governor the power to make regulations not inconsistent with the Act for or with respect to any matter required or permitted to be prescribed, or necessary or convenient to be prescribed, for carrying out or giving effect to the Act. Section 58(2) specially authorised the making of regulations for or with respect to regulating the conduct of the public at World Youth Day venues and facilities. The court cited the High Court in Coco v The Queen [1994] HCA 15 at [10]: The courts should not impute to the legislature an intention to interfere with fundamental rights. Such an intention must be clearly manifested by unmistakable and unambiguous language. General words will rarely be sufficient for that purpose if they do not specifically deal with the question because, in the context in which they appear, they will often be ambiguous on the aspect of interference with fundamental rights.
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The court held (at [83]) that: [c]onduct regulated by cl 7 so far as it relates to “annoyance” may extend to expressions of opinion which neither disrupt nor interfere with the freedoms of others, nor are objectively offensive in the sense traditionally used in State criminal statutes. Breach of this provision as drafted affects freedom of speech in a way that, in our opinion, is not supported by the statutory power conferred by s 58 properly construed. Because the court found the regulation to be beyond the regulation-making power granted it did not have to consider the challenges to the regulation on the basis that it infringed to implied freedom political communication under the Constitution (see [1.500]).
Reforming the process of delegated legislation [4.230] Reference has been made to the overwhelming nature of delegated legislation, both as to the number of rules involved and as to their wide-ranging implementation. The problem is one of accommodating both democratic principles and administrative efficiency. The problem is major and it is one which is escalating as Parliament more readily delegates legislative powers which authorise not only the “filling-in” of procedural defects but also the creation of substantive law. It is becoming increasingly common for Acts of Parliament simply to provide a general framework for the law, leaving delegated legislation the task of “filling the gaps” not only by devising procedural machinery but also by supplementing the substance of the law itself. The greatest source of Australian law is delegated law. The weight of material to be dealt with and the technical complexity of the subject matter mean that parliament cannot accommodate it. Of course, the essential paradox is that our parliamentary representatives are elected to make the law and
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Pythagorean theorem: 24 words. Lord’s Prayer: 66 words. Archimedes’ Principle: 67 words. Ten Commandments: 179 words. Gettysburg address: 286 words. US Declaration of Independence: 1,300 words. US Constitution with all 27 Amendments: 7,818 words. EU Regulations on the sale of cabbage: 26,911 words.
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that, therefore, the process of producing legislative rules by unelected people defeats the aims of responsible government. In particular, criticism may be levelled at the process by which regulations become law. Not only are regulations the products of bureaucrats rather than members of parliament, but they can become law simply by an administrative act followed by publication in the Government Gazette. On the other hand, that legislation which is passed by parliament through proper procedures must endure a far more rigorous examination. Not only is new legislation examined by both sides of parliament, it also has to be “read” three times in the house and be subject to debate, after which it must be passed by both the houses of parliament in order to become law. These safeguards do not surround the creation of delegated legislation.
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Again, it is necessary to acknowledge that the administration of a country such as Australia will not take place without an effective bureaucracy. The principle is exemplary: the parliament should produce laws which express in broad terms the wish of the people, and which leave to some given agency the task of filling in the details. That task requires particular expertise in the area in question and also the flexibility to deal with individuals in ways not normally available to courts enforcing legislation. We work on the assumption that people are sensible, intelligent creatures and will fill up forms the way they are asked. British Home Office Spokesman, Sydney Morning Herald (4 October 1969).
The actual procedure for the passage of a proposed regulation into law not only lacks those safeguards which surround the enactment of legislation, it is virtually a matter of achieving the desired result by default. In the federal sphere the usual practice is that the regulation is drafted by an administrative officer within a Minister’s department and is then submitted to the Executive Council. Afterwards it is signed by the Governor- General, notified in the Government Gazette, and laid before –tabled in –each House of Parliament. The difficulty is that the Parliamentary scrutiny is passive. To be rendered void, one of the Houses of Parliament must take action to disallow the regulation. There is no requirement that the regulation receive any positive acceptance, the requirement is simply that no impediment be raised. [4.240] The only active scrutiny in Federal Parliament is that by the Senate Standing Committee on Regulations and Ordinances. One of the oldest committees of the Federal Parliament, it was established in 1932 and it applies a four-part test to the delegated legislation that comes before it:
142
(a)
that the regulations are in accordance with the statute;
(b)
that the regulations do not trespass unduly on personal rights and liberties;
(c)
that the regulations do not unduly make the rights and liberties of citizens dependent upon administrative decisions which are not subject to adequate review by a judicial or other independent tribunal; and
(d)
that the regulations are concerned with administrative detail only and not with matters of substance which would be more appropriate for parliamentary enactment (as statutes).
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Chapter 4 The Executive and Law-making by Administrative Agencies
IN CONTEXT
Disallowance of Regulations [4.250] “[T] he power of disallowance is to ensure the control and supervision of
Parliament over regulation … [T]he object of the legislature is to preserve the legislative power of … Parliament over regulations made by the Executive … Not to give a new legislative power, but to maintain the … Parliament as the dominant authority in legislative matters.” Dignan v Australian Steamships Pty Ltd [1931] HCA 9 per Starke J
This Standing Committee no doubt does its best. The volume of material coming before it is enormous –several thousand legal instruments annually. It is obviously not in a position to advise the Parliament properly as to the meaning and effect of all regulations. Indeed, most are put forward with little or no explanatory information from the department concerned. As noted earlier, the active opposition of Parliament to a new regulation is required to disallow it. Acquiescence means it becomes part of the law.
The parliamentary process has changed. To a large extent we’ve got executive government. Parliament is a sham. I just observe the fact that the man on the bus thinks all politicians are bloody idiots. S Jacobs, Business Review Weekly (5 November 1993).
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Regulatory review [4.260] The Senate itself describes the role of the Standing Committee as follows: The Standing Committee on Regulations and Ordinances Many of the matters on which Parliament makes laws are extremely complex and it is neither possible nor desirable to include all the details in an Act of Parliament. Many acts therefore contain a provision that delegates to the government the power to draw up regulations covering detailed or technical matters required for the purpose of the act. This is known as delegated legislation. For example, the Health Insurance Act under which the Medicare scheme operates establishes broad principles and sets out the way the scheme is to be administered, but many of the fine details, including the scheduled fees for various medical procedures, are prescribed by regulation. A regulation carries the full force of the law –it has the same effect as an Act of Parliament. The power to make regulations is therefore an important one which needs to be monitored closely to ensure that it is not abused. For this reason the Acts Interpretation Act of 1901 requires the regulations be tabled in both houses of Parliament and gives either house the right to disallow (that is, veto) them. The Regulations and Ordinances Committee, with the assistance of an independent legal adviser, meets every week that the Senate sits to check all items of delegated legislation tabled in the Senate (around 1600 per year). This is to ensure that each item is in accordance with the Act of Parliament under which it is made, that it does not trespass unduly on personal rights and liberties and does not contain matter more appropriate for parliamentary enactment.
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The Committee works in a bipartisan manner and since its establishment in 1932 the Senate has not rejected a committee recommendation that a regulation be disallowed. Senate Briefs, No 4 –Senate Committees
PAPERWORK REDUCTION BILL Persons or organisations wishing to make submissions on the above bill should forward 20 copies to this office by 2 October 1995. Evening Post (New Zealand) (7 August 1995).
[4.270] Over recent years both State and Federal Government have confronted the problem of the growth of delegated legislation through both administrative and legal initiatives. The major administrative initiative is the Regulatory Impact Analysis framework laid down in the government’s Best Practice Regulation Handbook which ensures that Australian Government regulation –both primary and delegated legislation –is both efficient and effective through rigorous analysis and consultation. The main feature of the scheme is the Regulation Impact Statement which is intended to facilitate informed and better regulation through consideration of several elements: assessing the problem, objectives of government action, options that may achieve the objectives, impact analysis –costs, benefits and risks, consultation, implementation and review. The most significant legal initiative relating to the reform of delegated legislation – Legislative Instruments Act 2003 (Cth) –the object of which is set out in s 3:
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The object of this Act is to provide a comprehensive regime for the management of Commonwealth legislative instruments by: a)
establishing the Federal Register of Legislative Instruments as a repository of Commonwealth legislative instruments, explanatory statements and compilations; and
b)
encouraging rule-makers to undertake appropriate consultation before making legislative instruments; and
c)
encouraging high standards in the drafting of legislative instruments to promote their legal effectiveness, their clarity and their intelligibility to anticipated users; and
d)
improving public access to legislative instruments; and
e)
establishing improved mechanisms for Parliamentary scrutiny of legislative instruments; and
ea) repealing spent legislative instruments or provisions that merely amend or repeal other legislative instruments, or provide for the commencement of legislative instruments or Acts; and f)
establishing mechanisms to ensure that legislative instruments are periodically reviewed and, if they no longer have a continuing purpose, repealed.
Similar initiatives are being introduced at state level –for example, the Subordinate Legislation Act 1989 (NSW) and the Subordinate Legislation Act 1994 (Vic).
4.4 THE EXERCISE OF ADMINISTRATIVE DISCRETION AND THE REVIEW OF ADMINISTRATIVE DECISIONS [4.280] The growth in the size and the intricacy of Australian society has meant that role of the executive government has been magnified. The bureaucracy has, in fact, developed 144
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Chapter 4 The Executive and Law-making by Administrative Agencies
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a life of its own. The problem of delegated legislation has been described, but another significant concern is the extent of administrative discretion. Decisions made by the executive or administrative branch of government increasingly affect citizens and business. It is a regular occurrence that when the parliament, and in particular the Commonwealth Parliament, passes the legislation, that legislation will grant to ministers, or persons within their departments, discretionary powers to make decisions which may have a significant impact on those subject to them. Familiar examples range from the frequent and usually controversial matter of the refusal to grant a driver’s licence to the more serious matter of the refusal to renew (for example) the licence of a truck or taxi driver, who thus loses the means of making a living. There are many other discretionary powers, which include the power to grant or refuse a pension, the power to impose a penalty, the power to register or license premises as suitable for certain activities, and so on. Very few members of the Australian community would not have been affected by the exercise of discretionary administrative powers. Acknowledging that fact involves recognising not just the breadth of administrative discretion but also how essential it is to the process of government. For practical purposes, the capacity to decide individual rights has to go beyond the parliament and the judiciary. What is essential, however, is that procedures should exist which allow for those disadvantaged by the exercise of an administrative discretion to have that decision reviewed in accordance with some legal process. The machinery that has developed to allow citizens to challenge the exercise of administrative discretion is therefore of great importance. The laws which have developed to regulate the decisions and actions of government agencies and officials are referred to collectively as administrative law.
All sorts of people (lawyers, computer people, systems managers) will tell you all sorts of reasons why forms cannot be simplified. Don’t believe them. M J Young, Special Minister of State (23 February 1984).
IN CONTEXT
The role of administrative law in Australia’s civil justice system [4.290] The Australian system of administrative laws is made up of the following elements: • Primary decision-making: the original decision which is made by an agency or body • Internal review: the review of a decision by the agency or body which made the decision • Tribunals: independent bodies which provide “merits review”; that is, examining government decisions and altering them if necessary • Courts: which provide judicial review of the decision • The Commonwealth Ombudsman: whose role is to consider and investigate complaints about Australian Government departments and agencies and • Freedom of information: specific laws which create a general right of access to official information upon application, subject to exclusions. Attorney-General’s Department, Access to Justice Taskforce, “A strategic framework for access to justice in the Federal Civil Justice System”, Report (Sep 2009) p 129
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The Ombudsman [4.300] The Ombudsman is a Scandinavian invention from the early nineteenth century which has since been adopted widely throughout the world. The Ombudsman is, in effect, a public watchdog appointed by Parliament to check for administrative abuses. The position of Ombudsman was established federally by the Ombudsman Act 1976 (Cth). He or she wears a number of hats as the Commonwealth Ombudsman, the Defence Force Ombudsman, the Postal Industry Ombudsman and the Private Health Ombudsman. Each State and Territory have appointed an Ombudsman. The legislation creates the office of Ombudsman and charges the person holding that office with the task of ensuring that complaints against officers of government agencies are investigated and that remedial action is taken where required. Although the Ombudsman has no power to make binding decisions, there is a comprehensive power to report and make recommendations where the Ombudsman is of the opinion (Ombudsman Act 1976 (Cth), s 15(1)): (a) that the action: (i) appears to have been contrary to law; (ii) was unreasonable, unjust, oppressive or improperly discriminatory; (iii) was in accordance with a rule of law, a provision of an enactment or a practice but the rule, provision or practice is or may be unreasonable, unjust, oppressive or improperly discriminatory; Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
(iv) was based either wholly or partly on a mistake of law or on fact; or (v) was otherwise, in all the circumstances, wrong
The elected Parliament is a weak and weakening institution … the Executive Government is the principal beneficiary of the Parliament’s decline; and … the judiciary is tending to compete with the Executive Government in exploiting the Parliament’s weakness but it is having its own independence undermined through the initiative of Executive Government. The question is “does it matter?” G S Reid, in Tay and Kamenka, Law-making in Australia (Edward Arnold, 1980).
(b) that, in the course of the taking of the action, a discretionary power had been exercised for an improper purpose or on irrelevant grounds; or (c) in a case where the action comprised or included a decision to exercise a discretionary power in a particular manner or to refuse to exercise such a power: (i) that irrelevant considerations were taken into account, or that there was a failure to take relevant considerations into account, in the course of reaching the decision to exercise the power in that manner or to refuse to exercise the power, as the case may be; or (ii) that the complainant in respect of the investigation or some other person should have been furnished, but was not furnished, with particulars of the reasons for deciding to exercise the power in that manner or to refuse to exercise the power, as the case may be.
The Ombudsman’s role is to receive and investigate complaints and to make suitable recommendations. While the Ombudsman cannot direct the behaviour of bureaucrats, her or his recommendations and their accompanying publicity give force to her or his position. If remedial action is not taken by the agents being investigated, the Ombudsman may report directly to the Prime Minister (in the case of the federal scheme) as well as to Parliament in her or his Annual Report. Professor Dennis Pearce, a lawyer and former federal ombudsman, has expressed concern that when the courts act to correct bureaucratic misbehaviour, in many instances government departments either ignore them or refuse to obey them. During his term as 146
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Chapter 4 The Executive and Law-making by Administrative Agencies
ombudsman, Pearce encountered circumstances in which an agency was not prepared to adhere to judicial rulings or was prepared to ignore opinions about the effect of the laws that were inconvenient to it. “There was an impatience with what was considered to be the imposition of pedantic and expensive requirements”: Pearce D, “Executive versus Judiciary” (1991) 2 Public Law Review 179 at 179. He also referred to cases where departments refused to “adhere to the rule of law because it does not accord with the view that the agency takes of the law”. Specialist Ombudsman with power to resolve disputes also exist for particular industries. The Telecommunications Industry Ombudsman and the recently established Australian Financial ComplaintsAuthority (which replaces three separate external dispute resolution schemes –the Financial Service Ombudsman, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal) are significant examples which operate with statutory backing.
Freedom of information laws [4.310] The ideal of open government is obviously facilitated if citizens have the opportunity to gain access to administrative files. Australia was the first country with a Westminster-style government to introduce, in 1982, freedom of information laws –the imperative of open government outweighing concerns as to the adverse effect of such laws on the operation of the Commonwealth bureaucracy.
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The Freedom of Information Act 1982 (Cth) (FOI Act) has the objects expressed in s 3: (1) The objects of this Act are to give the Australian community access to information held by the Government of the Commonwealth or the Government of Norfolk Island, by: (a) requiring agencies to publish the information; and (b) providing for a right of access to documents. (2) The Parliament intends, by these objects, to promote Australia’s representative democracy by contributing towards the following: (a) increasing public participation in Government processes, with a view to promoting better-informed decision-making; (b) increasing scrutiny, discussion, comment and review of the Government’s activities. (3) The Parliament also intends, by these objects, to increase recognition that information held by the Government is to be managed for public purposes, and is a national resource. (4) The Parliament also intends that functions and powers given by this Act are to be performed and exercised, as far as possible, to facilitate and promote public access to information, promptly and at the lowest reasonable cost.
The FOI Act provides for the individual’s right of access to documents, defined to include any written or printed matter and any photograph held by any Commonwealth government body. Exemptions were provided, allowing secrecy to be maintained for various matters including financial confidentiality of the Commonwealth, Security, Cabinet and Executive Council documents on the minister issuing an “inclusive certificate” that an exemption applied. However, the efficacy of the FOI Act was severely compromised
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Australia is an island surrounded by Navigation Acts … and vexatious regulations of all descriptions. John Edward Burke, Australian Dictionary of Biography.
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by the 2006 decision of the High Court in McKinnon v Secretary, Department of Treasury [2006] HCA 45 which held that the Administrative Appeals Tribunal (AAT) did not have power to substitute its opinion for that of the relevant minister about whether disclosure would be contrary to the public interest or to assess for itself what the public interest required. Amendments to the FOI Act were introduced in 2010 appointing an Information Commissioner with power to review government decisions to deny access and to monitor the performance of the FOI process. Exemptions are now subject to a new single public interest test weighted to disclosure. Access to a conditionally exempt document can only be denied if, in the circumstances, access at the time would on balance be contrary to public interest. Under this test factors favouring disclosure include the objects of the FOI Act, informing debate on matters of public importance, promoting effective oversight of public expenditure and allowing a person access to their own personal information. Factors that cannot be considered include potential loss of confidence in or embarrassment to the government, and the high seniority of the author of a document.
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Whistleblowing [4.320] The US consumer activist Ralph Nader has described “whistleblowing” as “an act of a man or woman who, believing the public interest overrides the interest of the organisation he or she serves, publicly blows the whistle if the organisation is involved in corrupt, illegal, fraudulent and harmful activities”. There has been a growing awareness in Australia of the issues associated with whistleblowing and the importance of protecting those who risk personal and professional retaliation for making public disclosures of corruption or maladministration. Each State and Territory has “whistleblower” legislation to provide protection for public officials disclosing corrupt conduct, maladministration and waste.
Before I became President I realized and was warned that dealing with the Federal bureaucracy would be one of the worst problems I would have to face. It’s been even worse than I had anticipated. Jimmy Carter, New York Times (26 April 1978).
The Public Interest Disclosures Act 1994 (NSW), for example, has the following object: (1) The object of this Act is to encourage and facilitate the disclosure, in the public interest, of corrupt conduct, maladministration, serious and substantial waste, government information contravention and local government pecuniary interest contravention in the public sector by: (a) enhancing and augmenting established procedures for making disclosures concerning such matters, and (b) protecting persons from reprisals that might otherwise be inflicted on them because of those disclosures, and (c) providing for those disclosures to be properly investigated and dealt with. (2) Nothing in this Act is intended to affect the proper administration and management of an investigating authority or public authority (including action that may or is required to be taken in respect of the salary, wages, conditions of employment or discipline of a public official), subject to the following: (a) detrimental action is not to be taken against a person if to do so would be in contravention of this Act, and (b) beneficial treatment is not to be given in favour of a person if the purpose (or one of the purposes) for doing so is to influence the person to make, to refrain from making, or to withdraw a disclosure. 148
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Chapter 4 The Executive and Law-making by Administrative Agencies
A federal whistleblower law was enacted in 2013. The Public Interest Disclosure Act 2013 (Cth) has the following objects (s 6): (a) to promote the integrity and accountability of the Commonwealth public sector; and (b) to encourage and facilitate the making of public interest disclosures by public officials; and (c) to ensure that public officials who make public interest disclosures are supported and are protected from adverse consequences relating to the disclosures; and (d) to ensure that disclosures by public officials are properly investigated and dealt with.
Given that this chapter is addressing the Executive branch of government, the disclosure of whistleblowing above has addressed only whistleblowing in relation to the public sector. This is nevertheless a convenient context in which to note that strengthened private sector whistleblower protection laws are expected to be passed by the Federal Parliament in 2018. The Treasury Laws Amendment (Enhancing Whistleblower Protections) Bill 2017, once enacted, will create a single consolidated regime under the Corporations Act 2001 (Cth) extending protections to whistleblowers across the corporate, financial and credit sectors. Under the current laws contained in the Corporations Act, to qualify for whistleblower protection a person must:
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• be a current officer, employee or contractor of a company; • make a disclosure to ASIC, the company’s auditor or an officer or senior manager of the company in good faith; • have reasonable grounds to suspect that the company, an officer or employee has or may have contravened the Corporations Act; and • not make the disclosure anonymously. The key changes to be introduced under the Bill, as summarised by William Roberts Lawyers, include: • extending whistleblower protections to a broader range of individuals, including former employees, officers, associates and suppliers of a company, as well as an employee’s relatives or dependents; • widening the category of recipients who can receive a protected disclosure from a whistleblower, including supervisors, APRA and the Australian Federal Police; • the introduction of the concept of “emergency disclosure” where a whistleblower can make a disclosure to third parties such as a journalist when it is perceived that there is an imminent risk of serious harm or danger to public health or safety or to the financial system (in circumstances where the whistleblower had previously made a protected disclosure); • allowing for anonymous disclosure. The Court will be required to preserve and protect a whistleblower’s identity, unless it is in the interests of justice to do otherwise; • removing the onus on the whistleblower to demonstrate that they were acting in good faith; Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:03:43.
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• expanding the scope of matters that can be disclosed to include corporate corruption, bribery, fraud, money laundering, terrorist financing or other serious misconduct; and • broadening the options of redress for victimised whistleblowers such as injunctions, an apology, reinstatement of employment and access to monetary compensation, regardless of when the disclosure was made. In addition, adverse costs orders will only be made in limited circumstances, namely, where the whistleblower is found to have vexatiously initiated the proceedings or has unreasonably caused the other party to incur costs.
Merit review: The Administrative Appeals Tribunal
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The possibility of avoiding decisions increases in proportion to the square of the number of members on the committee. S S Rangnekar, The Wonderland of Indian Managers (South East Asia Books, 1998).
[4.330] The Administrative Appeals Tribunal (AAT) was established in 1976 under the Administrative Appeals Tribunal Act 1975 (Cth) with wide-ranging jurisdiction to hear appeals from the decisions of Ministers, officials and agencies made under more than 400 Commonwealth Acts and legislative instruments. The potential range of jurisdiction is enormous; from the refusal to renew a pilot’s licence to the deregulation of a tax agent or a deportation order. In July 2015 the Migration Review Tribunal, the Refugee Review Tribunal and the Social Security Appeals Tribunal merged with the AAT which now has wide jurisdiction to review a wide range of decisions made by the Australian Government. Administrative tribunals differ significantly from courts: in particular they form part of the executive government, and are not –as courts are –independent of it. From that distinction flows a most important consequence. The AAT may exercise all the powers and discretion conferred on the person who made the decision being reviewed. The AAT may resemble a court in many aspects of procedure and structure but its essential distinguishing characteristic is that it exercises administrative authority, not judicial authority. Part of the significance of that distinction has been explained by the Federal Court in Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 at 68, in these terms:
In Heaven there will be no law, and the lion will lie down with the lamb … in Hell there will be nothing but law, and due process will be meticulously observed. Grant Gilmore.
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The function of the Tribunal is … an administrative one. It is to review the administrative decision that is under attack before it. In that review, the Tribunal is not restricted to consideration of the questions which are relevant to a judicial determination of whether a discretionary power allowed by statute has been validly exercised. Except in a case where only one decision can lawfully be made, it is not ordinarily part of the function of court either to determine what decision should be made in the exercise of an administrative discretion in a given case or, where a decision has been lawfully made in pursuance of a permissible policy, to adjudicate upon the merits of the decision or the propriety of the policy. That is primarily an administrative rather than a judicial function. It is the function which has been entrusted to the Tribunal.
It follows that the AAT, reviewing the exercise by the bureaucracy of the powers and discretions conferred upon it, may substitute its own decision in place of that of the bureaucrat, whereas a court will normally be confined to ensuring that that person has followed proper procedures. The review by the AAT is “on the merits”. As the AAT states on its website (http://www.aat.gov.au), “this means that we take a fresh look at the facts, law and policy relating to the decision and arrive at our own decision”. The Tribunal may substitute what it regards as the “right or preferable
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Chapter 4 The Executive and Law-making by Administrative Agencies
decision” (Re Becker and Minister for Immigration and Ethnic Affairs (1977) 1 ALD 158 at 161 per Brennan J). The role of the AAT is performed in the States and Territories by a range of tribunals with similar roles. Increasingly these tribunals have morphed from Administrative Tribunals to Civil and Administrative Tribunals with the power not only to review administrative decisions but also to resolve commercial and consumer disputes.
Judicial review of administrative decisions [4.340] Judicial review plays an important role in Australia’s system of government as a means of ensuring the accountability of public officials for the legality of their actions. Judicial review is generally concerned with the lawfulness of an administrative decision. As Brennan J stated in Church of Scientology v Woodward [1982] HCA 78 at [5]:
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Judicial review is neither more nor less than the enforcement of the rule of law over executive action; it is the means by which executive action is prevented from exceeding the powers and functions assigned to the executive by law and the interests of the individual are protected accordingly.
[4.350] The enormous scope and significance of decisions taken by the administration has meant that for a long time the common law has made available remedies for those who have suffered damage because of a wrong administrative decision. Traditionally, the remedy has been for the court to issue a prerogative writ. Such writs are of ancient origin and provide a mechanism whereby the court may order an administrative officer, or tribunal, to act or to refrain from acting in a particular manner. Historically, the most significant of these writs have been:
Judicial review in Australia has been described as an “extremely dense and complex patchwork”, which is “daunting to an outsider peeking into Australian judicial review law”. M Taggart, “Australian ‘Exceptionalism’ in Judicial Review” (2008) 36 Federal Law Review 1 at 6.
• habeas corpus, whereby a person imprisoning another is directed to bring that other before a court; • mandamus, whereby the performance of an administrative duty is ordered; • certiorari, whereby a record of an administrative decision must be produced to permit its review by the court; and • prohibition, whereby the administrative officer or tribunal is forbidden from exceeding its powers. [4.360] In addition to the prerogative writs historically available in the common law courts, the equity courts also developed remedies for administrative excess, in particular the injunction. All of these remedies are available only at the discretion of the court, which may refuse an applicant for many reasons, including delay, the availability of alternative remedies, bad faith and that the remedy sought is too harsh. [4.370] The constraints imposed on the courts by the antiquity of these remedies led, in 1977, to the introduction into Federal Parliament of the Administrative Decisions (Judicial Review) Act 1977 (Cth). The then Attorney-General (R J Ellicott QC) described the proposed operation of the Act as follows (House of Representatives, Hansard (28 April 1977) at 1394-1395):
Civilisation is doomed unless some way can be found to check the growth of bureaucracy; and the only hope for the human race is for the rate of population increase to continue to exceed that of bureaucratic growth. Arthur Robinson.
The present law relating to the review by the courts of administrative decisions is in a most unsatisfactory state … The law in this area is clearly in need of reform –indeed, it could Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:03:43.
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Business and the Law be said to be medieval … What the present Bill seeks to do is to establish a single simple form of proceeding in the Federal Court of Australia for judicial review of Commonwealth administrative actions as an alternative to the present cumbersome and technical procedures for review by way of prerogative writ, or the present actions for a declaration or injunction … Judicial review by the Federal Court of Australia will not be concerned at all with the merits of the decision or action under review. The only question for the Court will be whether the action is lawful, in the sense that it is within the power conferred on the relevant Minister or official or body, that prescribed procedures have been followed and that general rules of law, such as conformity to the principles of natural justice, have been observed. The court will not be able to substitute its own decision for that of the person or body whose action is challenged in the court. It will be empowered to enjoin action or to quash a decision it finds unlawful and to direct action to be taken in accordance with the law. It will also be able to compel action by a person or body who has not acted, but who ought to have done so. We must see to it that the stream of British freedom –which has been kept clear by the decisions of the judges –does not perish in the bogs of departmental decisions. Lord Denning, Freedom under the Law (Stevens & Sons, 1949).
[4.380] As explained above, it is the function of the court, when reviewing an administrative decision, to determine the existence of a ground for review, not to debate the merits of the decision itself. The grounds for review are set out in s 5(1) of the Act as follows: (a) that a breach of the rules of natural justice occurred in connection with the making of the decision; (b) that procedures that were required by law to be observed in connection with the making of the decision were not observed; (c) that the person who purported to make the decision did not have the jurisdiction to make the decision;
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(d) that the decision was not authorised by the enactment in pursuance of which it was purported to be made; (e) that the making of the decision was an improper exercise of the power conferred by the enactment in pursuance of which it was purported to be made; (f)
that the decision involved an error of law, whether or not the error appears on the record of the decision;
(g) that the decision was induced or affected by fraud; (h) that there was no evidence or other material to justify the making of the decision; (i)
that the decision was otherwise contrary to law.
Where the court is satisfied that a sufficient ground is established and that the decision was not a lawful decision it may set aside that decision and make an “order of review”, the statutory substitute for the old common law remedies. Making the order of review is a discretionary matter for the court which will do so if it is in the interests of justice. In essence the order of review may quash the decision, remit the decision to the original decision-maker to remake the decision in accordance with the law or make an order (s 16):
152
(a)
declaring the rights of the parties; or
(b)
ordering them to refrain from doing something; or
(c)
to perform some act.
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Chapter 4 The Executive and Law-making by Administrative Agencies
IN CONTEXT
Natural justice and judicial review of the executive [4.390] The matters set in s 5(1) of the Administrative Decisions (Judicial Review) Act 1977 (Cth) as grounds for judicial review require the court to be satisfied that the administrative decision was a proper exercise of administrative power, in particular, that there was no breach of natural justice. This doctrine enshrines principles of a fair hearing and the absence of bias. These two principles were explained by Marks J in Gas and Fuel Corporation of Victoria v Wood Hall Ltd [1978] VR 385 at 396:
Give me your tired, your poor, your huddled masses, yearning to be free … Inscription on the Statue of liberty, New York.
The first is that an adjudication must be disinterested and unbiased … The second principle is that the parties must be given adequate notice and opportunity to be heard … each of the two principles may be said to have sub-branches or amplifications. One amplification of the first rule is that justice must not only be done but appear to be done … Sub-branches of the second principle are that each party must be given a fair hearing and a fair opportunity to present its case. Transcending both principles are the notions of fairness and judgment only after a full and fair hearing given to all parties.
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However, the precise content of “natural justice” is capable of adapting for contemporary notions of administrative fairness. Justice Kirby observed in Osmond v Public Service Board NSW Court of Appeal (1984, unreported) that: The development of administrative law by the judges in England, Australia and elsewhere has frequently seen the advancement of the notion of natural justice by reference to the criterion of “fairness”. True it is this criterion is uncertain of content. But that has advantages as well as disadvantages. It permits the courts to give the obligation appropriate content, according to the notions of fairness and justice as discerned by the judges from time to time. What may have been required by standards of fairness in a world of relatively few tribunals, circumscribed statutory privileges, lower levels of general public education and community expectations of the public service, will change with the growth of administration, the conferment of numerous statutory privileges, the advancement of public education and the enlargement of the community’s demand for accountability on the part of public administrators. These social changes elicit responses from the legislatures, as has been mentioned. But they also elicit development of administrative law by the judges, responding in accordance with our legal traditions, to the changing times. Such responses will occur, not in the face of legislative intent to the contrary but to supplement legislation, by rules developed to meet the myriad of circumstances presented in cases coming before the courts.
Give me your tired, your poor, your huddled masses yearning to be free, provided they have satisfactorily filled out forms 3584A through 3597Q. Dwight MacDonald, Against the American Grain (1963).
Isbester v Knox City Council [2015] HCA 20 [4.400] The High Court considered an appeal from the Victorian Court of Appeal concerning an application
for judicial review of a decision to have the appellant’s dog destroyed, where, the appellant alleged, one of the decision-makers was biased as she was the council officer who had given the instruction to prosecute in relation to an attack by the dog as well as the decision to have it put down. The High court held (at [50]) that:
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Business and the Law A fair-minded observer might reasonably apprehend that Ms Hughes might not have brought an impartial mind to the decision under s 84P(e) [to have the dog put down]. This conclusion implies nothing about how Ms Hughes in fact approached the matter. It does not imply that she acted otherwise than diligently, and in accordance with her duties, as the primary judge found, or that she was not in fact impartial. Natural justice required, however, that she not participate in the decision and because that occurred, the decision must be quashed.
QUESTIONS 1.
What is the role of the executive arm of government?
2.
Discuss the reasons for, and the problems inherent in, delegated legislation. What procedures are available to review delegated legislation?
3.
“I suggest that it is a fundamental truth of our existing constitutional arrangements that the executive has got out of control …”: Palmer G, Unbridled Power (2nd ed, Oxford University Press, 1987).
Give your reasons for agreeing or disagreeing with this proposition.
4.
Outline and assess the procedures available for a citizen to seek relief or challenge an administrative decision.
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WEB REFERENCES Australian Lawyers’ Alliance http://www.lawyersalliance.com.au Commonwealth Ombudsman http://www.ombudsman.gov.au Whistleblowers Australia http://www.whistleblowers.org.au
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5
5
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Commercial Dispute Resolution Andrew Terry THE BUSINESS CONTEXT Disputes are regrettably inevitable in business. In the words of the September 2009 Access to Justice Report (Access to Justice Taskforce, A Strategic Framework for Access to Justice in the Federal Civil Justice System) “people have, and will continue to have, disputes”. Fortunately most disputes are resolved “without recourse to formal legal institutions or dispute resolution mechanisms” through communication, compromise and common sense. Indeed the relationship between the disputing parties may actually be enhanced by this exercise. But it may not be and resort to the formal dispute resolution processes may be necessary. This chapter reviews the main available mechanisms – litigation, arbitration and alternative dispute resolution (ADR).
5.1
RESOLVING COMMERCIAL DISPUTES ........................................................................................................... 156
[5.10]
The dispute resolution system .................................................................................................................. 156
[5.50]
Small Business Commissioners ................................................................................................................ 158
5.2
LITIGATION .............................................................................................................................................................. 159
[5.80]
Legal process and proceedings ................................................................................................................ 160
[5.110]
Burden and standard of proof ................................................................................................................... 161
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[5.130]
The pleadings ............................................................................................................................................... 162
[5.160]
Interrogatories and discovery ................................................................................................................... 163
[5.200]
Facilitating litigation: Class actions and litigation funding ................................................................ 164
5.3
ARBITRATION .......................................................................................................................................................... 170
5.4
ALTERNATIVE DISPUTE RESOLUTION ........................................................................................................... 171
[5.320]
The development of ADR .......................................................................................................................... 171
[5.330]
Definition of ADR ....................................................................................................................................... 172
[5.340]
The advantages of ADR .............................................................................................................................. 172
[5.350]
Activating ADR ............................................................................................................................................ 173
[5.360]
ADR techniques ........................................................................................................................................... 174
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5.1 RESOLVING COMMERCIAL DISPUTES Discourage litigation. Persuade your neighbours to compromise whenever you can. Point out to them how the nominal winner is often a real loser –in fees, expenses, and waste of time. As a peace-maker, the lawyer has a superior opportunity of being a good man. There will be business enough. Abraham Lincoln.
The dispute resolution system
IN CONTEXT
Access to Justice and the Rule of Law [5.10] Access to justice is central to the rule of law and integral to the enjoyment of basic
human rights. It is an essential precondition to social inclusion and a critical element of a well-functioning democracy … An effective justice system must be accessible in all its parts. Without this, the system risks losing its relevance to, and the respect of, the community it serves. Accessibility is about more than ease of access to sandstone buildings or getting legal advice. It involves an appreciation and understanding of the needs of those who require the assistance of the legal system. While courts are an important aspect of the justice system, there are many situations where courts are the last place people will get the outcome they are looking for to resolve issues. Often a full blown court case will be completely disproportionate to the issues in dispute … The critical test is whether our justice system is fair, simple, affordable and accessible. It is also important that the system provides effective early intervention to help people resolve problems before they escalate and lead to entrenched disadvantage. People must be able to understand the law if it is to be effective. R McClelland, Attorney- General, Foreword to Report by Access to Justice Taskforce, A Strategic Framework for Access to Justice in the Federal Civil Justice System (September 2009)
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Chapter 5 Commercial Dispute Resolution
[5.20] There is a spectrum of mechanisms available for commercial dispute resolution. This chapter addresses the three most significant mechanisms –litigation, arbitration and ADR.
IN CONTEXT
It will be remembered that the earliest appearances of law was as a substitute for the private feuds between families or clans. Oliver Wendell Holmes.
Dispute resolution processes
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[5.30] PREVENTING DISPUTES
NEGOTIATION
You and the other people involved: • talk and listen to each other • consider what impact your actions (or not acting) have on other people • try to understand each other’s points of view.
You and the other people involved talk to each other and work together to try to resolve the dispute.
PROCESSES THAT GIVE YOU ADVICE
PROCESSES THAT HELP YOU For example: mediation, Ombudsman You and the other people involved in the dispute, with help from a third person, try to reach an agreement.
DISPUTE RESOLUTION PROCESSES
For example: conciliation, neutral evaluation, Ombdsman A third person gives you and the other people involved in the dispute expert advice to help you reach an agreement.
PROCESSES THAT MAKE A DECISION For example: artbitration, Ombudsman, courts and tribunals
A third person listens to everyone and makes a decision on how the dispute will be resolved.
The National Alternative Dispute Resolution Advisory Council advise that when choosing the best dispute resolution process, a number of issues need to be considered: • how the other people involved want to manage the dispute • whether you want an independent person involved and, if you do, what you want them to do • how structured you want the dispute resolution process to be • what sort of relationship you want to have with the other people involved • how much you are prepared to spend –in time and money
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• how much control you want over the process • how much control you want over making a decision or agreement. NADRAC, Your Guide to Dispute Resolution (2012) p 7 http://www.ag.gov.au/LegalSystem/
IN CONTEXT
Access to justice
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[5.40] People have, and will continue to have, disputes. Mostly these are resolved without resorting to the machinery of formal justice (such as lawyers, courts or dispute resolution services). Access to justice should include resilience: reinforcing and enhancing the capacity of people to resolve disputes themselves. However, the Government has a role in ensuring that there are mechanisms available to resolve disputes lawfully, peacefully and fairly, and to reinforce the fundamental principles that are embodied in laws. An accessible and effective way of resolving disputes is therefore central to the rule of law. Without it, disputes are either unresolved or dispute resolution is driven underground. In either case, the outcome is a loss of confidence in the rule of law and the expectation that society has the capacity to ensure cooperation is respected and rewarded. In this scenario, those with resources or other strengths would tend to prevail, regardless of the fairness of the outcome, depriving people of the enjoyment of legitimate rights and interests and encouraging lawlessness. That has impacts for individuals in respect of immediate disputes, but is more generally damaging on social cohesion and the fundamental basis of the economic cooperation that is the basis of social progress. Access to Justice Taskforce, A Strategic Framework for Access to Justice in the Federal Civil Justice System (September 2009).
Small Business Commissioners [5.50] While the primary responsibility for litigation-proofing a business lies in the due diligence and compliance practices of individual businesses, the real challenges for small business are acknowledged. Over the last few years most States have established Small Business Commissioners to represent the interests of small business. Small Business Commissioners can investigate complaints about unfair market practices affecting small business, and provide low-cost or subsidised ADR services for small businesses, to facilitate the mediation of disputes. The website of the NSW Small Business Commissioner explains that: The Office of the NSW Small Business Commissioner is your first stop if you have a commercial dispute. Our role is to help you find a solution, ideally through the use of negotiation, information and/or mediation, rather than litigation. 158
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Chapter 5 Commercial Dispute Resolution The first thing we do is listen to you and try to help you identify the key parts of the problem. We can give you strategic and procedural advice to help you “help yourself” and sort out whatever issues are getting in the way of your business success. If the problem continues, we are happy to also talk to the other side about it, to hear their perspective and help identify what needs to be addressed to allow both parties to get on with their businesses. We call this our informal mediation service. We can help you identify the key areas of focus and most importantly, we help you take your own side effectively. Where problems are too complex to be dealt with over the phone we arrange a formal mediation session for everyone to sit down and work through the issues. Our staff are formally trained to mediate commercial disputes, and we help all parties. In addition, we have a panel of independent professional mediators with a wide range of commercial experience. With our help, most parties can work out their problems before needing a court or tribunal decision.
At the federal level a small business ombudsman has been established under the Australian Small Business and Family Enterprise Ombudsman Act 2015 (Cth). The Ombudsman acts as an advocate for and advisor to small business and family enterprises, and has key functions in relation to advocacy and policy development and assistance with dispute resolution.
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5.2 LITIGATION [5.60] Although the development of a system of courts for the resolution of disputes is one of the finest achievements of mankind and a bastion against arbitrariness, despotism and the need for disputants to take the law into their own hands, there are disadvantages within the traditional system. Obstacles as cost and delay, coupled with questions as to the suitability of the adversarial process in the resolution of modern commercial issues, have led to the evolution of techniques known as alternative dispute resolution (ADR) (see [5.310]). In many, perhaps most cases, going to court over a dispute is the least satisfactory way to resolve a dispute. It is costly, stressful, time consuming, public, formal, inflexible and leads to a win/lose result in which even the “winner” is a “loser” having regard the cost and time and diversion from normal business and damage, usually fatal, to any ongoing business relationships.
Last year Aboriginal artist Terry Yumbulul from Arnhem Land revealed that he was caught by surprise when his design turned up on the $10 note. Yumbulul is interviewed on this Sunday’s Review on ABC-TV, during which he observes that in the distant past he wouldn’t have had to resort to legal avenues. “People who copied designs,” he said, “simply got speared on the spot”. Sydney Morning Herald (29 March 1990).
IN CONTEXT
The role of the courts in the federal civil justice system [5.70] The importance of courts in the justice system reflects their essential role in the
maintenance of the rule of law and their status as one of the three constitutional arms of Government. The courts properly decide the most complex, vexed and entrenched disputes not capable of resolution by other means or where the parties need or desire an adjudicated statement of the law. The role of courts in the federal civil justice system is heavily informed by their constitutional role (under Chapter III of the Commonwealth Constitution) as the institutions empowered to exercise the judicial power of the Commonwealth. This informs, particularly, the role of the courts in deciding disputes where the issue in dispute is the content of the relevant law.
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The exclusive role of the courts is: • deciding disputes about the content of the … law • creating or altering legal rights where that power is exclusively granted to the court by statute (where a court order is the only means by which it can be achieved …, and • use of coercive powers. Access to Justice Taskforce, A Strategic Framework for Access to Justice in the Federal Civil Justice System Access to Justice Report (September 2009) p 99.
Legal process and proceedings
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The adversary system
I’m all for the lawyer- led recovery, the economy needs something, but perhaps there could conceivably be some other way lawyers could be kept off the streets than spending a year or so doing cases. J Rogers, Business Review Weekly (7 August 1992).
[5.80] When an issue –either civil or criminal –requires resolution by a court, a trial takes place. The normal method of trial in the past has been by judge and jury. In fact for some years now, few civil cases have been tried in this way. Now they are usually resolved by a judge alone. (The Federal Court of Australia Act 1976 (Cth) allows a jury trial if “the ends of justice appear to render it expedient” (s 40) but the normal mode of trial is by judge alone.) Whether a jury is involved or not, an Australian trial proceeds on what is called the adversary principle. Each party to a dispute presents their case to the court (through their lawyers) and the more successful is the winner. The rules of procedure and evidence are so complex that, quite apart from the difficulties in ascertaining the law according to precedent, the system may frequently deliver a result in favour of the party who wins the procedural battle, without discovering the real truth. What can be said in favour of it is that its primary function is not just to reach a decision and prevent the extension of conflict, but rather to discover the merits of the case and decide accordingly. Nevertheless, in many respects it is more a contest between the parties than an inquiry into the truth.
IN CONTEXT
The adversary system [5.90] The essential features of the adversary system have been listed by Sir Richard
Eggleston (“What is Wrong with the Adversary System?” (1975) 49 Australian Law Journal 428 at 428), a former justice, as including the following: • The conduct of litigation up to the point of trial is left entirely in the hands of the parties. • The procedure is designed to concentrate the judicial function into one continuous hearing. • Evidence at the trial is elicited by the parties asking questions in turn, the judge being generally forbidden to call witnesses or to examine them other than to clarify their evidence where it is unclear.
160
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Chapter 5 Commercial Dispute Resolution
The most often cited disadvantages of the adversary system are that: • The parties decide for themselves which evidence to bring forward and which to endeavour to conceal. • The procedural and evidentiary rules place difficulties in the way of a witness trying to give evidence naturally. • The party who can pay the highest fees will have an advantage, just as physical attributes rather than truth may have decided the duel [in past centuries].
The inquisitorial system [5.100] The alternative procedure is the inquisitorial system common in the civil law jurisdictions of continental Europe under which the judge or investigator, usually a government official rather than one appointed from the ranks of practising lawyers, is an inquisitor actively seeking out the facts rather than acting as an impartial referee in hearing the cases put by the opposing parties. Lawyers for the parties have limited roles and in many instances, even in criminal trials, juries are dispensed with. Inquisitorial procedures are being increasingly adopted in non-judicial dispute resolution processes.
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Burden and standard of proof Burden of proof [5.110] In any case, the burden or onus of proving the truth of what is asserted rests on the party asserting it. The “burden” of proving an issue in criminal trials rests on the prosecution. In civil trials the general burden of proof rests on the plaintiff. However, if particular issues are raised by the defendant, the onus of proving them shifts to the defendant. In civil cases the burden may shift at different times during the hearing as one party establishes her or his case or a relevant part of it. The burden generally rests on the plaintiff at the start of proceedings to assert her or his case and thereafter it rests on whichever party would lose if the court gave its decision without hearing further evidence.
[T]he reality must be recognised that litigation may not be a practical option for all disputants and may not deliver its promised protections. What is required is a range of effective and efficient dispute resolution processes, including both litigation and alternatives to litigation, which complement the formal justice system and all of which are readily available to disputants. H Astor and C M Chinkin, Dispute Resolution in Australia (Butterworths, 1992).
Standard of proof [5.120] The degree to which the facts must be established depends upon whether the case is a civil or a criminal case. It is well-established law that while in civil cases the standard of proof requires a simple preponderance of evidence, criminal charges must be proved by the prosecution beyond reasonable doubt; that is, a higher onus is imposed. The civil standard simply requires the plaintiff to establish the case on a balance of probabilities –that it is more likely than not that she or he should succeed. Because of the more serious consequences of criminal charges the higher standard is imposed in criminal cases.
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The pleadings
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Instituting legal action
Defense counsel: Are you sure you did not enter Seven-Eleven on 40th and NE Broadway and hold up the cashier on June 17 of this year? Defendant. I’m pretty sure. R Jones, M Sevilla and G F Uelmen, Disorderly Conduct: Verbatim Excerpts from Actual Cases (WW Norton, 1989).
[5.130] Civil proceedings are commenced by summons or statement of claim. These documents form part of the pleadings and outline the claim or demand of the plaintiff. The document will normally only assert the facts and not the evidence which will later be used to prove them. For this reason it is open to the criticism that it may not be particularly informative. In response to the statement of claim the defendant files a defence which responds to each allegation in the statement of claim, either admitting or denying them. If the defendant relies on facts other than those in the statement of claim, these must be asserted in her or his defence. If the defendant also asserts some wrongdoing on the part of the plaintiff, then a counterclaim will be filed. In many cases, significant parts of the pleadings are drafted for procedural and tactical reasons rather than in a real endeavour to identify and resolve the matters in dispute, so that obstacles are put in the way of the parties resolving their dispute at an early stage. [5.140] Criminal proceedings, on the other hand, are initiated by the launching of a prosecution against the defendant. The initial pleading procedure here is usually replaced by the police investigation and interrogation of those “helping them with their enquiries”. It is not only the police and the state that can institute criminal proceedings; any citizen may prosecute for an offence of a “public nature” although private prosecutions are rare. Criminal prosecutions generally commence by summons or a process whereby the accused is arrested and charged. Serious criminal prosecutions are generally preceded by committal proceedings in which a magistrate is required to determine whether the case should proceed to trial.
IN CONTEXT
Complex litigation [5.150] The case of RACV Insurance Pty Ltd v Unisys Australia Ltd [2001] VSC 300 is the
subject of a case study in Chapter 18 (see [18.1070]). For present purposes it is interesting to note the comments of the trial judge as to the conduct of the case and the contemporary context of legal proceedings. He observed (at [3], [8]) that: these two corporations, apparently possessed of sufficient if not spare resources to enable them to do so, have now devoted relatively huge amounts of time and money in slugging it out in court for 32 days in an unedifying and possibly pointless fight over past events, in a contest as to who was at fault … It is appropriate to make some reference to the nature and size of the trial which took 32 sitting days … The evidence was of a factual and technical nature concerning the computer system. To the close to evidence the transcript ran to 2,731 pages. It extended to 3,178 pages by the close of final addresses in which counsel spoke to written submissions which ran to 378 pages and five supporting files of authorities … At the outset of the trial the court book consisted of 49 lever arch files (vol 1 devoted to the pleadings) which contained 18,935 pages. I also was given another lever arch
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Chapter 5 Commercial Dispute Resolution
file which contained the December 1993 agreement and which seemed to comprise several hundred pages at least. When finally tendered at the conclusion of evidence the court book was reduced, by the agreed discarding of thousands of pages, to 28 volumes including vol 1 containing the pleadings. I am, however, left with many thousands of pages of oral and documentary evidence. In the practical world, in which other litigants are prevented, by litigation such as the present indulged in by parties with deep pockets, from getting their cases on, or the time I can take to discuss and analyse the documents and the evidence in this judgment, let alone scour the thousands of pages to see what is there to which little or no reference has been made. I am, as I must be, guided by counsel’s final addresses in identifying the issues and the relevant materials. I emphasise though, that even then, they did not at that stage refer to every possible piece of evidence. That is for the obvious reason that it was impractical to do so and because so much of it was not necessary to refer to for the resolution of the issues as they were finally left for determination.
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Interrogatories and discovery [5.160] While pre-trial procedures in criminal matters are brief, except for the matter of obtaining an order for the release of the person charged upon appropriate bail arrangements, there may be further action to be taken in civil cases. With a view to narrowing the issues and establishing some of the facts one party may deliver interrogatories to the other. These constitute a series of questions requiring written answers on oath. The discovery procedure may also be used. It requires a named person to declare on oath all relevant documents in her or his possession and to state the whereabouts of other documents not in her or his possession. Inspection of those documents is then allowed, to speed up the proceedings. Interlocutory orders may also be sought from the court. These may simply involve obtaining an order for the correction of incomplete pleadings or for compliance with requests for interrogatories or discovery. More importantly, the court has power to grant either interim injunctions, which are granted as a matter of urgency to preserve an existing position until there is time to hear the other side, or more permanent injunctions which are granted after both sides have been heard and which restrain the other party from acting in a particular way (for instance selling a painting) until the case has been finalised.
The trial [5.170] After pre-trial matters are completed the case moves to a hearing in a civil matter the plaintiff (usually through a barrister) opens the case by explaining it and foreshadowing the evidence to be called. The plaintiff’s witnesses are then called to give evidence. Their initial evidence is known as evidence in chief. On completion of evidence in chief the witness may be cross-examined by the other party. Thereafter the party who called the witness is entitled to re-examine that witness, but only on matters arising out of the cross- examination or to clarify answers given during cross-examination. In criminal trials the evidentiary procedure is similar. The case will be opened by the prosecution. In criminal trials, and in civil trials with a jury, the decision on the facts will be made by the jury. In a criminal case therefore, the jury decides on the question of
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guilt or innocence after receiving legal directions and a summing-up from the judge. The judge will then decide upon the sentence. In civil trials the jury will determine which version of the facts has been established on the balance of probabilities and the judge will then apply the law. Where no jury has been used the judge decides the questions of fact also. The prisoner had been truculent throughout the trial, even to the extent of dismissing his counsel. The judge was about to pass sentence but firstly asked the prisoner if he had anything to say. “Bugger all” muttered the prisoner. The judge leaned over to his clerk and said, “Did I hear the accused say something?” “He said ‘bugger all’, my lord”, replied the clerk. “That’s strange”, said the judge, “I could have sworn I saw his lips move”. E Phillips, The World’s Best Lawyer Jokes (Fontana Press, 1993).
The court order [5.180] A court order in a civil case is legally binding and can be entered in a number of ways including a writ for levy of property (under which a sheriff or bailiff can seize assets which can be sold to pay the debt) and garnishee orders (under which money can be taken from bank accounts and wages).
Appeals [5.190] After the decision in the initial trial the parties have rights of appeal, although in most instances these are restricted to re-examining questions of law rather than matters of fact. With respect to the High Court, in nearly all cases, the special leave of that court must be obtained before an appeal can proceed. That special leave is not readily granted. The appellant usually has to show compelling reasons of justice or that a question of law of public importance is involved. If leave is granted the appeal may be heard by the whole court of seven justices or by a smaller number. Most appeals within the State and federal courts are heard by three justices. Unanimity in the decision is not necessary and from the appellant’s point of view the important thing is simply to convince a slim majority at the last appeal.
Facilitating litigation: Class actions and litigation funding [5.200] Those readers who have watched the movie Erin Brockovich (for which Julia Roberts won the best actress Academy Award) will be familiar with the power of contingency-fee class actions to bring a civil action for damages which for reasons of cost and practicality would not otherwise be available. Class actions –in which a group of people can join together to pursue legal action against a common defendant –and contingency fees –in which the legal action is funded by the plaintiff’s lawyer in return for an agreed percentage of any damages awarded –have long been features of the US legal system. They are now, with some qualifications, part of Australia’s legal system. The most obvious difference is that while contingency fees are not part of our legal system (except to a limited extent under which a lawyer can present a case on a no-win-no-fee basis for a premium on the normal fee but not for a percentage of damages awarded) a third party litigation funder can.
Class actions [5.210] Class actions allow groups of people to join together to pursue legal action against a common defendant where their claims are substantially similar, and there is a common issue of law. Such actions are available in the States to a limited extent and under the federal jurisdiction. The federal procedure introduced by the Federal Court of Australia Amendment Act 1991 (Cth) allows a class action wherever at least seven 164
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Chapter 5 Commercial Dispute Resolution
people join in a claim. It is not necessary for those initiating the proceedings to obtain the prior consent of all potential members of the group of plaintiffs. Those who would otherwise be members of the group are entitled by written notice to choose not to be members. Failing that they are joined in the action whether they are aware of it or not. There are many situations when a group of people may be similarly affected by the actions of another –eg shareholders in a company or passengers on a cruise ship. While it may not be practicable for reasons of cost for an individual to bring a legal action, an action by an individual on behalf of the class of persons affected, and to which all contribute, changes the dynamics dramatically. Ligation funding in which the litigation is funded by a third party on a no-win, no-fee basis, the class action is an even more powerful strategy.
Massive Class Action Launched Against Retail Super Funds The New Daily (11 September 2018)
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Law firm Slater and Gordon is launching what could become Australia’s largest ever class action after inviting millions of Australians to claw back fees from retail super funds. Slater and Gordon said its “Get Your Super Back” class action will be launched in light of evidence that Australians may have been charged excessive fees and subjected to uncompetitive cash interest rates. “Slater and Gordon will take on the banks on behalf of millions of Australians whose retirement savings may have been gouged by bank-owned super funds lining their pockets,” the firm said in a statement. “The firm will allege the big bank-backed super funds failed to obtain for members competitive cash interest rates on cash option funds, and
charged exorbitant fees, affecting millions of members who held part or all of their superannuation in bank owned funds.” While the scope of the class action is yet to be determined, official data shows there are some 28.6 million superannuation accounts held Australians, more than 12.3 million of which are retail funds. As many as five million people are expected join the action the litigation, making it the biggest class action in Australian history. It would easily dwarf the 10,000 litigants who joined the Black Saturday bushfire law suit and the more than 150,000 people who have signed up to the ongoing class action against bank fees, News Corp reported.
Litigation funding [5.220] Litigation funding was sanctioned by the High Court in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41. Retailers of tobacco products joined together and sought repayment of millions of dollars of illegally collected excise from the wholesale tobacco companies with whom they dealt. The High Court held that the action should succeed despite the fact that the class action had been funded by a specialist litigation funder (IMF (Australia) Limited). The court held that the class action fell within the Rules of the NSW Supreme Court.
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Business and the Law The class action is mushrooming throughout the courts of our land. It has become one of the most socially useful remedies in history. Now, the class action is striking at the malefactors’ nerve- endings: their pocket books. There is no more persuasive sanction. A Pomerantz, “New Developments in Class Actions: Has Their Death Knell been Sounded?” (1970) 25 Bus Lawyer 1259 at 1259.
Litigation funding of class actions has proven to be a very effective strategy for “small” plaintiffs to hold “large” defendants with deep pockets to account. A litigation funder –several are listed on the Australian Securities Exchange –funds the litigation at its expense and takes a percentage of any damages awarded. If the action is unsuccessful, it carries the costs of litigation. Currently lawyers themselves cannot fund legal action through contingency fee arrangements as in the United States but now that litigation funding is well established in Australia it may not be long before Australia follows.
IN CONTEXT
Fostif’s decision opens contingency-fee can of worms [5.230] In Campbell’s Cash and Carry Pty Ltd v Fostif, the High Court lifted the cloud of uncertainty hanging over the litigation-funding industry. Most commentators have focused on the decision’s immediate effects: an increase in the cases promoted by litigation funders, more class-action litigation –particularly in the securities and investment scheme claims – and more capital entering the litigation-funding market. But the real significance of Fostif lies in the future of contingency-fee agreement in Australia.
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Litigation funding agreements are contingency-fee agreements that provide funding for a plaintiff to engage a lawyer and pursue a claim in exchange for an agreed percentage of the proceeds. That percentage varies; 30% or 40% is common although the figure has been as high as 75%. In most cases, the litigation funder also takes the benefit of any cost order awarded to the defendant. In many cases, litigation funding ensures that litigation that would otherwise never have been commenced now finds its way to the courts. Fostif didn’t just end the dispute in relation to the legality of litigation funding. It also implicitly endorsed the concept of US-style contingency-fee agreements being used to promote litigation in Australia –at least in the case of litigation funders. Australian plaintiff’s lawyers have long sought the removal of the restrictions that prevent them from entering into true contingency-fee agreements. Now that it has been established that there is no good public policy reason for preventing litigation funders using contingency- fee agreements to promote litigation, what legitimate policy considerations can possibly justify such a prohibition applying to lawyers? Australian lawyers are among the most highly regulated in the world. They are subject to an extensive consumer protection regime and intense supervision by both their own professional bodies and independent regulators. This is in stark contrast to the litigation- funding industry, which is totally unregulated. Australian lawyers are now seeking the right to compete with the litigation funders by offering to conduct litigation on a true contingency-fee basis. When class actions were introduced in 1992, many feared the changes would, inevitably, lead to a rise in US-style, lawyer-driven litigation. Those campaigning for the introduction of class actions argued that the prohibition on contingency-fee agreements was a crucial factor 166
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Chapter 5 Commercial Dispute Resolution
that would ensure Australia did not take that direction. Indeed, the Australian Law Reform Commission expressly rejected the concept of true contingency-fee agreements in its report on the proposed new regime. The decision in Fostif has ensured the future of contingency-fee agreements for litigation funders. The position of lawyers cannot be distinguished. The contingency fees campaign that has long been simmering among plaintiffs’ lawyers has resumed, and the issue identified in the context of the Victorian Law Reform Commission’s Civil Justice Review. Few doubt that the barriers will fall. Lawyers promoting litigation on the back of US style contingency-fee agreements will inevitably become part of the Australian legal landscape in the same way as class actions and securities litigation. The real question is whether this is in the best interests of Australia as a whole or simply Australian lawyers. Stuart Clark, National Managing Partner of Clayton Utz’s Litigation and Dispute Resolution Department, Australian Financial Review (29 September 2006)
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Criticism of Class Action Fees S Danckert, “Unisuper Criticises Class Action Fees”, Sydney Morning Herald (21 August 2015).
[5.240] One of Australia’s largest institutional investors, the $50.3 billion industry superannuation fund UniSuper, has strongly criticised funders of class actions, saying there is little justification for them taking such a handsome share of settlements.
Mr Barrett said he was yet to see evidence of any need for litigation funders to take such a big slice.
UniSuper head of legal and risk Luke Barrett said Australia’s litigation funding landscape was dominated by a few players that quickly partnered with the law firms leading class actions, which meant that when a class action was put to shareholders there was only ever the option of one litigation funder.
“My question back to them is what is the value add and is 30 to 40% of the compensation a fair amount of compensation for that?”
“The big question is, why are litigation funders able to charge 30% to 40% of the recovery amount?,” said Mr Barrett … “That can often be a multiple of what the legal fees were, and then in the big shareholder class action normally they will be.”
“The litigation funders will say that their 30 to 40% commission –for want of a better word –is fair compensation for their value add.”
However, Mr Barrett said bringing in more litigation funders to Australia was not “always a positive development” as it was hard to compare their fee structures to the incumbents and would not go to the heart of the issue surrounding the lack of competition. “At the moment, even though there may be multiple litigation funders, the first litigation funder to partner up with a law firm to bring a particular class action enjoys a formidable position,” he said.
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Class Action Surge A White and C Merritt, The Australian 12 September 2015
[5.250] To experienced former insurance executive and director John Lamble, the spread of class actions against companies for such alleged lapses are a blight on the market and an offence to the idea that a buyer should beware when buying. “It is a past bruised shareholder effectively suing present shareholders,” Lamble says of lead plaintiff Richard Bungey. “And they make out that they are innocent but they shouldn’t be buying shares unless they are properly advised or knowledgeable. I am a strong believer in buyer-beware on shares.”
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That may be a rather old-fashioned view, with Australia now seen as the third most litigious country in the world after the US and Canada and attracting interest from international investors willing to fund claims against companies. According to the Australian Institute of Company Directors there have been 250 class action cases launched since 2011 when the class action regimen was introduced in the Federal Court. There are a long list of gripes against the spread of class actions: that they distract management from the job of what is usually having to turn around a company having a bad run: that since many are settled before getting to court they amount to little more than a bid for “go-away” money; that they only enrich the funders and lawyers; that because the payouts come from the directors’ and officers’ insurance policy rather than the pockets of directors and executives there is little genuine redress, and that they effectively pit one lot of shareholders against the other. The QBE action comes at a time when Attorney-General George Brandis is still considering how to respond to last year’s report by the Productivity Commission that calls for changes that corporate lawyers believe will spur the growth of class actions. That report, on Access to Justice, called for the introduction of US- style contingency fees that would allow class action lawyers to take a
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proportion of any financial damages they win for their clients. Australian lawyers are currently not permitted to use this form of billing. But that rule does not apply to the booming litigation funding industry, which remains relatively unregulated. While a handful of plaintiff law firms are the public face of the class action industry, the financial backing for most big claims against corporate Australia is generally provided by litigation funding companies in return for a share of the proceeds. These companies frequently take about 35% or more of whatever companies outlay to settle claims and ensure they do not appear on their accounts as contingent liabilities. If plaintiff lawyers are allowed to switch to contingency fees, corporate law firm King & Wood Mallesons believes one effect would be to increase the viability of lower- value claims, exposing small-to medium- sized businesses to the sort of litigation risk that currently confronts big business. “Such a change would increase the number of class actions,” King & Wood Mallesons said in its annual survey of the class action landscape. In May, another corporate law firm, Allens, warned of a growing tendency for class action law firms to sidestep the oversight of the courts by “launching” class actions in the media –with press conferences and information packs for journalists –before they file official documentation with the courts. Jason Betts of Herbert Smith Freehills said class actions had become a mainstay of the litigation environment facing Australian business and new entrants to this sector were looking for areas of commercial activity that had so far remained untouched by the phenomenon.
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Chapter 5 Commercial Dispute Resolution
He believed one of these new areas was claims alleging companies had engaged in “environmental toxic torts”. “Everything builds out of what the litigation funders do. They have focused on shareholder suits to date but consumers and others are next on the horizon.” He said Australia had the world’s most developed market for litigation finance. “We are not behind America, we are in front of America. We are it when it comes to litigation funding and we also have probably the lowest level of regulation (for litigation funders) in the world,” Mr Betts said. The AICD wants the government to rein in class action litigation funders, pegging the rise of
commercially-motivated funding as a major problem for corporations. “… Many class actions are now promoted by plaintiff’s lawyers and litigation funders, not by aggrieved persons seeking to commence proceedings to quell a real controversy,” the AICD said in a submission to the Productivity Commission. But even some critics of the class action system acknowledge it serves a purpose. Stewart Levitt of Levitt Robinson says class actions are often filling a void left by the “dereliction of duty” by ASIC. The corporate regulator, he says, does not do enough to pursue the top end of town, noting that it is extremely rare for senior executives to ever be sent to jail.
Class Action Inquiry to Determine who Benefits Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Chris Merritt, The Australian (23 February 2018)
[5.260] The financial outcome of a series of class actions will be subjected to independent scrutiny to determine whether they are being run for the benefit of clients or for the benefit of lawyers and litigation funders. The results of this exercise will be made public as part of the inquiry into class actions and litigation funding that is being conducted by the Australian Law Reform Commission. The goal is to test the arguments of both sides of the debate about class actions, which are seen by some as a way of increasing access to justice while others believe the real winners are plaintiff law firms and their financiers. … This followed calls last year for one of the nation’s leading plaintiff law firms, Maurice Blackburn, to face a royal commission into its handling of the massive class action payout from Victoria’s Black Saturday bushfires. After winning a settlement of $494 million for victims of the Kilmore East-Kinglake fire, Maurice Blackburn took $100m in fees while the firm’s work was being overseen by the Supreme Court of Victoria. The firm told the Federal Court in NSW last year that its charges for administering
another class action settlement would be $849 an hour for partners; $665 an hour for senior associates and $566 an hour for solicitors. … In a consultation paper issued in July last year, the Victorian commission pointed out that about 19 Australian and international funders are active in Australia. Four funders, led by IMF Bentham, dominate the market and accounted for 70 per cent of the revenue in 2016-17. … IMF Bentham alone was estimated to have 65.8 per cent of the market. Industry revenue for 2016-17 was predicted to be $89.2m, with profits of $38.5m. Revenue was projected to grow to $150.6m within the next five years, the consultation paper said. Most of that revenue is derived from class actions, particularly shareholder class actions. This has prompted concern that the business community faces a growing litigation risk. However, leading litigation funder John Walker has argued that funded class actions have benefited hundreds of thousands of people who would otherwise have been denied justice.
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The Victorian inquiry was called by the state government after an incident in 2016 in which lawyers and litigation funder LCM Litigation Funding received all of a $5m court win that was supposed to pay the entitlements of 300 sacked workers from Huon Corporation. In that case, law firm Piper Alderman received $1.7m, barristers led by Allan Myers QC received $885,000 and LCM received $1.85m. In its submission to the Victorian inquiry, Maurice Blackburn accepts that “there have been isolated instances where class actions appear to have been prosecuted purely for the purpose of enriching the litigation funder and/ or plaintiff lawyer”. But it told the inquiry the class action system as a whole was working well and there was no need for any change to the regulation of
litigation funders. This is at odds with the assessment of the Productivity Commission, which urged the federal government in 2014 to establish a licensing system for litigation funding companies to verify their capital adequacy. In return for financing class actions, litigation funders charge a percentage of whatever settlement is awarded to the claimants —an arrangement that means funders can take about 35 per cent of class action settlements. Maurice Blackburn has urged the Victorian inquiry to allow law firms to make similar arrangements by removing the ban that prevents them charging US-style contingency fees —a move that is also backed by the Productivity Commission.
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Tribunals
Arbitration as a method of dispute resolution is seen to offer the major benefits of enforceability, neutrality, speed and expertise over court based determinations; and, because arbitration is quicker and more expert, it is likely to be cheaper than the lengthier and more elaborate proceedings in court. P A Keane, “Judicial Support for Arbitration in Australia” (2010) 34 Australian Bar Review 1.
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[5.270] Reference was made at [2.630] to the establishment of tribunals which operate alongside but which are not formally part of a state or territory’s court system. Civil and administrative tribunals nevertheless have extensive powers to resolve consumer and commercial disputes and offer a number of advantages over traditional courts. They are less formal and offer quicker and cheaper dispute resolution. There is a particular emphasis on ADR and on an inquisitorial approach which encourages self-representation in contrast to the exclusively adversarial approach of the courts.
5.3 ARBITRATION [5.280] Arbitration is the determination of a dispute by an independent third party. Arbitration was the first recognised alternative to litigation in the modern age. In principle, it was to be an alternative which provided a faster, cheaper and, perhaps, more commercial remedy to disputes. However, arbitration is now virtually another form of litigation especially in matters of commercial importance. It is often as costly, as complicated, as time-consuming and as delayed as the original. Nevertheless, arbitration has the advantage that it is conducted in private so that the publicity of a trial is avoided. A further advantage is that the strict legal rules of evidence do not normally apply. Questions are determined accordingly to law unless otherwise agreed by the parties who may agree that any question is determined by reference to natural justice and fairness. The process of arbitration involves referring the matter in dispute to a third party –the arbitrator –whose function it is to hear the evidence and make a decision which the parties have agreed to accept as final. It has the advantage that in technical cases the arbitrator need not be a lawyer but may instead be an expert in the discipline in which
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Chapter 5 Commercial Dispute Resolution
the dispute has arisen. Commercial contracts frequently contain an arbitration clause which provides that any dispute arising should be referred to arbitration and not to a court. The result of the arbitration –the arbitral award –is enforceable in the same manner as a judgment of a court. Arbitration offers the advantages of choice of decision maker, efficiencies, privacy, convenience (as hearings are arranged at times and places to suit the parties), flexibility (as the procedures are within the control of the parties and the arbitrator), and finality. [5.290] Domestic commercial arbitration throughout Australia is governed by uniform provisions. In 2009 the Standing Committee of Attorney-Generals adopted a model commercial Arbitration Bill based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. The aim was to unify and modernise domestic arbitration regimes and to align them with international regimes. New South Wales was the first state to enact the model law in the Commercial Arbitration Act 2010 (NSW) and other states have since legislated similarly. The objective of the Act is “to improve commercial arbitration processes to facilitate the fair and final resolution of commercial disputes by arbitration without unnecessary delay or expense”.
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The parties have greater freedom than previously to agree on the procedures to be used in an arbitration and there are fewer grounds on which an arbitration award may be set aside. An award may be set aside on for incapacity, invalidity, and breaches of natural justice but not, as previously, for errors of law. Appeals to a court can be made only with the consent of both parties and the leave of the court. [5.300] International commercial arbitration is regulated in the International Arbitration Act 1974 (Cth) which governs Australia’s obligations to recognise and enforce foreign arbitration agreements and arbitral awards.
5.4 ALTERNATIVE DISPUTE RESOLUTION [5.310] Although the development of independent courts free of political control and applying and resolving disputes in accordance with the law is one of the greatest achievements of our legal system, it cannot be pretended that litigation through the courts is a beautiful thing. Litigation is costly and time consuming and stressful and public. It has the advantage that a dispute is resolved –or at least will be once the appeal process has been exhausted –but in the process the relationship between the parties is damaged, normally terminally. Arbitration suffers the same disadvantages. The disadvantages of litigation have led to development of ADR –processes for the resolution of disputes, principally but not exclusively commercial, without the intervention of a court. The procedures are aimed at producing a resolution by agreement between the parties rather than through the imposition of a judgment.
The development of ADR [5.320] The basic ADR techniques of mediation and conciliation originally developed early last century in relation to industrial disputes. The techniques were later applied in the areas of anti-discrimination, family and neighbourhood disputes in the United States
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Once promoted as a means of avoiding the contention, cost and expense of court trial, binding arbitration is now described in similar terms –‘judicialized’, formal, costly, time- consuming, and subject to hardball advocacy. Thomas J Stipanowich, “Arbitration: The New Litigation” (2010) University of Illinois Law Review 1.
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in the 1960s, and in Australia a decade later, to deal with disputes unresponsive to the traditional legal processes. The use of ADR in commercial disputes is a more recent initiative. Today ADR has developed from a private mechanism for resolving commercial disputes to a device frequently required by legislation, voluntary codes of industry practice or rules of court as an adjunct to the court system.
Definition of ADR [5.330] ADR embraces a wide, flexible and varying range of mechanisms for resolving disputes which are characterised by structured negotiation and consensus. Although arbitration is commonly regarded as an ADR technique it is a formal adjudicative and adversary technique –essentially a private litigation process –which has more similarities to litigation than the more innovative consensual processes which characterise ADR. As explained by Angyal (“Alternative Dispute Resolution”, Legal Issues (Australian Legal Group) (3 December 1987)): Let us never negotiate out of fear, but let us never fear to negotiate. John F Kennedy. The key difference between ADR and those traditional techniques of litigation and arbitration is that ADR techniques are used to produce a resolution to a dispute through a negotiated agreement while litigation and arbitration are processes by which a result is imposed on the parties.
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There remains a problem with terminology. Sir Laurence Street, a former Chief Justice of the Supreme Court of New South Wales and one of Australia’s strongest proponents of ADR, has commented (in “The Language of Alternative Dispute Resolution” (1992) 66 Australian Law Journal 194) that: It is not in truth “Alternative”. It is not in competition with the established judicial system. It is an Additional range of mechanisms within the overall aggregated mechanisms for there solution of disputes. Nothing can be alternative to the sovereign authority of the court system. We cannot tolerate any thought of an alternative to the judicial arm of the sovereign in the discharge of the responsibility of resolving disputes between state and citizen or between citizen and citizen. We can, however, accommodate mechanisms which operate as Additional or subsidiary processes in the discharge of the sovereign’s responsibility. These enable the court system to devote its precious time and resources to the more solemn task of administering justice in the name of the sovereign.
It is important not to regard ADR as just a poor relation to the real world of the courts. It is a complex, structured approach aimed at bringing the parties to a consensual solution by way of settlement, with a real possibility of preserving the commercial relationship. The fact is that most cases are settled anyway. The ADR process simply aims at achieving that result at minimal cost and as quickly as possible. ADR does not, however, prevent legal action. If the dispute is not resolved by ADR the parties can take the matter to the courts. The success of ADR nevertheless suggests that resort to the courts is much less likely if an ADR process was used.
The advantages of ADR The beauty of compromise. Mahatma Gandhi.
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[5.340] The Australian Disputes Centre Ltd –a non-profit company established in 1986 by the New South Wales Government to assist business and government enterprises to
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Chapter 5 Commercial Dispute Resolution
resolve their commercial disputes without the necessity of going to court –claims the following among the advantages of ADR over litigation: • Most disputes are resolved at 10% of the cost of litigation. • Most disputes are resolved in about 5% of the time of litigation. • The Centre resolves over 90% of its cases. • The parties themselves can decide who will be the independent third party from lists of specialists complied by the Australian Disputes Centre. • The third party is often an expert as well as a mediator eg a construction specialist can be provided to mediate a building dispute. • The parties come together at a time convenient to them, not at a time nominated by a court. • The disputing parties may use their lawyers, if they wish, to prepare information for the process, attend meetings, give legal advice and prepare settlement papers. • The goodwill of the parties is preserved and often improved by the resolution process. This is of particular importance where the parties need to continue a business relationship.
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• The parties may talk separately and in total confidence to the third party. This results in the disclosure of underlying interests which leads to a more satisfying resolution. • Because the process is confidential, the organisations and individuals involved maintain their privacy. • The real interests of the parties are satisfied because the parties develop a business solution to a business problem, rather than ending up with a court-imposed solution to a business problem. The disadvantages of litigation are obvious –cost, delay, formality, risk –and need little elaboration. Litigation tends to keep disputing parties apart. Although the threat “I’ll see you in court” marked a significant step forward from more primitive means of dispute resolution, it is limited and forces parties to take adversarial positions. Litigation, by definition, ensures a win/lose scenario. A particular dispute may be resolved but the future for any continuing relationship is bleak. ADR by contrast aims at a win/win situation.
Activating ADR [5.350] ADR can be activated in four main ways: 1.
By the appropriate provision being included in the original contract (out of which the dispute has arisen). Such a clause will require that, if a dispute arises, no court or arbitration proceedings may commence until the parties have employed ADR to resolve the dispute. If ADR should fail, then the usual legal processes are available.
2.
By the parties agreeing to attempt its resolution using ADR techniques after the dispute has arisen. In this situation the parties will agree on the method to be
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used and the way in which it is to be implemented. If, for example, mediation is chosen, they will appoint the mediators, define the mediator’s role, and arrange for conduct of the mediation, its termination and enforcement of any settlement reached.
Perfect justice is a mirage. In the pursuit of the illusion of perfect justice we jeopardize the justice that lies within our grasp. Macklin Fleming.
3.
Through Codes of Practice regulating commercial behaviour in various industries (eg banking and franchising).
4.
As an adjunct to court proceedings. Courts increasingly have the power (through legislation) to order the parties to attempt ADR.
ADR techniques [5.360] Because ADR depends on consensus it enshrines flexibility both in the procedures and the settlements, and it is up to the parties and the ADR adviser to determine the most efficient and satisfactory method of resolving the dispute. There are nevertheless a number of common techniques.
IN CONTEXT
ADR processes [5.370] There are three main types of ADR processes: Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
• facilitative • advisory • determinative. Facilitative This process is where a dispute resolution practitioner assists the parties to a dispute to identify the disputed issues, develop options, consider alternatives and try to reach an agreement about some issues or the whole dispute. Examples of facilitative processes include mediation, conciliation, facilitation and facilitated negotiation. Advisory This process is where a dispute resolution practitioner considers and appraises the dispute and provides advice as to the facts of the dispute, the law, and, in some cases, possible or desirable outcomes and how these may be achieved. Examples of advisory processes include: case appraisal, conciliation (where advice is offered or used) and (early) neutral evaluation. Determinative This process is where a dispute resolution practitioner evaluates the dispute (which may include the hearing of formal evidence from the parties) and makes a determination.
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Chapter 5 Commercial Dispute Resolution
Examples of determinative processes include: arbitration, expert determination and private judging. Attorney-General Department, Arbitration, Dispute Resolution (http://www.ag.gov.au).
Facilitated negotiation [5.380] Direct negotiation is commonly used as a strategy for informally settling disputes. The statistics –that only 6% of disputes result in the commencement of legal proceedings and only 0.2% of the totality of commercial disputes proceed to court adjudication (M J Fulton, Commercial Alternative Dispute Resolution (Law Book Co, 1989) p 14) – suggest that direct negotiation between the parties is widely used at an informal level. Direct negotiation is rarely a structured mechanism and many such “negotiations” originate from one party forcing a settlement on the other party rather than the parties proceeding by way of negotiation to a consensual solution.
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Facilitated negotiation is a structured, but informal, negotiation process which involves the assistance of an independent third-party facilitator. The two main techniques are conciliation and mediation. These non- coercive, non- compulsory, non- final and non- confrontationalist processes have three features in common (Street L, “The Language of Alternative Dispute Resolution” (1992) 66 Australian Law Journal 194): Both originate in an agreement between the disputants to call in the aid of a facilitator to assist in the structuring and conduct of settlement negotiations which will include, as part of their very essence, private consultations with each disputant. The facilitator has no authority to impose a solution on the disputants as does a judge or arbitrator. The whole process remains at all times entirely flexible and dependent upon the continuing willingness of the disputants to continue it until such time as either they themselves agree upon the terms of a settlement or one or other of them terminates the negotiations.
The difference between the processes lies in the role of the third-party facilitator whose role may be passive (in the sense of assisting to isolate the issues of the dispute and assisting the parties in reaching a consensual agreement but without providing opinions or advice) or active (in the sense of taking a more active role in the discussions, providing suggestions regarding settlement and possibly even providing a non-binding determination which may lead to a consensual agreement). Sir Laurence (at 196) points out that while conciliation is “active”, and mediation is “passive”, little turns on the terminology:
It takes no great understanding of the mysteries of high finance to make obvious the futility of spending a thousand dollars in order to get a thousand dollars. J Douglas, “Protective Committees in Railroad Reorganisations” (1934) 47 Harvard Law Review 565 at 567.
The extent and nature of the facilitator’s involvement in order to optimise the prospects of a successful outcome of the process will inevitably be more or less active according to the nature of the dispute, the personalities involved, the stage of deterioration of relations between the parties and the stage of the negotiation itself. Practitioners recognise the wisdom of the facilitator adopting a passive attitude at the outset. Likewise, they recognise both the expectations of the parties for a more active involvement as the negotiations progress, as well as the value of a positive contribution by the facilitator at the time the facilitator judges this to be propitious.
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Mediation [5.390] The National Alternative Dispute Resolution Advisory Council (“NADRAC”) defines mediation as:
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a process in which the parties to a dispute, with the assistance of a dispute resolution practitioner (the mediator), identify the disputed issues, develop options, consider alternatives and endeavour to reach an agreement. The mediator has no advisory or determinative role in regard to the content of the dispute or the outcome of its resolution, but may advise on or determine the process of mediation whereby resolution is attempted
A survey in the UK journal Legal Business asked QCs, junior barristers and solicitors to identify the five best and five worst judges in England, reports The law Society Bulletin (SA). Voted worst was Mr Justice Harmon, described as “jumping wildly to conclusions and being unpredictable”. Runner-up was Mr Justice Cresswell who was criticised for his inability to make decisions. One lawyer said, “if his wife puts out two bowls of cereal for him, he never gets to work”. Law Society Journal (September 1994).
176
Mediation is most common of the more formal ADR techniques. It involves a trained mediator facilitating a negotiation designed to help the parties better understand the other side’s position and consider any compromises that may be necessary for the parties themselves to resolve their dispute. Mediators do not normally give advice, unless the parties have requested an advisory/evaluative mediation or conciliation. The mediator does not making a binding decision –indeed the mediator does not have the authority to make a binding decision. Any party is free to leave the mediation at any time and pursue her or his rights through litigation. If the mediation results in an agreement the parties will enter into a contract reflecting their agreement which can be enforced through the courts if not honoured. Mediation has proven to be a very effective dispute resolution process. It is confidential, it leads to win-win solutions, it has the potential to preserve the relationship between the parties and disputes are resolved at a fraction of the cost and time that of litigated dispute resolution. Mediation is usually voluntary, but can be ordered by a court or tribunal. Where mediation is voluntary, the parties usually split any costs.
Conciliation [5.400] Whereas mediation is a purely facilitative process where the mediator has no advisory role, in conciliation the conciliator has an advisory role. As explained by the NADRAC: Conciliation is a process in which the parties to a dispute, with the assistance of a dispute resolution practitioner (the conciliator), identify the issues in dispute, develop options, consider alternatives and endeavour to reach an agreement. The Conciliator may have an advisory role on the content of the dispute or the outcome of its resolution, but not a determinative role. The conciliator may advise on or determine the process of conciliation whereby resolution is attempted, and may make suggestions for terms of settlement, give expert advice on likely settlement terms, and may actively encourage the participants to reach an agreement.
Early neutral evaluation [5.410] Early neutral evaluation (ENE) (also called neutral evaluation) is a non-binding technique in which a neutral party, often a retired judge or senior lawyer, will evaluate and comment on the merits or otherwise of the parties’ legal position and arguments and provide a balanced and neutral evaluation of the dispute. It provides the parties with a “reality check” which can assist the parties in assessing their case and may influence them towards a settlement. NADRAC defines ENE as:
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Chapter 5 Commercial Dispute Resolution A process in which he parties to a dispute present, at an early stage in attempting to resolve the dispute, arguments and evidence to a dispute resolution practitioner. That practitioner makes a determination on the key issues in dispute, and most effective means of resolving the dispute without determining the facts of the dispute.
Expert appraisal or determination [5.420] A Discrete mechanism with ADR is a process whereby an independent expert in the relevant area advises on the resolution of the dispute by means of a non-binding opinion or recommendation. The parties may accept or reject the opinion or use it as the basis for further negotiation. This process is generally known as expert appraisal or case appraisal. Alternatively, the parties at the time of agreeing on the use of this process may have also agreed to abide by the decision of the expert, in which case the process is more accurately expert determination. Both processes are quick, expedient and decisive and are of particular utility in relation to disputes arising in the course of an ongoing contractual relationship.
Mini-trials
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[5.430] A mini-trial is a highly structured information exchange and settlement negotiation process. It is described by Andrew Rogers QC, formerly of the Supreme Court of New South Wales, in an unpublished paper in these terms: Each of the disputants presents its best case to a negotiating panel representing both sides, generally assisted by a neutral adviser. Following the presentation, the negotiation panel meets to attempt to reach a pragmatic settlement. The rationale which underlies the process is that a reasonable solution to most problems can be structured by the disputants themselves if they are in full possession of the facts.
Each party has the opportunity to evaluate its respective strengths and weaknesses. Because the panel comprises senior executives of the disputing parties who have the authority to resolve the dispute and who may bring a fresher perspective to the dispute than the middle executives who may have been more intimately involved, the process is often called senior executive appraisal. The term “structured negotiation” is also used. This method is fast, cost-effective, and flexible in that the parameters for the conduct of the mini-trial are within the discretion of the parties. The solution will depend on the circumstance but will be business-oriented and may be innovative. The relationship between the parties is likely to be preserved.
QUESTIONS 1.
What are the advantages and disadvantages of ADR in relation to litigation?
2.
What are “class actions” and “litigation funding”? Should they be applauded for facilitating access to the court or condemned for encouraging litigation?
3.
Explain the nature and operation of commercial arbitration and its role as a dispute resolution strategy.
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4.
Your legal advisors indicate that you have a 90% chance of successfully prosecuting a breach of contract action against a supplier with whom you have had irregular and less than satisfactory dealings. Do you sue or agree to the supplier’s request to institute an ADR process. What factors are relevant to your decision? What ADR method may be appropriate?
WEB REFERENCES National Alternative Dispute Resolution Advisory Council http://www.nadrac.gov.au
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Part 2 GENERAL PRINCIPLES OF BUSINESS LAW
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6
6
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Contracts: Concepts of Agreement Andrew Terry, Cary Di Lernia THE BUSINESS CONTEXT This chapter describes the law of contract –that area of the civil law which is concerned with the enforcement of agreements. Whereas the other main branch of the civil law –the law of torts –is concerned with the obligations the law deems it appropriate that one person owes to another, the law of contract is firmly based in the concept of agreement. A contract is the legal expression of the agreement between the parties. It is the central concept in commercial law and provides the mechanism under which parties to a definite arrangement can regulate their transaction or relationship. It is the raw material from which commerce is constructed. For certainty, predictability and convenience, society places great importance on contracts. Commerce could not operate without a comprehensive and settled body of contract law. Particular business contracts, and recurring issues in business contracts, are further addressed in Chapter 7.
6.1
WHAT IS A CONTRACT? ........................................................................................................................................ 183
6.2
THE NATURE AND ROLE OF CONTRACT LAW ............................................................................................. 186
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6.3 [6.90]
Unilateral contracts and bilateral contracts ........................................................................................... 189
[6.100]
Simple contracts and formal contracts (deeds) ..................................................................................... 189
[6.110]
Oral contracts and written contracts ....................................................................................................... 190
[6.120]
Negotiated contracts and standard form contracts .............................................................................. 190
[6.130]
Consumer contracts and commercial contracts .................................................................................... 190
6.4
AGREEMENT ............................................................................................................................................................ 190
[6.190]
Rules relating to the making of an offer ................................................................................................. 192
[6.200]
Offer distinguished from invitation to treat ........................................................................................... 192
[6.330]
Offer distinguished from a supply of information ............................................................................... 195
[6.350]
An offer can be made to any number of people .................................................................................... 196
[6.380]
Rules relating to termination of an offer ................................................................................................ 198
[6.520]
Rules relating to acceptance ...................................................................................................................... 201
[6.710]
Revocation of acceptance ........................................................................................................................... 206
[6.720]
Electronic communications ....................................................................................................................... 206
[6.730]
Conditional agreements ............................................................................................................................ 206
[6.760]
Vague, uncertain and incomplete agreements ...................................................................................... 208
6.5
INTENTION TO CREATE LEGAL RELATIONS ................................................................................................ 212
[6.830]
Intention to be bound ................................................................................................................................. 212
[6.870]
Social and domestic arrangements .......................................................................................................... 214
[6.920]
Commercial agreements ............................................................................................................................ 215
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TYPES OF CONTRACTS .......................................................................................................................................... 189
CONSIDERATION ................................................................................................................................................... 216
[6.960]
What is consideration? ............................................................................................................................... 217
[6.990]
A practical concept ...................................................................................................................................... 219
[6.1010]
Consideration must be sufficient but need not be adequate ............................................................. 219
[6.1030]
Sufficient consideration ............................................................................................................................. 220
[6.1210]
Promissory estoppel ................................................................................................................................... 225
[6.1300]
Waiver of contractual rights ...................................................................................................................... 229
6.7
DEFECTS IN THE CONTRACT ............................................................................................................................. 230
[6.1320]
Lack of contractual capacity ...................................................................................................................... 230
[6.1370]
Illegal contracts ............................................................................................................................................ 232
[6.1510]
Lack of required formalities ...................................................................................................................... 237
[6.1540]
Absence of genuine consent ..................................................................................................................... 239
6.8
MISREPRESENTATION INDUCING THE CONTRACT .................................................................................. 240
[6.1570] Misrepresentation ....................................................................................................................................... 240 [6.1610]
Rescission for misrepresentation ............................................................................................................. 241
[6.1630]
Damages for misrepresentation ............................................................................................................... 242
[6.1640]
The significance of the statutory misrepresentation action ................................................................ 243
6.9
MISTAKE .................................................................................................................................................................... 243
[6.1660]
Non est factum ............................................................................................................................................. 244
[6.1690]
Unilateral mistake ....................................................................................................................................... 245
[6.1760]
Mutual mistake ............................................................................................................................................ 248
[6.1780]
Common mistake ........................................................................................................................................ 248
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Chapter 6 Contracts: Concepts of Agreement
6.10 DURESS ...................................................................................................................................................................... 250 [6.1850]
Physical duress ............................................................................................................................................ 251
[6.1870]
Economic duress ......................................................................................................................................... 251
6.11 UNDUE INFLUENCE .............................................................................................................................................. 252 6.12 UNCONSCIONABLE CONDUCT ........................................................................................................................ 254 6.13 CONTENTS OF THE CONTRACT ........................................................................................................................ 255 [6.1980]
Express terms ............................................................................................................................................... 256
[6.2180]
Implied terms ............................................................................................................................................... 264
[6.2285]
Variation of contract .................................................................................................................................... 268
6.14 EXEMPTION AND SIMILAR CLAUSES ............................................................................................................. 268 [6.2340]
The contractual effect of exemption clauses .......................................................................................... 270
[6.2460]
The interpretation of exemption clauses ................................................................................................ 277
[6.2520]
Exemption clauses rendered ineffective by statute .............................................................................. 279
6.15 THE DOCTRINE OF PRIVITY OF CONTRACT ................................................................................................. 280 6.16 CONTRACTS NEGOTIATED THROUGH AGENTS ........................................................................................ 282 6.17 ASSIGNMENT AND NOVATION ......................................................................................................................... 283
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6.18 ENDING THE CONTRACT .................................................................................................................................... 283 [6.2660]
Discharge by performance ........................................................................................................................ 283
[6.2680]
Discharge by agreement ............................................................................................................................ 284
[6.2690]
Discharge by operation of law .................................................................................................................. 284
[6.2740]
Discharge by frustration ............................................................................................................................ 285
[6.2800]
Discharge by breach ................................................................................................................................... 287
6.19 REMEDIES FOR BREACH OF CONTRACT ....................................................................................................... 287 [6.2820]
Termination of the contract ....................................................................................................................... 288
[6.2880]
Damages for breach of contract ................................................................................................................ 291
[6.3090]
Other remedies for breach of contract .................................................................................................... 296
6.1 WHAT IS A CONTRACT? [6.10] A common textbook definition of a contract is “an agreement which the courts will enforce”. This answer obviously suggests a further question: When will an agreement be legally binding and enforceable? The answer is that several requirements must be satisfied to form a valid contract. • Agreement between the parties, which is usually constituted by the acceptance of an offer; • Intention to create legal relations, which characterises the parties’ intention to be legally bound by their agreement; • Consideration, which amounts to the “price” one party provides in return for the promise of the other; • Legal capacity, which requires that the parties are not restricted in their right and power to make a contract;
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Business and the Law Contract law has had an abiding appeal for those desirous of probing the inner workings of the common law … In part the appeal is due to the universal logic of a set of rules fashioned by a society to support the institution of consensual agreements among its members … But, in part, the appeal is also sustained by the parochial peculiarities of a set of rules evolved over centuries by pragmatic judges working within their particular historic confines … Above all, however, contract law has an accessibility, free of the technicalities that encumber more advanced commercial subjects and it lacks the complexities of the political systems that complicate areas of public law … E Allan Farnsworth, United States Contract law.
• Genuine consent, which refers to a number of situations in which the validity of a contract may be affected by what the courts call a “vitiating factor” which removes any real and genuine consent to the agreement; • Legality of objects under which the validity of a contract may be questioned because its object is not supported by the law; • Formal requirements under which the law may impose particular requirements on which the validity or enforceability of the contract depends. These requirements are discussed in this chapter along with other aspects of the law of contract including the contents of the contract, the parties to the contract, ending the contract and remedies for breach of the contract. [6.20] The law of contract exists primarily to determine the question of when promises will be enforced by the courts. The answers are found primarily in the common law. The law of contract is essentially a common law development in which the basic rules were worked out by the common law courts. This is the reason that there are so many English cases from the nineteenth and twentieth centuries to be found in this part of the text. These cases are still authoritative in Australia today. Legislation nevertheless increasingly affects the operation of particular contracts, either by implying terms in them, by declaring them to be unlawful or unenforceable or by permitting the courts to modify or terminate them. Reference is made throughout this chapter to two particular provisions of the Australian Consumer Law (ACL) –Australia’s national consumer law enacted as a schedule to the Competition and Consumer Act 2010 (Cth). The prohibition of unconscionable conduct in s 21 significantly impacts on the traditional principles of the freedom and sanctity of contracts in trade and commerce, and the prohibition of misleading or deceptive conduct in s 18 impacts greatly on general areas of traditional contract law but, in particular, on liability for pre-contractual representations. Despite these provisions being enacted as part of the ACL they apply to all conduct in business whether business-to-consumer (B2C) or business-to-business (B2B). In the words of the Chief Justice of the High Court, French CJ (Bending Words, lecture (20 March 2014)): There are few, if any, contract cases run in the courts today which do not involve an associated claim for misleading or deceptive conduct in pre-contractual negotiations, or breach of a statutory warranty, or invocation of some regulatory or formal requirement, which may go to the legality and thereby the enforceability of the contract.
IN CONTEXT
Contracts Must Be Built on Ethics, Because They Can Even Confuse Lawyers Like Me Clare Payne, Australian Financial Review (5 September 2018)
[6.30] Contracts, disclaimers, the fine print –they may be designed to protect us but sometimes they seem to do nothing but obstruct and confuse. No wonder many find themselves
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Chapter 6 Contracts: Concepts of Agreement
signing and hoping for the best. Even as a lawyer, on occasion I find myself just trusting the system, flicking through pages of terms and conditions to reach an “I agree” button. I presume there will be recourse of some sort if things turn bad, that some sense of what’s “reasonable” will prevail. At other times, however, I take to a contract with a fine-tooth comb, putting my legal skills to work, and I’m surprised by what I find. At its most basic, a contract formalises an agreement, with legal intention. There’s also consideration, the promise of something of value in exchange for something of value. This can be called “the benefit of the bargain”. However, even when I’m set to receive nothing in return, giving a talk for free for example, I’ve been asked to sign away more than what might be considered reasonable. I’ve been asked to give over complete intellectual property rights to my content, agree to having no right of review of media that includes me and even asked to allow alterations to not just my content but also my voice. Sign on the dotted line, they ask, applying pressure by letting me know that all the other speakers have already done so. It makes me wonder if anyone is really reading the contracts. Or perhaps we’re all becoming complacent, trusting all will be OK because we’re just too busy to give things the attention they really need. To say some contracts are one-sided is an understatement, they’re more like an abuse of power, and some are most certainly unethical. The Australian Competition and Consumer Commission (ACCC) has been forced to step in to protect small businesses in what is sometimes a “significant imbalance” when they deal with contracts with big business. And of course, we have a series of legal issues brewing in the gig economy, where fair contract terms may be applied regardless of what’s been agreed. Sometimes those issuing the contracts don’t even understand them. When I’ve questioned certain provisions, they’ve been more than willing to strike them out, making me glad I asked but also making we wonder why I had to. Some may say it’s all because of the lawyers; they got us into this situation where contracts run for pages and pages with font sizes so small they strain the eyes and language so complicated it requires a dictionary. But even lawyers are rethinking their ways, altering contract design by using illustrations and comic strips –and yes, they are still legally binding. Lawyers who can demystify contracts and the legal system in general are in demand. It’s been years since Richard Branson set out to have contracts people understand and others have seen the benefit of his ways. A contract is easier to enforce if the other party understands the terms. Not least of all it has a chance of being considered fair.
Distrust the men who make bargains. They are a disgrace to humanity. No man ever saw a dog swap a bone with another dog. Marcus Clarke, “On Borrowing Money”, in A Marcus Clarke Reader (Lansdowne Press, 1963).
Contentious areas Of course, we shouldn’t just switch off and sign away our lives, because sometimes people can lose everything, particularly when it comes to finances. Taking the time to read a contract could save you a fortune. But just as financial literacy is just one component of a good banking system (the bankers have responsibilities and obligations to uphold as well), so should there be a strong ethical foundation when it comes to contracts, one on which people can rely and trust. Perhaps some give on both sides could get us to a better place. When issuing a contract, the issuer could provide some guidance, drawing the attention of the other party to frequently contentious areas, advising them, “You might want to consider …”. If no guidance is forthcoming, then a simple question might point you in the right direction, for example, “Are there particular terms that I should be aware of, areas that people frequently ask to change or breach?” Of course, none of these suggestions should be in lieu of reading the actual contract or even getting legal advice, but let’s be realistic, this may just be a case of something is better than nothing, because sadly that’s exactly what you could be left with if things go wrong.
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6.2 THE NATURE AND ROLE OF CONTRACT LAW
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The law of contract may be described as the endeavour of the state, a more or less imperfect one by the nature of the case, to establish a positive sanction for the expectation of good faith which has grown up in the mutual dealings of men of average right-mindedness. Sir Frederick Pollock, Principles of Contract (1885).
[6.40] In Attorney General’s Department, Discussion Paper to Explore the Scope for Reforming Australian Contract Law (Attorney General’s Department, March 2012) it was stated that: Efficient and just systems of contract law play a central role in successful economies. Contract law increases people’s autonomy by allowing them to make enforceable agreements, and supports economic growth by giving businesses and individuals the stability and predictability they need to trade and invest. Contract law also upholds basic standards of fairness in people’s dealings with each other.
[6.50] The contract is the most common legal transaction in society and each day most people make a significant number for example buying a newspaper, a bus ticket or groceries. In each case the arrangement made is governed by the law of contract, which provides a way of answering a series of questions concerning the exercise of the contractual will of the parties (D E Allan and M E Hiscock, Law of Contract in Australia (CCH Australia, 1987) p 29): 1.
Is there a binding contract between these parties?
2.
What are the terms of that contract?
3.
What do those terms mean?
4.
Who is affected by the contract?
5.
What is the effect of non-performance of the contract?
6.
Can non-performance be excused?
7.
What is the reach of the law to fulfil disappointed contractual expectations?
Given the straightforward nature of the majority of contracts that are entered into in a consumer society, it is hardly surprising that the law of contract is not uppermost in the thoughts of the average consumer as he or she makes the routine transactions of daily life. Carter and Harland nevertheless conclude that business people are also prone to making contracts without reference or with minimal reference to the applicable legal principles. Various reasons were suggested (J W Carter, E Peden, G J Tolhurst, Contract Law in Australia (5th ed, Butterworths, 2007) at [1-16]): • [s]heer pressure of day-to-day business made formality and explicitness in contracting an unwelcome burden; • insistence on such formality and explicitness offends by suggesting distrust; • the possible need of business people in dispute to have commercial dealings and relations with each other in the future; • distrust of lawyers or a perception that they charge too much; • the fact that when negotiating a settlement, disputants are in control of both the direct result and its foreseeable consequences whereas litigation is nothing if not uncertain; • the possibility of disclosure; 186
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Chapter 6 Contracts: Concepts of Agreement
• that litigating itself, irrespective of the result, may damage one’s commercial reputation by suggesting that the litigant is not “realistic” or “commercial”; • a perception by the disputant and by others that inability to settle is a mark of failure and defeat. In The Terrible Truth about Lawyers: What Every Business Person Needs to Know (Collins, 1987), Mark McCormack, a former lawyer and founder of the International Management Group (and widely recognised as having founded the sports-marketing industry), comments (at p 12):
Comparatively few people regard the everyday transactions we all make as proper contracts, comparable with the awfully solemn ritual involved in acquiring a place to live. But buying an evening paper or a ride on a bus are all contracts too. Generations of people dissatisfied with what they have bought have really created the English law of contract. Anthony Nicholson, Esprit de law.
I think, quite frankly, that the best agreements I have ever made have been those with no contract or written agreement attached to them –no legalese, no what-ifs, no fine print.
McCormack refers in particular to a “handshake” deal made with the famous golfer Arnold Palmer in 1960:
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[a]handshake that, more than any other single event, ushered in the era of mutual profit between professional athletes and professional managers. Basically, Arnold and I had an understanding. We were reasonable people. We trusted each other and had a common goal. Our arrangement was simplicity itself. In the 27 years since that handshake, a lot has happened that neither Arnold nor I could have anticipated. But for all that has changed, we have rarely had to take more than a minute or two to resolve any issue.
[6.60] Unfortunately, the cut and thrust of the real world does not always throw up that combination of personalities and circumstances, and even McCormack acknowledges that business deals cannot always be so amicably concluded (at p 12): [e]ven assuming the best faith and most congenial of circumstances, there is still the grim but real possibility that one party or the other will be hit by the proverbial bus. People change. People forget. People die, but deals, especially when the stakes get high, live on and on. So the terrible truth is that the lawyers cannot be kept out of the picture forever. Even deals that start with a handclasp and a big smile eventually take on the baggage of signed documents and memos back and forth.
McCormack nevertheless argues (at 12) that: [t]he contract –no matter how much the lawyers hum and haw over detail, and how shamelessly they murder the English language in the name of legal precision –can only be an approximate description of the understanding between the parties. A deal is a living thing, a contract is static. And the purpose of a contract is to support the living, evolving deal, not supplant it.
McCormack’s criticism is, of course, not of the law of contract but of the drafting of contracts. It may be that the ideal contract is yet to be drafted. McCormack is critical that “in business contexts, where clear communication is crucial, lawyers hide behind mumbo jumbo that nobody else understands”. On the other hand, the agreement drafted by well- meaning business people may be severely flawed. The answer, as usual, is between the two extremes. The lawyer’s function is to reflect the commercial reality, whatever that may be, in a contractual document. The parties involved must reach a consensus on their rights and obligations, and must communicate the commercial deal to the drafter with sufficient detail to enable it to be translated into an effective document. If the parties have proper input into their contracts, commercial disputes are much less likely.
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[T]he law of contract lives, as it has always lived, in a symbiotic relationship with other legal principles that qualify or expand its scope … we may confidently expect that the legal system will not abandon the institution of contract and that the law of contract will survive in a familiar legal environment where rules are continually refined and priority is accorded to one rule over another … The exigencies of civilised intercourse call for legal sanctions to enforce obligations voluntarily assumed by parties. G Brennan, “Opening Address” (1990) 3 Journal of Contract Law 85.
[6.70] Every business action or inaction has a legal consequence that is primarily determined by reference to contract law. In this sense the law of contract may be regarded as a mechanism for resolving disputes by reference to denned boundaries. The most important role of the law of contract is nevertheless to prevent disputes. Its primary function is to provide the mechanism for certainty and predictability on which commerce depends. In D E Allan and M E Hiscock, Law of Contract in Australia (CCH Australia, Sydney, 1987) p 29 it was said that: The function of the law [of contract] is to provide a framework within which individuals or commercial entities can plan and take decisions concerning the future course of their activities, in the confidence that the premise on which they began, that the law would indicate the extent to which it would support and carry into effect their intent, was justified. Contracts embody these intentions. It is the expectation of the parties that these intentions will be realised. It is the function of the law to ensure that they are. In this way the most significant contribution to commerce and economy that the law makes is by making this planning possible … The purpose of the law [of contract] is to secure the realisation of reasonable expectations induced by promises, and to provide certainty and predictability in the planning of commercial ventures. It establishes an elaborate legal model to support the assurance that these objects will be achieved.
IN CONTEXT
From Common Law to Code [6.80] The development of the law of contract has its origins in the simple and unsophis-
My one code, by its simplicity, has done more good in France than the mass of all the laws that preceded me. Napoleon Bonaparte.
ticated English markets of over 200 years ago. The basic foundations of modern contract law were put in place by the judges developing the common law through the doctrine of precedent in an environment that in terms of both practice and theory is dramatically different to that of today. It is a remarkable achievement of the common law that the law of contract remains essentially common law, a judge-made body of law with the basic principles and rules still enshrined in judicial decisions. (The oldest authority cited in this text is Pinnel’s case which was decided in 1605 but which, over four centuries later, remains an authoritative decision on the contractual requirement of “consideration”.) The challenge for the common law has been to accommodate the changing circumstances within the essential and established framework of contract law. The law of contract remains essentially judge-made, despite increasing legislative intervention to protect the disadvantaged and to redress the balance between weak and strong in terms of bargaining. Significant reforms in relation to misleading and unconscionable conduct under the ACL which impact on all contracts in business are addressed in Chapters 19 and 20. Legislation has also been enacted to “codify” areas of the law relating to specialised commercial contracts, such as sale of goods, negotiable instruments and insurance, but the relevant legislation nevertheless defaults to the common law in order to determine the essential question of whether a contract had actually been entered into. Reference was made in Chapter 1 to a Draft Australian Law of Contract –a document with 109 articles which codifies the general rules of contract law currently found in the case law.
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Chapter 6 Contracts: Concepts of Agreement
Its authors –Professors Fred Ellinghaus, David Kelly and Ted Wright from the University of Newcastle Law School – argue the Code would “replace a voluminous and highly complex body of case law rules expressed in fluctuating forms of judicial doctrine, by a finite number of rules in a fixed form, expressed as simply and concisely as possible”. They argue that they are “trying to replace the very unmanageable current system in which the only way in which you can ascertain the law of contract is by consulting a legal adviser, who then has to consult many volumes of case law and volumes of commentaries on that case law and when they come up with an answer there will be some degree of uncertainty” C Merritt, The Australian 14 March 2014.
6.3 TYPES OF CONTRACTS Unilateral contracts and bilateral contracts [6.90] A contract must have at least two parties. There are two types: • Bilateral contracts under which both parties assume obligations and which form the vast majority of contracts.
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• Unilateral contracts under which only one party assumes an obligation. The difference can be explained by the following example. If A loses her dog and hires X to find it, X has an obligation to look for the dog and A has an obligation to pay X when the dog is found. This is a bilateral contract because both parties have obligations under it. If instead, A says she will pay a reward to any person that finds the dog, no one is bound to go and look for the dog or find it. However, A must pay the reward to the person who relying on the offer made by A has searched for the dog and located it. Thus, this is a unilateral contract because it is only A that has assumed an obligation. The operation of the rules of agreement, intention and consideration in the context of unilateral contracts is illustrated by Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 (see [6.360]).
A code is an end and a beginning. Unlike a statute, which is superimposed upon the common law like a ship floating on the water, a code supersedes the common law, excluding all reference (except on very special grounds) to any source of law other than itself. It is because it writes finis to the old and permits a new start being made that a code is the given solution when extensive changes in a legal system are required. H R Hahlo, “Here Lies the Common Law: Rest in Peace”, (1967) 30 Modern Law Review 241 at 243.
Simple contracts and formal contracts (deeds) [6.100] This categorisation looks at the form of the contract, rather than its content. • A simple contract may or may not be in writing but will have consideration as an essential element. • A formal contract is one which is valid because it is made using a particular written form called a contract under seal or a deed. If this form is used, consideration is not required. The Conveyancing Acts, Law of Property Acts, and other property Acts of the various States and Territories set out the requirements for a document to be a deed. The document must be written, describe itself as a deed, be signed by the parties intended to be bound and the signatures must be witnessed by someone who is not a party to the deed. It is important to remember that this division relates purely to the form used. It has nothing to do with the contents of the contract –a simple contract may have very complex terms, while a formal contract maybe very “simple” in the sense of being “straightforward”.
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Oral contracts and written contracts [6.110] With very few exceptions (most importantly, contracts for the sale of land –see [6.1480] ff) contracts can be written or oral. In fact many contracts are partly written and partly oral, which will be the case where a court holds that oral representations inducing a written contract have contractual effect. Good housekeeping nevertheless virtually demands that contracts with significant subject matter –and presumably, significant consideration –be written to overcome problems with proof that may otherwise arise in the event of subsequent disputation. One strategy for avoiding disputation is for the parties’ agreement to be properly negotiated and comprehensively recorded.
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Negotiated contracts and standard form contracts Nowhere is the confusion between legal and moral ideas more manifest than in the law of contract … The duty to keep a contract at common law means a prediction that you must pay damages if you do not keep it – and nothing else. Oliver Wendell Holmes.
[6.120] A standard form contract is a written contract prepared by the stronger party and leaving no, or little, opportunity for negotiation. They are generally take-it or leave- it contracts. We are all familiar with the protocol –“sign here, here and here” or “click here, here and here”. In theory they can be negotiated but in practice they rarely are. They are rarely read and, even if they are, probably often only imperfectly understood. Contemporary life would be impossible –certainly difficult –without standard form contracts and it is absurd to suggest that we individually negotiate “everyday” contracts. But standard form contracts do provide the opportunity for the stronger party to impose terms on the weaker and it is hardly surprising that a comprehensive body of consumer protection law –in particular, the Australian Consumer Law –confers a significant body of protection.
Consumer contracts and commercial contracts [6.130] Contracts is a contact irrespective of the parties to it. There is one law of contract. The law of contract which has developed through the common law over the past two centuries does not generally distinguish between business-to-consumer (B2C) and business-to-business (B2B) contracts. Since the end of last century there has nevertheless been a preparedness to act on the reality that the law of contract does not accommodate the vulnerability of those with insufficient bargaining power to protect their own interests, particularly consumers. A legislative safety net is now provided in particular by the ACL but also through a range of particular legislative initiatives.
6.4 AGREEMENT [6.140] It is important at the outset to understand the approach that the courts take in determining the question of agreement. The courts will ask the question: “Would a reasonable person looking at what the parties said and did, think that the parties entered into an agreement?” In other words, the courts will take into account the conduct of the parties, rather than examining what the parties thought they were doing at the time. [6.150] The courts also recognise that the parties very often do not rigidly compartmentalise their dealings into a strict “offer” and “acceptance” duality and are prepared to recognise that there may come a point of time in a business relationship where in fact 190
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Chapter 6 Contracts: Concepts of Agreement Obviously the law of contract has a very complex job to do. As business changes with the times, the law of contract needs to change if it is to be relevant and efficient. The history of the law of contract over the last 200 years has shown a process of refinement as the needs themselves have become more elaborate. But in many places the law has not changed sufficiently to provide an adequate service for the society which depends on it. D Roebuck, The Law of Contract: Text and Materials (Law Book Co, 1974).
a binding agreement has been reached. As stated in Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833 at [369]: The essential question in such cases is whether the parties conduct, including what was said and not said including the evident commercial aims and expectations of the parties, reveals an understanding or agreement or as sometimes expressed, a manifestation of mutual assent which bespeaks an intention to be legally bound to the essential elements of a contract.
In Brambles Holdings Limited v Bathurst City Council [2001] NSWCA 61 the court found an implied acceptance through acting consistently in terms with the offer despite the offer not having been formally accepted. [6.160] The first requirement of a contract therefore is that the parties to the contract (who may be natural or artificial legal persons such as companies) must have reached an agreement. In analysing situations where this requirement is disputed, the courts usually adopt a two-step approach: • Did one party (the offeror) make an offer? • Did the other party (the offeree) accept that offer?
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An offer is a promise to do something provided the other party does something in return. In the course of negotiations the offeror may make statements without intending them to amount to an offer. For a statement to fall within the legal definition of an offer it must constitute a firm and definite promise to do or refrain from doing something that, on an objective test, is intended to result in a contractual obligation on acceptance.
Kuzmanovski v New South Wales Lotteries Corporation [2010] FCA 876 [6.170] Despite apparently winning $100,000 on a $5 scratch lottery ticket based on Pictionary, NSW Lotteries refused to pay the prize on the basis that the express rules on the ticket were not exhaustive. Rule 16 of the lottery rules provided that the right to payment only required presentation of the ticket with a winning game. The Court held that there was a contractual right to the prize as the elements of offer and acceptance (in addition to the offer elements of a valid contract which were not in dispute in this case) were satisfied: Rule 16 can be seen as a promise for an act (namely presentation of the ticket for the purposes of satisfying the requirements of the rule, including the making of a determination under it) which is accepted by the doing of the act (namely presenting the ticket). By taking the trouble to present the ticket for payment: Mr Kuzmanovski did everything as its holder that Lotteries required him to do under r 16 to be considered by it in making a determination whether he was entitled to be paid. The promise was to pay on presentation of a ticket if, when presented, it was determined to be a winning one: Australian Woollen Mills [1954] HCA 20 at 33. There the Court said: It is of the essence of contract, regarded as a class of obligations, that there is a voluntary assumption of a legally enforceable duty. In such cases as the present, therefore, in order that a contract may be created by offer and acceptance, it is necessary that what is alleged to be an offer should have been intended to give rise, on the doing of the act, to an obligation. Although not much is involved in a person engaging in the act of presenting a ticket, nonetheless Lotteries’ promise to pay was conditional on that act of presentation occurring. The fact that the ticket had been purchased earlier is
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Business and the Law no answer to that act resulting in the creation of a new contract between the presenter and Lotteries for the reason given by AL Smith LJ in Carlill [1893] 1 QB at 273 namely: Now, is there not a request there? It comes to this: “In consideration of your buying my smoke ball, and then using it as I prescribe, I promise that if you catch the influenza within a certain time I will pay you £100”.
[6.180] It must be remembered that the law applies an objective theory of contract. In determining whether a binding contract has been concluded, the law is concerned not with the parties’ subjective intentions, but with the “outward manifestations of these intentions”: Taylor v Johnson [1983] HCA 5.
Rules relating to the making of an offer A contract is a mutual promise. W Paley, The Principles of Moral and Political Philosophy (1784).
[6.190] Various rules have developed to help determine whether a statement amounts to an offer: • An offer must be distinguished from an invitation to treat. • An offer must be distinguished from a supply of information. • An offer can be addressed to any number of people.
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Offer distinguished from invitation to treat [6.200] Invitation to treat is an old-fashioned term that means invitation to trade or negotiate. If a statement is regarded as an invitation to treat, the person who responds to the invitation will be treated as making the offer. This means that the maker of the invitation will be in the position of deciding whether to accept or reject any offers. Whether a particular statement is an offer or an invitation to treat depends partly on the particular words used and partly on the surrounding circumstances that indicate what a reasonable person probably intended to be the effect of the statement.
Price lists, circulars and catalogues [6.210] Generally speaking statements in price lists, circulars and catalogues will be seen as invitations to treat to avoid the possibility of more responses being received than can be supplied from the available stock.
Grainger & Sons v Gough [1896] AC 325 [6.220] A wine merchant distributed a circular that listed the prices of the wines he had in stock. It was
held that the circular was not an offer to sell those wines at those prices. Rather it was an invitation for people to respond by making offers to buy certain quantities of wine at those prices. The reason given (per Lord Herschell, at 334) was that the: transmission of such a price list does not amount to an offer to supply an unlimited quantity of the wine described at the price named, so that as soon as an order is given there is a binding contract to supply that quantity. If it were so, the merchant might find himself involved in any number of contractual obligations to supply wine of a particular description which he would be quite unable to carry out, his stock of wine of that description being necessarily limited.
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Chapter 6 Contracts: Concepts of Agreement
Advertisements [6.230] In the usual case where goods or services are advertised for sale, the advertisement is not treated as an offer but as an invitation to treat.
Partridge v Crittenden [1968] 2 All ER 421 [6.240] Partridge placed an advertisement in a magazine that said “Bramblefinch cocks, bramblefinch hens 25s each”. Partridge was charged under the Protection of Birds Act 1954 (UK) that prohibited “offering for sale” such birds. He was found not guilty on the basis that the newspaper advertisement was not an offer but merely an invitation to treat. Legislation is today more carefully drafted to accommodate the idiosyncrasies of contract law. For example, the Motor Dealers and Repairers Act 2013 (NSW) requires a sale notice to be attached to a second-hand vehicle which a motor dealer “offers or displays for sale” (s 63). In exceptional cases, statements in an advertisement will be treated as offers as is demonstrated by the Carbolic Smoke Ball case (see [6.360]).
Every sale has five basic obstacles: no need, no money, no hurry, no desire, no trust. Zig Ziglar.
Goods displayed in shops
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[6.250] Goods displayed in shop windows are generally treated the same way as advertisements.
Fisher v Bell [1961] 1 QB 394 [6.260] The defendant was prosecuted under the Restriction of Offensive Weapons Act 1959 (UK) with
“offering for sale” an offensive weapon which was defined in the Act to include flick knives. The basis of the charge was that the defendant had displayed a flick knife in his shop window with a price tag attached. He was acquitted. The reason given (per Lord Parker, at 399) was that: It is perfectly clear that according to the ordinary law of contract the display of an article with a price on it in a shop window is merely an invitation to treat. It is in no sense an offer for sale, the acceptance of which constitutes a contract.
A similar approach is taken to the display of goods in a supermarket or other self-service shops.
Pharmaceutical Society of Great Britain v Boots Cash Chemists (Southern) Ltd [1953] 1 QB 401 [6.270] Under the Pharmacy and Poisons Act 1933 (UK), the sale of certain prescribed drugs was prohibited unless “effected under the supervision of a registered pharmacist”. The Pharmaceutical Society brought an action against Boots that operated a self-service pharmacy in which customers would bring the items they wished to purchase, including prescribed drugs, from the shelf to the cashier. A registered pharmacist worked near the cashier and would, if necessary, stop the sale of a particular item. It was held that the goods displayed on the shelves with price tags constituted an invitation to treat. By taking the goods to the cashier and offering to pay, the customer made the offer that the pharmacy could then accept or reject. Because a registered
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Business and the Law pharmacist supervised the actual sale – the pharmacy’s acceptance of the customer’s offer – the legislation had not been breached. The reason given (Somervell LJ at 405-6) was as follows: [The layout could] be regarded as a more organised way of doing what is done already in many types of shops – and a bookseller is perhaps the best example –namely, enabling customers to have free access to what is in the shop, to look at the different articles and then, ultimately, having got the ones which they wish to buy, to come up to the assistant saying “I want this”. The assistant in 999 times out of 1000 says, “That is all right”, and the money passes and the transaction is completed … In the case of an ordinary shop, although goods are displayed and it is intended that customers should go and choose what they want, the contract is not completed until, the customer having indicated the articles which he needs, the shopkeeper, or someone on his behalf, accepts that offer. Then the contract is completed. I can see no reason at all, that being clearly the normal position, for drawing any different implication as a result of this layout.
IN CONTEXT
Invitations to treat and false advertising
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I never knew an auctioneer to lie, unless it was absolutely necessary. Josh Billings (1818-1885).
[6.280] Because statements in advertisements, catalogues, price lists and shop dis-
plays are normally invitations to treat and not offers, it follows that the merchant is not obliged to sell the goods to someone who purports to accept the “offer”. For example, the retailer who mistakenly advertises goods at $99 instead of the proper price of $199 is not obliged to sell them at that cheaper price. The incorrect statement is an invitation to treat and the intending purchaser’s supposed acceptance (“Great price, I’ll have a couple of those”) is in fact the offer which can be accepted or rejected by the retailer. If, as may be the case in this situation, the retailer refuses to sell at the lower price there are no contractual consequences. However, the effect of the consumer protection provisions of the Australian Consumer Law must be considered. This legislation does not affect the contractual status of the aborted transaction but provides both civil actions and criminal penalties for multiple pricing (where goods are not sold for the lowest displayed price: ss 47, 165); “false or misleading representations with respect to the price of goods or services” (ss 29(1)(i), 151); and bait advertising (ss 35, 157). Damages are also available to those who can satisfy the court that they have suffered loss or damage through their reliance on the misleading conduct.
Auctions [6.290] An auctioneer’s call for bids is, in the case of an auction with a reserve price, an invitation to treat. The bid is the offer which the auctioneer can accept or reject (Payne v Cave (1789) 100 ER 502). If the auction is “without reserve” the same rules apply, with the qualification that an auctioneer who refuses to sell to the highest bidder may be able to be sued for contravening a separate and distinct contractual obligation to sell to the highest bidder (Warlow v Harrison (1859) 120 ER 925). 194
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Chapter 6 Contracts: Concepts of Agreement
Tenders [6.300] Tendering is an increasingly common commercial practice. A company’s call for tenders is an invitation to treat. The submission of a tender in response constitutes an offer. The company can reject any tender and is not obliged to accept the highest or lowest (depending on whether the tender is to buy or sell) tender. If, however, the tender documents stated that the highest (or lowest) tender would be successful the call for tenders is an offer to deal with the person submitting the best tender: see Spencer v Harding (1870) LR 5CP 561.
Harvela Investments Ltd v Royal Trust Co of Canada Ltd [1986] AC 207 [6.310] The seller of a parcel of shares decided that it would call for sealed bids from two likely purchasers. The seller advised each of them that it would accept the highest price submitted. The plaintiff tendered $2.71 million. The defendant’s sealed bid was “$2.1 million or $101,000 in excess of any other bid whichever is the higher”. The seller accepted this latter bid. The Privy Council held that the seller had made the offer not the bidders because it agreed to accept the highest bid. However, there was an implied term that any such bid must be for a fixed amount and that the defendant did not make such a bid. There was therefore a binding contract between Harvela and the seller for the sale of the shares at $2.71 m.
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Vending machines [6.320] In Thornton v Shoe Lane Parking Ltd (1971) 2 QB 163, Lord Denning held that exclusionary terms printed on a parking station ticket had no contractual effect because they were not notified to the customer prior to the contract being made. Lord Denning explained (at 169) that: The customer pays his money and gets a ticket. He cannot refuse it. He cannot get his money back. He may protest to the machine, even swear at it. But it will remain unmoved. He is committed beyond recall. He was committed at the very moment when he put his money into the machine. The contract was concluded at that time. It can be translated into offer and acceptance in this way: the offer is made when the proprietor of the machine holds it out as being ready to receive money. The acceptance takes place when the customer puts his money into the slot. The terms of the offer are contained in the notice placed on or near the machine stating what is offered for the money. The customer is bound by those terms as long as they are sufficiently brought to his notice beforehand, but not otherwise. He is not bound by the terms printed on the ticket if they differ from the notice, because the ticket comes too late. The contract has already been made.
Not Too Good to Be True! We can sell your home for much less than you’d expect. Christchurch Star Property Weekly (New Zealand, 8 August 1996).
Offer distinguished from a supply of information [6.330] A person who is merely supplying information in response to an enquiry is not making an offer.
Harvey v Facey [1893] AC 552 [6.340] Harvey sent a telegram to Facey asking, “Will you sell us Bumper Hall Pen? Telegraph lowest cash price” Facey replied by telegram, “Lowest cash price for Bumper Hall Pen £900”. Harvey then sent another
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Business and the Law telegram which said, “We agree to buy Bumper Hall Pen for £900 asked by you. Please send us your title deeds in order that we may get early possession”. When Facey refused to go through with the sale, Harvey sued for breach of contract on the basis that Facey had made an offer which Harvey had accepted. The action failed. It was held that Facey’s telegram was not an offer but merely a supply of information in response to an inquiry. Harvey’s second telegram amounted to an offer which Facey did not accept.
An offer can be made to any number of people [6.350] In the case of a bilateral contract, the offer will usually be made to a particular person. However, in the case of unilateral contracts, the offer will normally be made to the world at large. The leading case on the circumstances in which a newspaper advertisement can give rise to a unilateral contract is the Carbolic Smoke Ball case.
There’s no such thing as a free lunch. Milton Friedman.
Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256
Case Study
Background
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[6.360] The British influenza epidemic of 1891-92 extracted a heavy toll on human life. For the
purveyors of quack medicines it provided a wonderful opportunity. The last decade of the 19th century was the golden age of quackery and the carbolic smoke ball patented by Frederick Roe in December 1889 was merely one of a range of devices that were aggressively promoted to a naive public at that time. Roe’s patent application described his smoke ball as “An improved device for facilitating the distribution, inhalation and application of medicated and other powder”. Although the patent specification envisaged other powders being used, Roe confined himself to using carbolic acid or phenol in powder form, this being the standard germ killer of the time. Early advertisements for the smoke ball made typically extravagant claims: Will positively cure Influenza, Catarrh, Asthma, Bronchitis, Hay Fever, Neuralgia, Throat Deafness, Hoarseness, Loss of Voice, Whooping Cough, Croup, Coughs, Colds, and all other ailments caused by Taking Cold.
Facts An advertisement that offered a reward of £100, “to any person who contracts the increasing epidemic, influenza, colds, … after having used the ball according to the printed directions” gave rise to litigation. The company was so convinced of the infallibility of its product that its advertisement pointed out that it had deposited the sum of £1000 with its bank as “proof of its sincerity”. The advertisement that gave rise to the litigation first appeared in the Pall Mall Gazette on 13 November 1891. Mrs Carlill bought a carbolic smoke ball from a chemist shop, and used it three times daily for two weeks in accordance with the written instructions. She nevertheless contracted influenza. When the company refused to pay the £100 reward, Mrs Carlill sued for breach of contract. Issues In its defence the Carbolic Smoke Ball Co raised virtually every possible argument that was available to deny the existence of a contract. In summary the company argued that:
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Chapter 6 Contracts: Concepts of Agreement
• The newspaper advertisement was not an offer. • Even if it was an offer, Mrs Carlill had not validly accepted the offer. • Even if she had, the arrangement was not intended to create legal relations. • Even if it was, she had provided no consideration in exchange for the company’s promise. • Even if a contract had been formed, it was of no effect since it failed to meet certain statutory requirements. Decision The English Court of Appeal dismissed all of these arguments and held that a valid contract had been formed and consequently Mrs Carlill was entitled to the £100. Implications For present purposes, the main implications of the case are in the way that the Court of Appeal rejected the various arguments advanced to suggest that the advertisement did not constitute an offer. The company’s argument that the advertisement was not a statement that people would take seriously (it was a “mere puff”) was rejected by reference to the statement that £1000 had been deposited with the Alliance Bank to show the company’s “sincerity in the matter”. Lindley LJ (at 261) stated:
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Now, for what was that money deposited or that statement made except to negative the suggestion that this was a mere puff and meant nothing at all? The deposit is called in aid by the advertiser as proof of his sincerity in the matter –that is, the sincerity of his promise to pay this £100 in the event which he has specified. I say this for the purpose of giving point to the observation that we are not inferring a promise; there is the promise, as plain as words can make it.
The company argued that the advertisement was so vague and incomplete that reasonable people would not interpret it to contain any legal promise. For example, the advertisement did not specify any time limit within which a person had to contract influenza in order for them to claim the reward. Neither was there any way for the company to check that the smoke ball had been correctly used. Bowen LJ held that: The answer to that argument seems to me to be that if a person chooses to make extravagant promises of this kind he probably does so because it pays him to make them, and, if he has made them, the extravagance of the promises is no reason in law why he should not be bound by them.
Lindley LJ conceded that the language was vague and uncertain in some respects but nevertheless considered that “business people or reasonable people” would understand it to mean that £100 would be paid to anybody who used the smoke ball three times daily for two weeks according to the printed directions, and who contracted influenza within a reasonable time after so using it. In response to the company’s argument that an offer had to be directed at a particular person or persons and could not be made to the whole world, Bowen LJ stated that: It was also said that the contract is made with all the world – that is, with everybody; and that you cannot contract with everybody. It is not a contract made with all the world. There is the fallacy of the argument. It is an offer made to all the world; and why should not an offer be made to all the world which is to ripen into a contract with anybody who comes forward and performs the condition? It is an offer to become liable to any one who, before it is retracted, performs the condition, and, although the offer is made to the world, the contract is made with that limited portion of the public who come forward and perform the condition on the faith of the advertisement.
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[6.370] It must be remembered that the contract that was found to exist in the Carbolic Smoke Ball case was a unilateral contract. The case is also important in demonstrating how the concepts of acceptance and consideration are applied in such contracts. These aspects of the case are discussed at [6.420].
Rules relating to termination of an offer The marvels of modern technology include the development of a soda can which, when discarded, will last forever –and a $7,000 car, which, when properly cared for, will rust out in two or three years. Paul Harwitz, Wall Street Journal.
[6.380] Once the court has decided that a statement amounts to an offer, it will look to see which of the following events occurred first: • The offer was revoked by the offeror. • The offer lapsed due to the passage of time. • The offer lapsed due to the death of the offeror or offeree. • The offer lapsed due to a change of circumstances. • The offer was rejected by the offeree. • The offer was accepted by the offeree.
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The offer was revoked by the offeror [6.390] The general rule is that an offer can be revoked (withdrawn or cancelled) by the offeror any time before it is accepted. This is true even if the offeror promises to keep the offer open for a certain period: Routledge v Grant (1828) 4 Bing 653. However, where the promise to keep the offer open for a certain period is given in exchange for some consideration a separate contract (called an option) arises. Revocation of the offer before the end of the period will amount to a breach of the option contract. [6.400] The general rule is that a revocation is not effective until it is communicated by the offeror to the offeree (Byrne v Van Tienhoven (1880) LR 5 CPD 344) or until the offeree becomes aware that the offer is no longer open. It is not necessary that the offeror personally communicate the revocation to the offeree. It is sufficient if a reasonable person would be aware that the offer had been withdrawn.
Dickinson v Dodds (1876) 2 Ch D 463 [6.410] Dodds offered to sell Dickinson some houses for £800. This offer was stated “to be left over Friday, 9 am”. However, Dodds sold the houses to someone else on the Thursday. Dickinson heard of this sale indirectly but still handed Dodds a formal acceptance of the offer before 9 am Friday. It was held that no contract was formed with Dickinson. The offer had been revoked before acceptance since Dickinson had actually received notice of the revocation even though this was not from the offeror. [6.420] In the case of offers that might give rise to unilateral contracts, such as that in the Carbolic Smoke Ball case, these rules are modified in two respects. First, such offers are interpreted as involving an implied promise not to revoke the offer once the offeree has started performance until there has been a reasonable time for completion. This implied promise is enforceable –it is supported by consideration through the offeree’s commencement of performance. 198
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Chapter 6 Contracts: Concepts of Agreement
Second, a revocation will be effective if it is made in the same manner as the offer irrespective of whether a particular person who was aware of the offer was actually made aware of the revocation. For example, A advertises in the local paper that he will pay a reward to anyone who finds his lost dog. B sees the advertisement and thinks about looking for the dog. The dog returns to A of its own accord. A then advertises in the local paper that the dog has returned and that the reward is withdrawn. B does not read the withdrawal notice but starts to look for the dog. The revocation is effective before B has commenced performance.
The offer lapsed due to the passage of time [6.430] Where the offer contains a limit on the time that it is to remain open, the offer lapses on the expiry of that time. If no time limit is specified, the offer will lapse if it is not accepted within a reasonable time.
The law of contract is the basis of trading and many other legal relationships. Its clarity and accessibility are therefore of the greatest importance. The general principles of contract are now well established and the Commission regards it as ripe for codification. English Law Reform Commission, First Programme (1965).
Dencio v Zivanovic (1991) 105 FLR 117
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[6.440] The plaintiff sued the defendant for damages for personal injury. On 28 September 1990 the plaintiff’s solicitor contacted the defendant’s solicitor and made an offer to settle the case for a particular amount. The defendant’s solicitor did not obtain instructions to settle the matter until 6 August 1991 when he wrote to the plaintiff’s solicitor accepting the offer. In the meantime the plaintiff’s solicitor had taken various steps to prepare the case for a court hearing, and some of these steps were known to the defendant’s solicitors. The court held that there was no binding contract between the plaintiff and the defendant, since the offer made by the plaintiff to settle the matter had not been accepted by the defendant within a reasonable time.
The offer lapsed due to the death of the offeror or offeree [6.450] The general rule is that an offer which has not been accepted is automatically terminated on death of the offeror or the offeree. There is a qualification to this rule in the case of the death of the offeror –the offer can be accepted by an offeree who is not aware of the offeror’s death unless the offer requires personal involvement by the deceased person as performance in such a case is clearly impossible. It should be noted that once an offer has been accepted, the death of one of the parties does not generally affect the contract. The rights and obligations of the deceased person are taken over by the person who is appointed to manage the affairs of the dead person (personal representative). However, if the contract involves doing things that only the dead person can do (such as painting a portrait) the contract will come to an end due to the doctrine of frustration (see [6.2710] ff).
The offer lapsed due to a change of circumstances [6.460] An offer will lapse if it expressly or impliedly depends on a particular state of affairs which ceases to exist prior to the offer being accepted.
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Financings Ltd v Stimson [1962] 3 All ER 386 [6.470] Prior to a dealer’s acceptance of a customer’s offer to purchase a car, the car was stolen and later recovered in a damaged condition. It was held that the dealer could not then accept the offer because the car was not in substantially the same condition as when the offer was made.
The offer was rejected by the offeree I don’t want a lawyer to tell me what I cannot do; I hire him to tell me how to do what I want to do. J Pierpont Morgan.
[6.480] If the offeree rejects the offer, the offer comes to an end and the offeree cannot later change his mind and accept the offer (see Hyde v Wrench (1840) 49 ER 132 ([6.540])). If the offeree’s response indicates a preparedness to deal with the offeror but on slightly different terms it is treated as a counter-offer. A purported “acceptance” which is qualified and introduces a new term is not an effective acceptance (see Turner Kempson & Co Pty Ltd v Camm [1922] VLR 498 (see [6.490]). It operates as a counter-offer which has the effect of destroying the original offer, but which can itself be accepted. (“I accept, provided that the vehicle passes my mechanic’s inspection” is a counter-offer because of the proviso added.)
Turner Kempson & Co Pty Ltd v Camm [1922] VLR 498
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[6.490] Turner Kempson offered to supply to Camm a quantity of raspberry pulp at a certain price which
was to be delivered to Camm in Melbourne, with payment within seven days. Camm replied adding terms as to the quality of the product to be delivered and staggering the delivery dates. Turner Kempson refused to deliver the pulp, arguing that there was no contract in existence. The court held that by adding new terms to the purported acceptance, Camm had made a counter-offer to Turner Kempson which it had not accepted. There was thus no contract in existence.
A different outcome will occur where the response to the offer is not seen as a counter- offer but merely as a request for further information. In these circumstances, the offer remains open and may later be accepted by the offeree.
Stevenson Jacques & Co v McLean (1880) 5 QBD 346 [6.500] McLean made an offer by telegram on Saturday to sell 3800 tons of iron to Stevenson “at 40s net cash per ton, open till Monday”. At 9.42 am on Monday Stevenson sent a telegram to McLean that said “Please wire whether you will accept 40s for delivery over two months or if not longest limit you would give”. When McLean did not reply, Stevenson sent another telegram at 1.34 pm accepting the offer made by McLean on the previous Saturday. By this time McLean had sold the iron to someone else but his telegram to this effect did not reach Stevenson until 1.46 pm. Stevenson sued for breach of contract. It was held that a valid contract had been formed. The 9.42 am telegram was not a counter-offer –it was merely a request for further information. It did not destroy the original offer that was validly accepted by the 1.34 pm telegram.
The offer was accepted by the offeree [6.510] Where the offer is accepted by the offeree before any of the other events discussed above occur, then an agreement will be formed and, subject to the other requirements of a 200
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Chapter 6 Contracts: Concepts of Agreement
valid contract being met, a contract will arise. At this point neither party is free to change their mind without being subject to an action for breach of the contract.
Rules relating to acceptance [6.520] Several rules have developed in cases where the fact of acceptance has been disputed. These include that: • The acceptance must be absolute and unqualified. • The acceptance must be made in reliance on the offer. • Any conditions as to the method of acceptance must be complied with. • The acceptance only becomes effective when it is communicated to the offeror.
The acceptance must be absolute and unqualified
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[6.530] For a statement to be seen as an acceptance of an offer it must be a clear commitment to all the terms of the offer. As noted at [6.480], if the statement attempts to introduce any qualifications or new terms, it will be seen as a counter-offer that destroys the previous offer. A conditional “acceptance” is not in law an acceptance. There is nevertheless scope for debate on whether a response is or is not conditional. The classic example is an acceptance that is expressed to be “subject to contract” or “subject to my solicitor’s approval” (see [7.80]).
Perhaps one day a legal philosopher of great wisdom and knowledge of the world will be able to extract from all the differing exceptions a few golden rules which will work in all those cases of conflict which we now categorise as contractual … But until then we should be happy with our anomalies and exceptions, and look for more ways of creating new principles to deal with problems of limited scope. D Roebuck, “The Crisis of Contract” (1969) 3(2) University of Tasmania Law Review 191 at 193.
Hyde v Wrench (1840) 49 ER 132 [6.540] The defendant’s offer to sell his property for 1000 pounds was countered by the plaintiff’s offer
for 950 pounds, which was rejected by the defendant. The plaintiff’s later “acceptance” of the original 1000 pound offer was invalid. The counter-offer destroyed the original offer, and, in effect, operated as a fresh offer to buy the property for 1000 pounds. Because the defendant had not accepted this offer there was no contract.
If the response to the offer is a request for further information rather than a counter offer the enquiry has a neutral effect on the offer which remains open and available to be accepted, rejected or countered with a counter-offer (see Stevenson Jacques & Co v McLean (1880) 5 QBD 346 at [6.500]).
The acceptance must be made in reliance on the offer [6.550] To be effective, an “acceptance” must be made in reliance on the offer. If, for example, an action for which a reward has been offered is performed in ignorance of the reward, there is no contractual entitlement to the reward. Provided, however, that the acceptor has knowledge of the offer, the particular motive in accepting is not relevant. The Australian High Court has nevertheless held that mere knowledge by itself is insufficient –the offer must also be present to the offeree’s mind at the time of acceptance:
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R v Clarke [1927] HCA 47 [6.560] The plaintiff failed in an action to claim a reward offered for information leading to the conviction of
a murderer. He knew of the reward but he admitted in court that he gave the information to save himself from being charged with the murder and with the reward “not present to his mind”. Higgins J stated that: The motive inducing consent may be immaterial but the consent is vital. Without that there is no contract … Clarke had seen the offer, indeed; but it was not present to his mind –he had forgotten it, and gave no consideration to it, in his intense excitement as to his own danger. There cannot be assent without knowledge of the offer; and ignorance of the offer is the same thing whether it is due to never hearing of it or to forgetting it after hearing.
As Isaacs ACJ pointed out: An offer of £100 to any person who should swim a hundred yards in the harbour on the first day of the year would not in my opinion be satisfied by a person who was accidentally or maliciously thrown overboard on that date and who swam the distance simply to save his life, without any thought of the offer.
Any conditions as to the method of acceptance must be complied with [6.570] The offeror can prescribe a particular method of acceptance which must be complied with for the acceptance to be effective.
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Eliason v Henshaw (1819) 4 Wheaton 225 [6.580] Eliason sent a letter by wagon to Henshaw offering to buy flour and requesting that the answer be sent by the returning wagon. Henshaw purported to accept this offer through an alternative method of communication which he expected would arrive sooner but which in fact arrived six days after the wagon. Henshaw’s action for breach of contract failed as the acceptance was not in the stipulated manner. Whenever you accept our views we shall be in full agreement with you. Moshe Dayan.
If Henshaw’s reply had in fact reached Eliason as early as he hoped, the court would have had to decide whether the specified method was the only way the offer could be accepted or whether an equally advantageous method of communication could be used instead. If no particular method is specified, acceptance can be by words (spoken or written) or sometimes even by the offeree’s actions.
Brogden v Metropolitan Railway Co (1877) 2 App Cas 666 [6.590] The parties acted on the terms of a written offer which, by oversight, had never been accepted. It was held that because the parties had conducted themselves as if they were bound by the offer that had not been formally accepted there was a contract between them on those terms.
The acceptance only becomes effective when it is communicated to the offeror [6.600] The general rule, which is subject to some exceptions, is that acceptance is effective at the time it is communicated to the offeror. The general rule is that silence cannot 202
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Chapter 6 Contracts: Concepts of Agreement
constitute acceptance even where the offeror states that he will treat silence as acceptance of his offer.
Felthouse v Bindley (1862) 142 ER 1037 [6.610] The plaintiff had written to his nephew offering to buy a particular horse at a particular price and
stating that “If I do not hear from you to the contrary, I will take it you have accepted”. The nephew, intending to accept the offer, told the auctioneer (the defendant) to withdraw the horse from the sale. The auctioneer inadvertently sold the horse at auction and was sued by the plaintiff in the tort of conversion (for wrongfully dealing with goods in a manner inconsistent with the owner’s rights). The success of this action depended on the plaintiff establishing that he had title to the horse ie that ownership had passed to him under the contract with his nephew. The action was unsuccessful, the court holding that the uncle’s offer had not been accepted. Silence cannot constitute acceptance and communication to a third party, the auctioneer, was not communication to the offeror as required.
[6.620] To be effective, the acceptance must be communicated to the offeror by the offeree or someone who is authorised by them.
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Powell v Lee (1908) 99 LT 284 [6.630] The plaintiff was informed by a member of an appointments committee who was acting without authority that his application was successful. The committee later reconsidered its earlier decision and resolved to appoint another applicant. The plaintiff’s action for breach of contract was unsuccessful, with the court holding that an acceptance is not effective unless it is communicated by the offeree or their authorised agent. It is important to remember that this communication can take place by conduct so that in certain circumstances the silence of the offeree can equate to conduct. Thus an offeree may make it clear to an offeror that he accepts the offer made unless the offeree says something to the contrary or for example signs a document agreeing to a series of deliveries by the offeror “until further notice”.
Empirnall Holdings Pty Ltd v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 [6.640] Empirnall engaged Machon Paull to develop a site it owned. After work commenced Machon Paull submitted a written contract to Empirnall which was never signed. Work on the site continued to be made. The issue of whether there was a contract between the parties arose when Empirnall went bankrupt owing Machon Paull a considerable amount. The Court confirmed the general rule that “silent acceptance of an offer is generally insufficient to create any contract” but held that silence combined with other circumstances may constitute valid acceptance (at 535 per McHugh JA): Where an offeree with a reasonable opportunity to reject the offer of goods or services takes the benefit of them under circumstances which indicate that they were to be paid for in accordance with the offer, it is open to the tribunal of fact to hold that the offer was accepted according to its terms.
This was the case here. Empirnall’s acceptance of the work was acceptance of the terms offered by Machon Paull. It was not “mere silence, but included conduct in taking the benefit of an offer, knowing the terms”.
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Northstate Carpet Mills Pty Ltd v BR Industries Pty Ltd [2006] NSWSC 1057 [6.650] The first defendant wished to obtain carpet from the plaintiff on credit. A representative of the plaintiff told the second defendant who was a director of the first defendant that it required completion of a credit application. There was attached to the application form a guarantee. The credit application form was filled out but not the guarantee. There was no evidence that the application or guarantee had been accepted by the plaintiff, nor was the credit application form ever returned to the first defendant. The director of the first defendant said that he deliberately did not fill out the guarantee form. The plaintiff proceeded to supply carpet to the first defendant. When the first defendant defaulted on its payment, the plaintiff sued under the guarantee, arguing that the guarantee had been accepted by virtue of the conduct of the plaintiff in supplying the carpet to the first defendant. It was held that there was no contract of guarantee between the plaintiff and the defendant. The offer made in the application was for a 45-day account and yet the plaintiff told the defendant that it had opened a 14-day account only. Even if it could be argued that returning the guarantee was an offer, it was only an offer to guarantee a 45-day account and not a 14-day account. The Court pointed out (at [40]) that:
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Unfortunately courts have been noticing in the past few years that commercial enterprises have been cutting corners, mostly in the name of costs reduction and it has not been uncommon for finance companies not to send the debtor or its guarantor copies of the completed finance contracts and rely on the fact that the customer has the loan or product as the case may be. It is fashionable to minimise the importance of complying with the law of contract. Unfortunately, this line of thinking while it may reduce costs, leads to the present sort of problem that is where too little attention was given to the making of the contract as a result of which what the supplier thought was a guaranteed transaction was not. English law, having committed itself to a rather technical and schematic doctrine of contract, in application takes a practical approach, often at the cost of forcing the facts to fit uneasily into the marked slots of offer acceptance and consideration. New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd [1975] AC 154 per Lord Wilberforce.
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[6.660] There are two exceptions to the rule that acceptance must be actually communicated to the offeror: • where the offeror waives the requirement of communication; and • the postal acceptance rule. The first exception to the general rule that acceptance is only effective when it is communicated to the offeror relates to unilateral offers of the type that arose in the Carbolic Smoke Ball case, where it was held that common sense dictates that the offeror impliedly dispenses with the necessity to communicate acceptance and imposes some other method of acceptance. In that case the argument advanced by the company that even if the newspaper advertisement was an offer, Mrs Carlill had failed to communicate her acceptance of it to them was rejected on the basis that (per Bowen LJ at 270): If I advertise to the world that my dog is lost, and that anybody who brings the dog to a particular place will be paid some money, are all the police or other persons whose business it is to find lost dogs to be expected to sit down and write me a note saying that they have accepted my proposal? Why, of course, they at once look after the dog and as soon as they find the dog they have performed the condition. The essence of the transaction is that the dog should be found, and it is not necessary under such circumstances, as it seems to me, that in order to make the contract binding there should be any notification of acceptance. It follows … from the nature of the thing that the performance of the condition is sufficient acceptance without the notification of it, and a person who makes an offer in an advertisement of that kind makes an offer which must be read by the light of that commonsense reflection. He does, therefore, in his offer impliedly indicate that he does not require notification of the acceptance of the offer.
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Chapter 6 Contracts: Concepts of Agreement
The second exception to the general rule that an acceptance takes effect when it is communicated to the offeror is created by the postal rule which states that where it is appropriate to use the post as the method of communicating acceptance, the acceptance takes effect at the time of posting rather than the time of receipt by the offeror. The postal rule was developed on the basis that an offeror who is prepared to accept a mailed acceptance should take the risk of loss or delay in the mail.
The postal rules
Household Fire & Carriage Accident Insurance Co (Ltd) v Grant (1879) LR 4 Ex D 216 [6.670] Grant applied by post for shares in the insurance company. The company’s letter of acceptance allotting shares to Grant was never delivered, despite being properly addressed. Because he had not received notification, Grant assumed that his offer to acquire shares had not been accepted and the amount owing on the shares was not paid. When the company went into liquidation and the liquidator demanded payment, Grant denied that he was a shareholder (and therefore not liable for the uncalled amount) because there was no contract. The court held that there was a contract, the company’s acceptance by the allotment of shares being complete on posting.
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[6.680] The rule applies: • only where the circumstances are such that the parties thought that the post might be used to communicate acceptance; • in such a case even if the offeree never receives the letter. It does not apply: • if the offeree wrongly addresses the letter or puts inadequate stamps on it; • in any circumstances where the offeror requires that the acceptance must actually be received by the offeror.
I have received memos so swollen with managerial babble that they struck me as the literary equivalent of assault with a deadly weapon. Peter Baida, American Heritage (April 1985).
Nor to: • the revocation of an offer; • any instantaneous method of communication for example email or fax.
Holwell Securities Ltd v Hughes [1974] WLR 155 [6.690] An option agreement provided that the option could be exercised by “notice in writing” within a particular period. Within that period, the plaintiff hand-delivered a letter advising that it was intending to exercise its option and enclosing a cheque for the deposit. A letter formally exercising the option was later sent within the specified period but never arrived. The court held that there was no acceptance and therefore no contract. The words “by notice in writing” displaced the postal rule and made it clear that actual communication was required. The postal rule has no application to the revocation of an offer.
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Henthorn v Fraser [1892] 2 Ch 27 [6.700] An offer was stated to be open for 14 days but it was revoked by mail the next day. Before the letter of revocation was delivered, the offer was accepted by post. It was held that a contract had been formed. The revocation of the offer was not effective until it was actually communicated to the offeree which occurred after the contract was formed due to the operation of the postal rule that applied to the letter of acceptance.
Revocation of acceptance [6.710] An offeree can revoke an acceptance provided that the revocation is communicated to the offeror before the acceptance is received. Since the postal rule does not apply to the revocation of an acceptance, it is not effective unless actually communicated to the offeror before the moment acceptance.
Electronic communications
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There is no surer way to find out what parties meant, than to see what they have done. Insurance Co v Dutcher 95 US 269 (1877) at 273 per Swayne J.
[6.720] The growth of e-commerce has required a legislative response relating to the transmission and receipt of electronic communication which will be relevant whenever the question of offer and acceptance arises using this method. This legislation, the Electronic Transactions Act 1999 (Cth) and its State and Territory counter parts are dealt with in Chapter 7. However, it is important to remember that the general legal principles of contract law discussed in this chapter apply equally to e-commerce contracts as to contracts made by any other form of communication (see [7.610]).
Conditional agreements [6.730] Parties may make a contract “subject to” a designated event such as “subject to finance” or “subject to solicitors’ approval”. Such “subject to” clauses create a condition precedent –a contingency which must occur before a contract is binding. In Perri v Coolangatta Investments Pty Ltd [1982] HCA 29 Mason J stated (at [15]) that: There is an obvious difference between the condition which is precedent to the formation or existence of a contract and the condition which is precedent to the obligation of a party to perform his part of the contract and is subsequent in the sense that it entitles the party to terminate the contract on non-fulfilment. In the first category the transaction creates no rights enforceable by the parties unless and until the condition is fulfilled. In the second category there is a binding contract which creates rights capable of enforcement, though the obligation of a party, or perhaps of both parties, to perform depends on fulfilment of the condition and non-fulfilment entitles him to terminate.
Meehan v Jones [1982] HCA 52 [6.740] A contract contained a provision to the effect that it was subject to suitable finance being available.
When the purchaser told the vendor they had found satisfactory finance, the vendor refused to complete, resulting in a claim for specific performance by the purchaser. The vendor argued that no binding contract had been made between the parties as the term “satisfactory” referred to satisfaction of the vendor and the purchaser, leaving vital matters yet to be agreed, and rendering what was perceived by the purchaser to be a contract a mere “agreement to agree”. It was also argued that the language in the clause was so imprecise 206
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Chapter 6 Contracts: Concepts of Agreement and indefinite that it would not be possible for a court to determine what satisfactory finance meant. A further argument made was that if the agreement be read as the purchaser would prefer, the purchaser would have discretion as to whether to perform the contract meaning what appeared to be a contract was illusory. The appeal by the purchaser was allowed on the grounds that the terms were included in the contract for the purchaser’s benefit to ensure the contract would be performed (at [6], [7]): Of course it is obvious enough that every such case must depend on the particular words of the contract in question, and that it is not profitable to compare with each other cases decided on different contractual provisions. However, it may be possible to state principles which will provide some guidance through the thicket of decisions. When the words of a condition state that a contract is subject to finance, or to suitable finance, or to satisfactory finance, the question immediately arises whether the test which is required to be applied is a subjective or an objective one. On the one hand, the contract may be conditional upon the purchaser obtaining finance which he finds sufficient or satisfactory –such finance as he honestly thinks he needs to complete the purchase. On the other hand, the condition may be fulfilled if finance is available which the purchaser ought to find sufficient, or which ought reasonably to satisfy him, even though he honestly, but unreasonably, regards it as insufficient or unsatisfactory. The fact that opinions may differ as to which of these two meanings is given to the words of the clause does not mean that the clause is uncertain. If the Court, in construing the contract, can decide which of the two possible meanings is that which the parties intended, there will be no uncertainty … It is only if the court is unable to put any definite meaning on the contract that it can be said to be uncertain.
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This case illustrates that the court will look to the substance and reality of the agreement made to determine each parties’ rights and obligations under the bargain they have struck (at [28]): Here the expressed intention of the parties was that the purchaser would obtain finance; his obtaining of finance on satisfactory terms was necessary to give the transaction its intended efficacy. The consequence would be that he had an obligation to do all that was reasonable on his part to obtain that finance. It would make for greater consistency to say that, if the purchaser is bound to act reasonably in seeking to obtain finance, he is bound to act reasonably as well as honestly in deciding whether the finance was satisfactory. So understood the special condition would preserve an even balance between the vendors and the purchaser. However, I have no need to decide the question. Here it makes no difference whether the purchaser was under an obligation to act honestly or honestly and reasonably in deciding whether the terms of an offer of finance were satisfactory [because finance had been obtained].
An order for specific performance was made.
“Subject to contract” agreements
Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 [6.750] The memorandum evidencing a sale of real property contained a clause providing that “This agreement is made subject to the preparation of a formal contract of sale which shall be acceptable to my solicitors on the above terms and conditions”. The sale fell through and a dispute arose as to which party was entitled to the deposit. If there was an enforceable contract, the vendor was entitled to the deposit. If there was not an enforceable contract the purchaser was entitled to the deposit. It was held that no contract had arisen. In that case, the High Court considered that agreements “subject to contract” could fall into three categories. Dixon CJ, McTiernan and Kitto JJ stated (at 360) that: Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes.
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Business and the Law It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.
The High Court was of the view that in the first two cases there was a contract, but that in the third case the parties did not intend to be bound until the formal contract was prepared (at 360, 361): In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution … Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own … The parties, may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document … or simply because they wish to reserve to themselves a right to withdraw at any time until the formal document is signed …
In determining into which category a particular case falls, the High Court held (at 362) that:
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The question depends upon the intention disclosed by the language the parties have employed and no special form of words is essential to be used in order that there shall be no contract binding upon the parties before the execution of their agreement in its ultimate shape … Nor is any formula, such as “subject to contract” so intractable as always and necessarily to produce that result.
In this case, it was held that the agreement fell into the third category and, despite payment of a deposit, there was no binding contract between the parties.
The common law evolves not merely by breeding new principles but also, when they are fully grown, by burying their ancestors. In Hong Kong Fit Shipping Co Ltd v Kawasaki [1962] 1 All ER 474 per Diplock JJ.
The law has also had to take into account the modern practice of entering a document which is often described as a Heads of Agreement. This issue is dealt with at [7.120].
Vague, uncertain and incomplete agreements [6.760] From time to time the courts are faced with a situation where the parties have clearly reached an agreement but the courts are unable to decide if the agreement has been broken. This may be because the terms of the offer are too vague for the courts to decide what they mean or because the agreement leaves out something that turns out to be important. This might arise where the parties have used wording such as “reasonable” but which cannot be linked to any external standard or the parties have referred to something which has to be agreed in the future. In some instances the court will be forced to admit that the agreement is not enforceable as a contract. However, courts will try as much as possible to find that commercial agreements are binding and are reluctant to find such agreements void for uncertainty. In particular, this might mean looking at any agreement on a clause-by-clause basis to see what can be salvaged as enforceable, rather than declaring the whole agreement as unenforceable. In Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 25 Young CJ pointed out
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Chapter 6 Contracts: Concepts of Agreement
that this was part of the commercial approach which courts should take to agreements, particularly where agreements have been entered into by parties experienced in commercial dealings. He was thus able to look at each issue which the trial judge found had not been agreed on and discover an explanation which for the most part gave effect to the transaction.
IN CONTEXT
The general principles [6.770] The general principles that apply in cases where agreements are vague, uncer-
tain and incomplete –the issues frequently overlap –were recently restated by Sackville JA (with whom Macfarlan and Gleeson JA agreed) in Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 (at [59]-[64]):
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First, in Australia the “objective” theory of contract has been accepted. Consequently, in determining whether a binding contract has been concluded, the law is concerned not with the parties’ subjective intentions, but with “the outward manifestations of these intentions”. Thus what matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. In a case where the ordinary process of offer and acceptance has taken place, the court inquires as to what a reasonable person would infer or deduce from observing the exchanges between the parties. Secondly, it is not necessary, in determining whether a contract has been formed, to identify a precise offer or acceptance; nor is it necessary to identify a precise time at which an offer or acceptance can be identified. The questions to be asked are: in all the circumstances can an agreement be inferred? Has mutual assent been manifested? What would a reasonable person in the position of the [plaintiff] and a reasonable person in the position of the defendant think as to whether there was a concluded bargain? Thirdly, an agreement that is incomplete will not give rise to an enforceable contract. As was said in Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd [1982] HCA 53: It is established by authority, both ancient and modern, that the courts will not lend their aid to the enforcement of an incomplete agreement, being no more than an agreement of the parties to agree at some time in the future.
Agreement is brought about by changing people’s minds – other people’s. Si Hayakawa.
An alleged contract will fail for incompleteness if, even though the parties have used clear language, a term which is regarded as essential as a matter of law has not been agreed. The principle was stated by Viscount Dunedin in May and Butcher Ltd v The King [1934] 2 KB 17: To be a good contract there must be a concluded bargain, and a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. Of course it may leave something which still has to be determined, but then that determination must be a determination which does not depend upon the agreement between the parties.
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If the parties have not agreed on all essential terms, for example because they have left one such term to be settled by future agreement, the contract is incomplete no matter what the parties themselves may think. Moreover, if the parties have not reached consensus on the essential terms of the contract, there will be no binding contract notwithstanding that one of the parties has commenced work referable to the agreement. Depending on the circumstances, non-contractual remedies, for example on restitutionary principles, may be available but the contract itself is incomplete and therefore unenforceable. Fourthly, for an agreement for the supply and sale of goods to constitute an enforceable contract, the parties must agree as to price, although they may leave the price to be determined by a third person or by an agreed mechanism. Thus, if a contract for the supply or sale of goods expressly provides for the price to be agreed between the parties, there is no concluded contract.
Scammell and Nephew Ltd v HC and JG Ouston [1941] AC 251 [6.780] A written agreement relating to the purchase of a truck required that a deposit be paid and that the
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balance of the purchase price be paid “on hire-purchase terms over a period of two years”. It was held that this agreement was not enforceable as a contract because the court was unable to give the quoted phrase any definite meaning. This was explained (per Lord Wright, at 268) as follows: … the language used was so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any particular contractual intention. The object of the court is to do justice between the parties and the court will do its best, if satisfied that there was an ascertainable and determinate intention to contract, to give effect to that intention, looking at substance and not mere form. It will not be deterred by mere difficulties of interpretation. Difficulty is not synonymous with ambiguity so long as any definite meaning can be extracted. But the test of intention is to be found in the words used. If these words, considered however broadly and untechnically and with due regard to all the just implications, fail to evince any definite meaning on which the court can safely act, the court has no choice but to say that there is no contract. Such a position is not often found. But I think that it is found in this case. My reason for so thinking is not only based on the actual vagueness and unintelligibility of the words used, but is confirmed by the startling diversity of explanations, tendered by those who think there was a bargain, of what the bargain was.
When a man repeats a promise again and again, he means to fail you. Desmund Fuller.
It is clear from this passage that the courts are reluctant to deprive agreements which the parties clearly intended to be binding from having contractual effect, and any difficulty in interpreting the parties’ intention will not absolve the court from the responsibility to determine that agreement.
Hillas & Co Ltd v Arcos Ltd [1932] All ER Rep 494 [6.790] The contract was for the supply of “22,000 standards of softwood goods of fair specification over the season 1930” and included an option for a further 100,000 standards in 1931. It was held that the agreement was enforceable as a contract since the meaning of these terms could be determined by reference to the previous dealings between the parties. The court commented (at 503 per Lord Wright) that: 210
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Chapter 6 Contracts: Concepts of Agreement Business people often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is, accordingly, the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects.
If a term of the agreement that is vague or meaningless can be deleted without undermining the basis of the contract, the court will sever the term and enforce the rest of the contract (Whitlock v Brew (1968) 118 CLR 445).
Nicolene Ltd v Simmonds [1953] 1 QB 543 [6.800] A written contract included a provision that stated that the contract was subject to the “usual conditions of acceptance”. The court deleted the provision from the contract on the basis that there were no “usual conditions of acceptance” and deletion of the provision did not affect the rest of the contract.
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[6.810] Similar principles apply where the terms of the agreement are clear but the agreement leaves out something that turns out to be important in a subsequent dispute. In Scammell v Ouston [1941] 1 AC 251, in which the court held that the meaning of the phrase “on hire-purchase terms” was too uncertain to be enforced, Lord Wright held that the contract was also unenforceable due to being incomplete (at 268): But I think the other reason, which is that the parties never in intention nor even in appearance reached an agreement, is a still sounder reason against enforcing the claim. In truth, in my opinion, their agreement was inchoate and never got beyond negotiations. They did, indeed, accept the position that there should be some form of hire-purchase agreement, but they never went on to complete their agreement by settling between them what the terms of the hire-purchase agreement were to be. The furthest point they reached was an understanding or agreement to agree upon hire-purchase terms.
Successful collaborative negotiation lies in finding out what the other side really wants and showing them a way to get it, while you get what you want. Herb Cohen.
There are some common types of documents where the issue of incompleteness might arise: • agreements that are “subject to contract” were discussed at [6.750] (see Masters v Cameron; • agreements to agree are not enforceable because they clearly do not constitute a concluded bargain leaving nothing further to be settled between the parties.
May & Butcher Ltd v The King [1934] 2 KB 17 [6.820] A written agreement stated that the prices on which the parties agreed to deal “shall be agreed upon from time to time”. It was held that the agreement was not enforceable since there were no objective criteria or agreed formula by which the price could be made certain.
Although an “agreement to agree” is not an enforceable contract, an agreement to negotiate may be enforceable. This is further discussed in Chapter 7.
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Business and the Law A passing familiarity with the law of contracts is all you need to hold yourself out as a commercial lawyer. Leases, loan agreements, trusts and lots of other documents with highfaluting names are really just contracts. This should be borne in mind if another lawyer presents you with some document and you have no idea what it is. If it requires signing, and it isn’t either a will or something that has to be filed in court, you can call it a contract without fear of being laughed at. D R White and P R Jenks, The Official Lawyer’s Handbook (Harriman House, 1992).
6.5 INTENTION TO CREATE LEGAL RELATIONS Intention to be bound [6.830] An essential element for a valid and enforceable contract is an intention to create legal relations –that the parties intend to be legally bound by their agreement. This requirement applies to all contracts but is rarely an issue in practice because of presumptions –that can be rebutted –that household, domestic and social arrangements are not intended to be legally binding while business agreements are presumed to be legally binding. Both presumptions are merely starting points for analysis and evidence may be produced to rebut the presumption. Of course some situations are more difficult to classify and the court will determine whether or not there is contractual intention from the surrounding circumstances. It is clear that in many situations an offer is accepted without any intention that the agreement so reached should carry legal consequences should one person fail to abide by the agreement. The most obvious examples are the day-to-day arrangements made by members of a household. The courts have recognised this by a presumption that agreements in a family domestic social context are not intended to be legally enforceable. On the other hand, in the case of agreements arrived at in a commercial context, the courts have presumed that such agreements are normally intended to be legally enforceable. Both presumptions are merely starting points for analysis and evidence may be provided to rebut the presumptions as is discussed below. However, the High Court has recently stated, in the Ermogenous case that less emphasis should be placed on these presumptions and that they should be looked at as part of the surrounding circumstances; that is, they were there to identify the party who had the onus of proof rather than form a hard and fast rule.
Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8 [6.840] The defendant appointed the plaintiff as Greek Orthodox Archbishop of Australia. It paid him an agreed salary. When his employment was terminated, he sued to recover payments he alleged were due for annual and long service leave. The defendant argued (inter alia) that there was a presumption that agreements between Ministers of Religion and their churches relating to remuneration were not legally enforceable. This presumption it was argued stemmed from a number of cases that decided that Anglican clergy were not “employees” of the Church of England due to the relationship between the Church and its clergy under Canon Law. It was held that no such presumption existed and that there was in fact a contract of employment between the Archbishop and the defendant. There was a danger that a proposition such as not presuming an intent to enter legal relations could be equal to a presumption that an agreement made between a clergyman about remuneration would not give rise to an enforceable contract: It is said that it may be presumed that there are some “family arrangements” which are not intended to give rise to legal obligations and it was said in this case that it should not be presumed that there was an intention to create legal relations because it was a matter concerning the engagement of a minister of religion. For our part, we doubt the utility of using the language of presumptions in this context. At best, the use of that language does no more than
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Chapter 6 Contracts: Concepts of Agreement invite attention to identifying the party who bears the onus of proof. In this case, where issue was joined about the existence of a legally binding contract between the parties, there could be no doubt that it was for the appellant to demonstrate that there was such a contract. Reference to presumptions may serve only to distract attention from that more basic and important proposition.
per Gaudron, McHugh, Hayne and Callinan JJ, at [26]
Ashton v Pratt [2015] NSWCA 12 [6.850] The ex-mistress of one of Australia’s richest men claimed that in a conversation in November 2003 Mr Pratt promised to provide $2.5 million on trust for each of Ms Ashton’s two children, pay her an allowance of $500,000 per year, as well as $36,000 for rent and $30,000 per year for travel expenses in consideration for her not returning to the escort industry but providing services to him while in Sydney for one or two nights a week. The primary issues for the court were whether the parties intended to create legal relations and whether terms were sufficiently certain to create a binding contract. The Court of Appeal concluded it was not apparent that either party intended the promises would be legally enforceable.
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The Court held that the parties did not intend to create legal relations, and that even if they did, the contract would be void for uncertainty due to incompleteness in a number of “essential elements” which could not be cured by a Court implying terms of reasonableness (at [82]): Although it may be readily inferred from the context in which the conversations took place that it was intended that Ms Ashton would occupy a position which could be described as Mr Pratt’s mistress, apart from concentrating on Mr Pratt’s needs and wants there is no delineation of the extent of Ms Ashton’s obligations. There was no evidence to suggest that the position of mistress imposes any particular obligation on a person occupying that position. Reasonable persons would not expect that question to be determined by a court.
IN CONTEXT
Pre-nuptial agreements [6.860] Since the year 2000, couples (married or de facto) have been able to enter into
pre-nuptial agreements, also known as Binding Financial Agreements (BFAs). However a 2008 decision of the Full Court of the Family Court in Black v Black [2008] FamCAFC 7 cast doubt on the validity of such agreements through a restrictive interpretation of the BFA provisions of the Family Law Act 1975 (Cth) leading to much uncertainty. Retrospective legislation was passed to deal with issues raised by the decision but the changes raised further technical legal issues with the validity of BFAs, making it difficult to find a lawyer to draft one due to the potential risk of being sued. In April 2015, the Attorney-General released proposed amendments to “remove existing uncertainties around requirements for entering, interpreting and enforcing these out-of-court private arrangements”. Given a general lack of judicial resources, finding a solution to this particular problem – when parties have voluntarily entered such arrangements on legal advice and in the absence of duress – is of high importance in view of the proportion of failed relationships which rely on such agreements.
Agree, for the law is costly. Proverb, Camden, Remains concerning Britain (1674).
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Social and domestic arrangements [6.870] In social and domestic agreements the law presumes that the parties did not intend legal obligations to arise from their arrangement.
Balfour v Balfour [1919] 2 KB 571 [6.880] Mr and Mrs Balfour entered into an arrangement while on holiday in England that he would return
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to Sri Lanka while she would stay on in London due to health reasons and that Mr Balfour would pay his wife £30 per month until she returned to Sri Lanka. Mr Balfour paid this amount for a while but when his wife failed to return to Sri Lanka he stopped. His wife sued. Her action failed on the basis that at the time the arrangement was made the parties did not intend that the agreement would be legally enforceable. Atkin LJ noted that “the ordinary example is where two parties agree to take a walk together, or where there is an offer and an acceptance of hospitality”. In relation to such agreements, Atkin LJ commented (at 578) that: Nobody would suggest in ordinary circumstances that those agreements result in what we know as a contract, and one of the most usual forms of agreement which does not constitute a contract appears to me to be the arrangements which are made between husband and wife. It is quite common, and it is the natural and inevitable result of the relationship of husband and wife, that the two spouses should make arrangements between themselves agreements such as are in dispute in this action agreements for allowances, by which the husband agrees that he will pay to his wife a certain sum of money, per week, or per month or per year, to cover either her own expenses or the necessary expenses of the household and the children of the marriage, and in which the wife promises either expressly or impliedly to apply the allowance for the purpose for which it is given. To my mind those agreements, or many of them, do not result in contracts at all … they are not contracts, and they are not contracts because the parties did not intend that they should be attended by legal consequences … They are not sued upon, not because the parties are reluctant to enforce their legal rights when the agreement is broken, but because the parties, in the inception of the arrangement, never intended that they should be sued upon. Agreements such as these are outside the realm of contracts altogether.
The presumption that social and domestic agreements are not intended to be legally enforceable can be rebutted by reference to the context and the consequences of the agreement.
Wakeling v Ripley (1951) 51 SR (NSW) 183 [6.890] The defendant, an elderly and wealthy man living near Sydney, urged his sister and her husband
who were living in England to return to Australia to live with him in return for a home, a living and virtually all his property on his death. After much correspondence, the plaintiffs moved to Australia but less than a year later, the defendant refused to uphold the original agreement. It was held that presumption had been rebutted and the agreement was enforceable as a contract. The reason given (per Street CJ at 187) was that: [There] is ample evidence that the plaintiffs were insistent on having the matter put on a clear footing and in the form of a legal bargain between them before they agreed to adopt the suggestion that they should come out and live in Australia. The consequences for the plaintiffs were so serious, in taking the step that they did, that it would seem obvious that they were anxious to get a definite assurance and a definite agreement as to the provision that was to be made for them, and accepting, there being no evidence to the contrary, their account of the letters which they wrote to the defendant, and looking to the terms of the replies. I think that the parties did intend to enter into a binding and enforceable contract.
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Chapter 6 Contracts: Concepts of Agreement
[6.900] There is nothing to prevent an agreement between neighbours being legally binding, even though discussions between them may be held in an informal manner.
McKeand v Thomas [2006] NSWSC 1028 [6.910] McKeand and Thomas were neighbours. When Thomas had built their home they made arrangements for various services to be supplied by underground connections laid in a trench parallel to the border of McKeand’s land but just inside their own property. At that time, McKeand’s services were supplied via aerial connections across their own property. As part of a redevelopment proposal, McKeand wanted to lay the services cabling in the trench on Thomas’ land. McKeand and Thomas had a conversation about this in which McKeand alleged that Thomas agreed to this and to grant an easement for services. When McKeand had the documents prepared, Thomas refused to sign them, claiming that no such agreement had been reached. It was held on this issue that the conversation was on a serious topic and that it was intended to be acted on without formalisation within days. McKeand was going to instruct the builder to lay the cables forthwith in the trench and Thomas should have realised that McKeand relied on the agreement to have services connected to his home. The seriousness to the promisee of taking steps envisaged by the contract is a proper matter to take into account in deciding if an agreement has been reached.
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Commercial agreements [6.920] There is a strong presumption that commercial agreements are intended to create a legal relationship. However, the presumption can be rebutted in appropriate cases. One example is where an “honour” clause was inserted in the conditions attached to a commercial tipping competition.
The two greatest and most characteristic achievements of English lawyers –the law of trusts and the doctrine of valuable consideration. J A Strahan, Bench and Bar of England.
Jones v Vernons Pools Ltd [1938] 2 All ER 626 [6.930] A clause in a document issued by a football pools company stated that “it is intended and agreed that [this transaction] shall not … give rise to any legal relationship … or be legally enforceable … but all such arrangements, agreements and transactions are binding in honour only”. It was held that the “honour clause” rebutted the presumption of an intention to create legal relations and therefore no enforceable contract arose.
Blue v Ashley [2017] EWHC 1298 [6.940] Mr Ashley, a well-known businessman, and Mr Blue, an investment banker and consultant, attended a business lunch which went pretty well. Alcohol was involved and both Ashley and Blue had had a few. It was subsequently alleged by Blue that during the course of the “meeting” Ashely agreed that should the share price of a company in which he was the majority shareholder doubled he would pay Blue £15 million. Of course, the agreement was not recorded in writing. Of course the share price doubled. Of course Ashley refused to pay Blue. The ensuring breach of contract action raised issues of offer, acceptance, consideration, certainty, and intention to create legal relations which was the main issue in the case. In finding against Mr Blue the judge gave eight reasons for his decision: 1.
The setting in which the agreement was formed, “an evening of drinking in a pub with three investment bankers is an unlikely setting in which to negotiate a contractual bonus arrangement with a consultant who was meeting them on behalf of the company”. Although an agreement could be made in an
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Business and the Law informal setting and the business owner had a history of conducting business in informal settings where alcohol was consumed, there was no evidence that he negotiated or concluded contracts at these types of meetings. 2.
The purpose of the meeting was to introduce the corporate brokers, not to discuss the consultant’s remuneration.
3.
The conversation was jocular in nature and tone and the discussions about remuneration were mere “banter”.
4.
It would make no commercial sense for the business owner to make the alleged offer and was not in keeping with his character.
5.
It was fanciful to suggest that the consultant could influence the share price to double.
6.
The offer was too vague for it to be taken as seriously, for example there was no reference to the work the consultant was to carry out to earn the payment and how that work would be measured.
7.
Besides the consultant, none of those present believed the business owner was being serious, e.g. it was not followed up in writing at the time or shortly after, and the consultant only took it seriously once the share price started to increase.
Justice Leggatt held that:
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… no reasonable person present in the Horse & Groom … would have thought that the offer to pay Mr Blue £15 million was serious and was intended to create a contract, and no one who was actually present in the Horse & Groom that evening – including Mr Blue – did in fact think so at the time. They all thought it was a joke. The fact that Mr Blue has since convinced himself that the offer was a serious one, and that a legally binding agreement was made, shows only that the human capacity for wishful thinking knows few bounds.
… the gentleman’s agreement, reported to have been defined by Mr Justice Viasey as “an agreement which is not an agreement, made between two persons, neither of whom is a gentleman, whereby each expects the other to be strictly bound without himself being bound at all”. R E Megarry, A Second Miscellany at Law: A Further Diversion for Lawyers and Others (Wildy, Simmonds and Hill, 1933).
The issue of intention to create legal relations can arise in the business context when business people make arrangements casually. In such cases, issues of uncertainty, incompleteness and lack of contractual intent frequently overlap. These issues are further discussed in Chapter 7.
6.6 CONSIDERATION [6.950] In addition to the need for a finalised agreement it is a requirement that each party must provide consideration. Where this requirement is in doubt, the courts examine the situation from the point of view of the person (promisee) who is seeking to enforce the agreement. The crucial question is whether the promisee has provided any consideration in exchange for the promise he is attempting to enforce. If he has, then the promise may be enforced under the rules relating to simple contracts. If they have not provided any consideration, the court will describe the promise as a gratuitous promise. Gratuitous promises will only be enforced if: • they are contained in a deed; • or in circumstances where the doctrine of promissory estoppel applies (see [6.1210]); or • in a commercial context where they amount to misleading or deceptive conduct enforceable under the ACL.
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Chapter 6 Contracts: Concepts of Agreement
There are certain rules relating to the notion of consideration, which are discussed below. These include: • consideration can be executed but not past; • consideration must be sufficient but need not be adequate.
What is consideration? [6.960] Consideration may be described as the “price” paid in exchange for the promise that the promisee is attempting to enforce. Although it may be a sum of money, consideration can be anything that provides some benefit to the promisor or imposes some burden or detriment on the promisee. In most cases, it will be a promise in return for a promise. The two most cited definitions of consideration are Currie v Misa (1875) LR 10 Exch 153 per Lush J: A valuable consideration in the sense of the law may consist either in some rights, interest, profit or benefit accruing to one party, or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.
And Dunlop v Selfridge [1915] AC 847 per Lord Dunedin: An act or forbearance of one party, or the promise thereof, is the price for which the promise of the other is bought, and the promise thus given for value is enforceable.
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The definition of consideration that was adopted by Bowen LJ in the English Court of Appeal in the Carbolic Smoke Ball case was as follows: Any act of the plaintiff from which the defendant derives a benefit or advantage or any labour, detriment, or inconvenience sustained by the plaintiff, provided such act is performed or such inconvenience suffered by the plaintiff, with the consent, either express or implied, of the defendant.
One of the issues raised in the Carbolic Smoke Ball case was whether there was a contract between the company and Mrs Carlill because she had provided no consideration (ie nothing in return) for Carbolic’s promise to pay her the £100 reward. The court found that she had provided such consideration by: • actually using the smoke ball because this provided a benefit to the company because this use promoted their sales;
No-one understands this concept. Why they call it consideration, when it has nothing to do with being nice to someone, is one of the law’s well- shrouded mysteries. Nevertheless, at least nominal consideration always has to be there. According to tradition, the delivery of a mere peppercorn would be sufficient consideration for a contract to transfer Canary Wharf complete with a “Build your own Jubilee Line” kit. (In practice, of course, no-one in their right mind would blow a whole peppercorn that way.) White and Jenks, The Official Lawyer’s Handbook (Harriman House, 1992).
• undergoing the inconvenience of using the smoke ball which she was required to do before she was eligible for the reward. Whatever the consideration in a particular case, it must be given in exchange for the promise. The concept of the bargain is central to the law of contract and the rule that consideration must be given in exchange for the promise is integral to this concept. As Isaacs J stated in R v Clarke [1922] HCA 47 quoting the American jurist Oliver Wendell Holmes: The root of the whole matter is the relation of reciprocal conventional inducement, each for the other, between consideration and promise.
The consideration required to support the promise must of course be requested, expressly or impliedly, by the promisor. The consideration is the “price” the promisor stipulates for the promise. If A says that he will give his car to B for nothing in return that is a gratuitous Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-20 04:20:22.
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promise. If B later says that to A that he wants to give A some money in return, this does not amount to a contractual arrangement because A never asked B for anything. In practice –as in the case of negotiations leading to a concluded agreement for the sale of a car at a particular price –the consideration requested to support the promise is settled through the normal bargaining process, and ultimately in the offer that is accepted. The proposition that consideration must “move from the promisee” does not mean that the consideration must “move to the promisor”. The promisor may stipulate as consideration that the promisee provide some benefit to a third party. A friend’s promise to give you $X if you paint Y’s house is a promise given for value which you can enforce.
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“Executed”, “executory” and “past” consideration It is the essence of a consideration, that, by the terms of the agreement, it is given and accepted as the motive or inducement of the promise. Conversely, the promise must be made and accepted as the conventional motive or inducement for furnishing the consideration. The root of the whole matter is the relation of reciprocal conventional inducement, each for the other, between consideration and promise. Oliver Wendell Holmes, The Common Law (1881).
[6.970] Although consideration –the “price” for the promise –may have been performed (eg in the Carbolic Smoke Ball case, through using the smoke ball as requested), it may envisage an act yet to occur (eg a promise). Consideration is said to be executed if the act which constitutes the consideration has been performed or executory if it is an act yet to occur. For example, A promises to sell his motor car for $10,000 to B. Before B pays A, the consideration is executory. When B pays A, the consideration becomes executed. However, consideration is not recognised by the law as having any value in the eyes of the law if it is past, which is where the act which is said to constitute the consideration has pre-dated the promise. “Past” consideration is discussed at [6.1060].
Acts, promises and forbearances [6.980] It has already been stated that consideration can be an act or a promise. Consideration can also be constituted by a forbearance which may be defined as deliberately and intentionally not doing a particular act or exercising a particular right. In Dunton v Dunton (1892) 18 VLR 114, for example, the plaintiff successfully sued her ex-husband for not honouring his promise to pay her a monthly sum provided that she conducted herself with “sobriety, and in a respectable, orderly and virtuous manner”. Within limits imposed by the criminal law Mrs Dunton had a right to conduct herself as she chose to, and by giving up this right at her ex-husband’s request she provided consideration to support her ex-husband’s promise. A particular example of forbearance as consideration is a forbearance to sue. A party who is being sued or against whom legal proceedings have been threatened may suggest that the action not be proceeded with, or be withdrawn, in return for, for example, a payment of a particular amount. Although originally a plaintiff’s forbearance from bringing an honest claim was not good consideration if the court considered that the claim would have failed, this rule has been modified to accommodate the “obvious desirability of encouraging parties to compromise disputes in an honest fashion wherever possible”: Australian Contract Law Reporter (CCH, subscription service) at [8-160]. Today a plaintiff arguing a forbearance to sue as consideration for the defendant’s promise must prove, in relation to the claim that has been surrendered, that: • It was reasonable and not vexatious or frivolous. • There was an honest belief in the chance of its success.
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Chapter 6 Contracts: Concepts of Agreement
• No facts had been concealed from the other party, which might have affected the validity of the claim. These limits are necessary, otherwise “it would be possible for unscrupulous or absurdly unreasonable persons to threaten litigation and thus secure a promise to buy them off which would become enforceable once the baseless claim was expressly surrendered”: Australian Contract Law Reporter (CCH, subscription service) at [8-160].
A practical concept [6.990] The proposition that the consideration found in Carbolic Smoke Ball was relatively artificial would meet with little argument from the New Zealand Court of Appeal, which suggested in Aotearoa International Ltd v Scancarriers A/S [1985] 1 NZLR 513 that consideration will be found “oneway or another where it is reasonable to infer that the parties to a commercial transaction intended to enter into a binding commitment”. This proposition simply reflects the essentially practical nature of the law of contract, which is dedicated to the underlying proposition that agreements intended by the parties to be binding should be upheld if possible. The courts are committed to upholding, not destroying bargains.
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IN CONTEXT
Abolition of the doctrine of consideration [6.1000] The Draft Australian Law of Contract –a draft codification of the general rules of contract law recommends the abolition of the doctrine of consideration:
The doctrine of consideration has long been out of date and has been reduced to a shadowy existence by such useless and confusing doctrine. It is a requirement of formation only in common law countries, and is not included in any of the model codes, except the Restatement. It has ceased to serve any useful purpose and its abolition is long overdue.
The language of benefit and detriment is, and I believe long has been, out of date. So is the idea that consideration must be an economic benefit of some kind. All that is necessary is that the defendant should, expressly or impliedly, ask for something in return for his promise, an act or a promise by the offeree. If he gets what he has asked for, then the promise is given for consideration unless there is some vitiating factor. Though lip-service has been paid to the notions of benefit and detriment, they have no substantial meaning, in the light of the principle that the court will not inquire into the adequacy of the consideration. J C Smith, “The Law of Contract –Alive or Dead?” (1979) 13 The Law Teacher 73.
Consideration must be sufficient but need not be adequate [6.1010] Although the words “adequate” and “sufficient” are normally used synonymously, they have been given distinct meanings in discussions of consideration. The proposition that consideration need not be adequate means that the law does not require that the “price” is of equal value to the promise for which it is bought. It reflects the “freedom of contract” principles which shaped the law of contract in its formative years that the parties can make their own contract on their own terms and that it is not the role of the courts to assess whether the consideration is adequate in the sense of being appropriate. The term “peppercorn” consideration is often used today to signify “token” consideration. There are many examples of “peppercorn” or “token” consideration. However, while the general principle that the courts do not look to the adequacy of consideration
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applies, this is eroded in two important areas; namely, by the equitable doctrine of unconscionability and by legislative regimes designed to protect consumers and small business from unfair or unconscionable contracts (see Chapter 20).
Chappell & Co Ltd v Nestlé Co Ltd [1960] AC 87 [6.1020] As a promotional technique, Nestle, a chocolate manufacturer, offered the public a record of a
popular tune for one shilling and sixpence plus the wrappers of three bars of Nestlé’s chocolate (valued at sixpence each). Copyright in the tune was held by Chappell, and under the Copyright Act 1956 (UK) any person could use a copyright tune provided that the owner of the copyright tune was paid a royalty at the prescribed rate of 6.25 per cent of the “ordinary retail selling price”. Nestlé offered to pay royalties of 6.25 per cent of the one shilling and sixpence but Chappell argued that the true retail price was three shillings – the one shilling and sixpence plus the value of the three chocolate wrappers (one shilling and sixpence). Nestlé’s argument, that the wrappers were not part of the consideration because they were valueless and discarded, failed. The record was sold to increase sales of chocolate and the wrappers were part of the consideration. Lord Somerville held (at 114, emphasis added) that: I think they are part of the consideration. They are so described in the offer. “They”, the wrappers, “will help you to get smash hit recordings”. They are so described in the record itself –“all you have to do to get such new record is to send three wrappers from Nestlé’s 6d milk chocolate bars, together with postal order for 1s 6d”. This I would have thought irrelevant. A contracting party can stipulate for what consideration he chooses. A peppercorn does not cease to be good consideration, if it is established that the promisor does not like pepper and will throw away the corn.
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Sufficient consideration Contract: An agreement that is binding only on the weaker party. Frederick Sawyer.
[6.1030] Although consideration need not be adequate it must be sufficient in the sense of being of some value in the eyes of the law. There are several well-established categories where the alleged consideration is regarded as being of no value in the eyes of the law. These include situations where the alleged consideration is: • a promise that is so vague as to be “illusory”; • an act that predates the promise (past consideration); • performance of a public duty; • performance of a previous contractual obligation owed to the same party; • part payment of an existing debt. It was noted at [6.760] that where an agreement is so vague that the courts are unable to determine its meaning they will refuse to enforce the agreement. It was also noted that the courts generally presume that family arrangements are not intended to create legal relationships. In some of the older cases, such agreements were not enforced on the basis that the consideration provided by the promisee was so vague as to be “illusory”.
White v Bluett (1853) 23 LJ Ex 36 [6.1040] A father promised to excuse a debt owed to him by his son if the son promised “not to bore his
father”. The son had often complained that he had been treated more harshly than his brothers. It was held that the father’s promise could not be enforced on the grounds that the son’s promise was too vague to amount to consideration for the father’s promise. 220
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Chapter 6 Contracts: Concepts of Agreement
This case can be contrasted with the following case.
Dunton v Dunton (1892) 18 VLR 114 [6.1050] Mr Dunton agreed to pay his divorced wife a certain amount each month provided that she conducted herself “with sobriety, and in a respectable, orderly and virtuous manner”. When Mr Dunton refused to pay the amount, Mrs Dunton sued him for breach of contract. She was successful. Two of the three judges held that her promise to give up the right to behave in any fashion she chose was sufficiently certain to constitute consideration on her part. On the other hand the dissenting judgment also seems quite logical (at 117 per Hood J (dissenting)): A promise in order to be a good consideration must be such as may be enforced. It must, therefore, be not only lawful, and in itself possible, but it must also be reasonably definite. Now, a promise by a woman that she will conduct herself with sobriety, and in a respectable, orderly, and virtuous manner, seems to me to be about as vague a promise as can well be imagined. What are the acts which she is to do or to refrain from doing? What is the meaning to be attached to the words if looked at in the light of a definite promise? A promise by a woman that she will conduct herself with sobriety may mean that she will not drink intoxicating liquor at all, or that she will not get drunk, or it may mean that she may do either so long as she does not do so in public. So with conducting herself in a virtuous manner. Is that in public or in private, and does it include anything short of unchastity? As to respectability and order they are words of such varying meaning that I cannot understand any agreement about them. All this makes me unable to see any promise whatever made by the plaintiff in this document, and in any event forces me to the conclusion that such a promise is too uncertain to form the consideration for any legal agreement.
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Past acts cannot be sufficient consideration for a later promise [6.1060] The courts will refuse to recognise as consideration acts or promises which predate the promise that is sought to be enforced. This attitude is sometimes summarised in the principle that “past consideration is no consideration”.
Roscorla v Thomas (1842) 3 QB 234 [6.1070] Roscorla purchased a horse from Thomas. After the sale had been concluded, Roscorla asked for an assurance that the horse was sound and Thomas assured him that the horse was “sound and free from vice”. When he later discovered that the horse was vicious, Roscorla sued for breach of contract. The action failed. It was held that Thomas’ assurance was not part of the purchase contract, which had been concluded prior to the assurance being given. As Roscorla had provided no consideration in return for the assurance, this promise could not be enforced against Thomas.
However, if that which was done in the past was done at the promisor’s request and with the intention that it would be compensated, the consideration, although “past”, may nevertheless support the later promise that guarantees the amount. In Re Casey’s Patents [1892] 1 Ch 104, for example, Bowen LJ held that: [A]promise to render future services, if an effectual promise, is certainly good consideration … the fact of a past service raises an implication that at the time it was rendered it was to be paid for, and if it was a service which was to be paid for, when you get in the subsequent document a promise to pay, that promise may be treated either as an admission which evidences or as a positive bargain which fixes the amount of that reasonable remuneration on the faith of which the service was originally rendered.
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A promise merely to perform a public duty is insufficient [6.1080] A promise to perform an act that one is already obliged to perform under some public duty is not recognised as good consideration. If, however, the promise is to do something that goes beyond the obligations imposed by law, the additional performance may constitute sufficient consideration.
Glasbrook Bros Ltd v Glamorgan County Council [1925] AC 270 [6.1090] The owners of a colliery sought police protection during a strike. The local police authority formed
the view that the duty of the police to preserve public order would be met by provision of a mobile patrol, but the colliery owner wanted a greater police presence and agreed to pay for the extra costs associated with a continuous police presence. The House of Lords held that the local police authority could sue on the colliery owner’s promise. They provided good and sufficient consideration by doing more than the Police Superintendent in charge honestly and reasonably believed was necessary to perform their existing legal duty to preserve public order.
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A promise to perform a previous contractual obligation owed to the same party is insufficient Here’s the rule for bargains: Do other men, for they would do you. That’s the true business precept. Charles Dickens.
[6.1100] A promisee’s actual or promised performance of a pre-existing contractual duty does not constitute a good and sufficient consideration for the promisor’s act, promise or forbearance. In Wigan v Edwards (1973) 47 ALJR 586, the High Court stated (per Mason J at 594) the general rule as follows: The general rule is that a promise to perform an existing duty is no consideration, at least when the promise is made by a party to a pre-existing contract, when it is made to the promisee under that contract, and it is to do no more than the promisor is bound to do under the contract. The rule expresses the concept that the new promise, indistinguishable from the old, is an illusory consideration. And it gives no comfort to a party who by merely threatening a breach of contract seeks to secure an additional contractual benefit from the other party on the footing that the first party’s new promise of performance will provide sufficient consideration for that benefit.
However, such a promise may be regarded as good consideration where it can be seen as conferring a commercial benefit on the promisor. This view was adopted in the United Kingdom in Williams v Raffey Bros & Nicholls (Contractors) Ltd [1999] 1 QB 1 which has been followed in the Supreme Court of NSW (Santow J) in Musumeci v Winadell (1994) 34 NSWLR 723 (see [6.1120]).
Stilk v Myrick (1809) 170 ER 1168 [6.1110] A ship’s captain promised to share the wages of two deserters among the remaining crew if they agreed to sail the ship home short-handed. It was held that the captain’s promise could not be enforced. The reason for this (per Lord Ellenborough at 1169) was that: Before they sailed from London [the crew] had undertaken to do all that they could under all the emergencies of the voyage … The desertion of a part of the crew is to be considered an emergency of the voyage as much as their
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Chapter 6 Contracts: Concepts of Agreement death; and those who remain are bound by the terms of their original contract to exert themselves to the utmost to bring the ship in safely to her destined port. Therefore … I think [the agreement to share the wages of the deserters] is void for want of consideration.
Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723 [6.1120] The plaintiff tenant took a five-year lease of premises in a shopping centre to operate them as a
fruit shop from the defendant landlord. Two years later, the landlord let another shop in the centre to another fruit merchant who was part of a chain. There was nothing in the plaintiff’s lease to prevent the defendant from doing this, but as a result the plaintiff’s business suffered considerably. The defendant agreed to reduce the rent payable under the existing lease by one-third but purported to terminate this arrangement when negotiations for a new lease broke down. The Supreme Court of NSW (Santow J) held that that there was a binding agreement to vary the lease. The consideration for the landlord’s promise was the practical benefit of having the plaintiff in place as a viable tenant paying a reduced rental rather than having an empty shop.
However, as with promises to perform a public duty, if the promise involves something more than is required under the previous contract, it will be treated as sufficient consideration.
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[6.1130] The facts were similar to those in Stilk v Myrick (see [6.1110]) except that in this case 17 of the crew of 36 refused to sail the ship home (and were sent to prison), and of the 19 remaining crew only five were able seamen. The captain promised to pay an additional sum on top of their wages to induce the remaining able seamen to sail the ship home. This promise was held to be enforceable. The reason given (per Lord Campbell CLJ at 1473) was that: [F]or the ship to go to sea with so few hands was dangerous to life. If so, it was not incumbent on the plaintiff to perform the work … there was therefore a consideration for the contract; and the captain made it without coercion. This is therefore a voluntary agreement upon sufficient consideration.
In the above cases the promises were between the parties to an existing contract. In cases where A and B enter into an agreement under which A promises to perform the obligations under a contract with C, A’s promise is sufficient consideration to support a promise by B.
Shadwell v Shadwell (1860) 142 ER 62 [6.1140] Mr Shadwell promised to marry (the future) Mrs Shadwell in return for her promise to marry him
(ie they got engaged). When Mr Shadwell’s uncle heard about this, he promised to pay his nephew an annual allowance until his income reached a certain level if the marriage went ahead as planned. The uncle paid the allowance for some years and then stopped whereupon his nephew sued him for breach of contract. The action was successful. It was held that although the nephew merely carried out an existing contractual obligation to marry his fiancee, there was consideration for the uncle’s promise through the benefit to him (the marriage was “an object of interest to a near relative”) and a detriment to the nephew in that, if he changed his mind, there was the possibility that two people might sue him rather than one.
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IN CONTEXT
Breach of promise to marry [6.1150] The action for breach of a promise to marry which existed under the common law
was abolished by legislation in 1976 (s 111A of the Marriage Act 1961 (Cth)). Thus it is no longer possible to obtain damages for a broken engagement.
Part payment of an existing debt
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Contract law has such widespread application in a society such as ours, that courts do well to simplify its concepts. J & C Reid Pty v Abau Holdings Pty Ltd (1988) NSW Conveyancing Reports 55416 per Kirby P.
[6.1160] A common example of a forbearance is a promise by A not to take or continue legal action against B in return for B’s promise of some, usually undisclosed, payment. However, a complication arises where A’s legal claim against B is a debt that has already fallen due. Imagine that the debt is $100. If A promises not to take legal action to recover this amount from B in return for B’s promise to pay $60, the court will hold that B has failed to provide any consideration for A’s promise not to sue for $100. Therefore, unless A’s promise is in a deed or the doctrine of promissory estoppel applies (see [6.1210]), A can change their mind and sue for the outstanding $40. Usually the debt arises under a previous contract but the same rules apply where the debt arises under a court judgment in which case the debt incurs interest at a standard rate from the date of the judgment.
Foakes v Beer (1884) 9 App Cas 605 [6.1170] As a result of a previous court case, Mrs Beer had obtained judgment against Dr Foakes for a par-
ticular sum. The parties agreed that Dr Foakes would pay £500 immediately and the balance in instalments, and that Mrs Beer would not take “any proceedings whatever on the judgment”. After Dr Foakes paid all the instalments as agreed, Mrs Beer sued him for interest on the basis that all judgments bear interest from the date of judgment. Despite Dr Foakes acting on Mrs Beer’s promise (which was, in effect, that she would allow payment by instalments and not pursue her claim for interest), it was held that he had provided no consideration as his promise to pay the judgment debt was a contractual obligation he already owed pursuant to the original judgment. Lord Blackburn, acknowledged (at 622) that: All men of business whether merchants or tradesmen, do every day recognise and act on the ground that prompt payment of a part of their demand may be more beneficial to them than it would be to insist on their rights and enforce payment of the whole. Even where the debtor is perfectly solvent and sure to pay at last, this often is so. Where the credit of the debtor is doubtful it must be more so. Commercial convenience nevertheless did not override the time-honoured rule that one party’s act or promise given to discharge the original obligation cannot constitute good and sufficient consideration for the other party’s promise not to demand strict performance of that obligation.
[6.1180] The time-honoured rule that was referred to by Lord Blackburn is known as the rule in Pinnel’s case (1602) 77 ER 237, which was decided in England in 1605 and is perhaps the oldest court case still cited in Australia. The rule in Pinnel’s case has not escaped criticism for the obvious reason that it disregards commercial convenience. In Couldery v Bartrum (1881) 19 Ch D 394, Jessel MR said (at 399) that: 224
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Chapter 6 Contracts: Concepts of Agreement According to English common law, a creditor might accept anything in satisfaction of his debt except a lesser amount of money. He might take a horse or a canary, or a tomtit if he chose and that was accord and satisfaction; but, by a most extraordinary peculiarity of the English Common Law, he could not take 19 shillings and sixpence in the pound.
D & C Builders Ltd v Rees [1966] 2 QB 617 [6.1190] A small building firm accepted a debtor’s offer of £300 in full satisfaction of a debt of £482, after
being told that if they did not accept the lesser amount they would get nothing. Because of financial desperation they accepted a cheque for £300 in full satisfaction for the debt of £482. On the law that had applied prior to this decision it would have been held that the promise to accept a lesser sum would have been enforceable because consideration had been provided by paying in a different manner from that originally required (ie a lesser payment by cheque as opposed to the full sum by cash). The Court of Appeal nevertheless held that the building firm could recover the balance, deciding that, under current commercial practice, payment by cheque did not constitute fresh consideration. Lord Denning MR stated (at 623) that: No sensible distinction can be taken between payment of a lesser sum by cash and payment of it by cheque … In point of law payment of a lesser sum, whether by cash or by cheque, is no discharge of a greater sum.
[6.1200] The rule in Pinnel’s case does not apply in the following circumstances:
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• If the creditor agrees to substitute “fresh” or different consideration for the original consideration –for example payment of a lesser amount at an earlier date or a different place, or if something else is substituted for the original consideration –the promise is enforceable because consideration has been provided to support it. • If a “composition with creditors” is entered into. If the majority of creditors of a particular debtor agree to accept a lesser sum in full satisfaction of their debts, the agreement is binding on them all. This rule, which is based on the principle that to allow an individual creditor to resile from the agreement would amount to a fraud on the other creditors, is now enshrined in Pt X of the Bankruptcy Act 1966 (Cth). • If payment of a lesser sum is by a third party on the understanding that the creditor will accept a lesser sum in full satisfaction. The justification for this exception is that if the creditor were able to sue the debtor for the balance owing this would amount to a fraud by the creditor on the third party. • If the parties record their agreement in a deed since promises contained in a deed are enforceable whether or not they are supported by consideration.
In the High Trees case, Denning J sought to tap a slender stream of authority which had flowed in equity since the judgment of Lord Cairns in 1877 in Hughes v Metropolitan Railway. N C Seddon and M P Ellinghaus, Cheshire and Fifoot’s Law of Contract (9th ed, LexisNexis, 2008) p 90.
• If the doctrine of promissory estoppel applies (see [6.1210]).
Promissory estoppel [6.1210] The doctrine of promissory estoppel was developed as a response to the unfairness that the strict rules that apply to the formation of a contract –in particular, the requirement of consideration –means that where a person makes a promise, which is not supported by consideration, he or she may revoke that promise at any time, no matter whether her or his conduct is unfair. Thus if A promises B to keep an offer open for a certain period, there is nothing to stop A from revoking the offer at any time before that time is up unless B has given some consideration to A to keep the offer open for the
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Business and the Law … novelty of argument is not a reason for judicial inaction where the law permits action and justice requires it. X v Amalgamated Services Pty Ltd (1987) 9 NSWLR 575 per Kirby P.
required time. Where the doctrine applies, such a person will be prevented or estopped from going back on the original promise. It is important to note that the doctrine has a limited application, the key requirement being unconscionable conduct by the defendant in the proceedings. If the requirements are not met, the doctrine will not apply. The doctrine of promissory estoppel does not mean that every gratuitous promise will now be enforced. [6.1220] In the landmark case of Central London Property Trust v High Trees House Ltd [1947] KB 130, Lord Denning in the English Court of Appeal led the law into uncharted territory with his principle that a contracting party may be prevented from insisting on her or his strict legal rights if, having regard to the dealings which have taken place between the parties, it would be inequitable to allow such insistence because the promisee has altered her or his position in reliance on the promise.
Central London Property Trust v High Trees House Ltd [1947] KB 130
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[6.1230] In 1939 Central London Property Trust (the landlord) leased a block of flats to High Trees House
(the tenant) for 99 years at an annual rental of £2500. When in 1940 the tenant was unable to sub-lease many of the flats due to war-time conditions in London, the landlord agreed to reduce the annual rental by half but without stating the duration of this agreement. Once the war ended in 1945 and the flats were all let again, the landlord brought legal action to establish that the previous rental should be reinstated. The landlord was successful. Although there was no claim for the full rental during the war-time period, Lord Denning took the opportunity to state that the landlord would have been estopped (or precluded) from going back on the promise to accept the lower rental during those years despite the absence of any consideration provided by the tenant. In his view, the rules of equity prevented the landlord going back on his promise and enforcing the original contract terms because it would be “unjust to allow him to enforce them having regard to the dealings which have taken place between the parties”.
[6.1240] This principle was not authoritatively accepted in Australia until the decision of the High Court in Legione v Hateley [1983] HCA 11. At this time, the circumstances in which the doctrine of promissory estoppel applied were where: • There is a preexisting contractual relationship between the parties. • One party to that relationship (the promisor) voluntarily makes a clear, precise, unequivocal and unambiguous promise to the other party (the promisee) that strict performance of that person’s obligations under the legal relationship will not be insisted upon. • The promise is made with the knowledge and intention that it would be acted on by the promisee. • The promisee acts on the promise and suffers a detriment through altering their position in reliance on the promise; and • It would be unjust or inequitable to allow the promisor to resile from (go back on) the promise. In these circumstances the promisee could defend a breach of contract action brought by a promisor who had gone back on their promise and who was suing under the original contract terms. 226
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Chapter 6 Contracts: Concepts of Agreement
The next issue to be dealt with was whether the doctrine was in fact wider in application than the view adopted in Legione v Hateley.
Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7
Case Study
Background
[6.1250] The High Trees case obviously shook the foundations of contract law although its effect
was limited because the doctrine acted as a “shield and not a sword”. Although it provided a defence to a breach of contract action, it did not confer any right to enforce the promise. The High Court was now confronted with the issue as to whether the doctrine applies in the absence of a pre-existing relationship and whether it extended to voluntary promises.
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Facts Waltons (a retailer) and Maher entered into negotiations for Maher to demolish a building he owned and construct new premises which Waltons would rent. The timetable imposed by Waltons for construction and fit-out was particularly tight and negotiations proceeded on this basis. Contractual documents were drawn up which Waltons’ solicitors advised Maher’s solicitors were acceptable to Waltons. Maher signed the contract which was forwarded to Waltons’ solicitors “by way of exchange”. At this stage there was no binding contract between the parties, it being a general rule of conveyancing law that a contract involving a lease of real property is not concluded until each party has signed the agreed form of lease and exchanged it for the counterpart copy signed by the other side. Maher nevertheless proceeded to commence demolition of the building, believing its execution by Waltons to be a mere formality. This belief was induced by Waltons’ solicitor, who advised Maher’s solicitor that he believed an amended agreement would be signed and that he would advise Maher the following day if Waltons did not agree to any of the amendments. Waltons was aware that demolition had commenced, but despite uncertainty as to whether or not it would proceed, took no steps to inform Maher. It was not until demolition was completed and almost 50 per cent of the work required to complete the new building to Waltons’ specifications had been carried out that they advised Maher’s solicitors that they would not sign the contract and would not proceed with the matter. Decision The High Court held that Waltons was estopped from denying that there was a valid and enforceable contract, despite the absence of a concluded agreement, on the basis of promissory estoppel. Implications It was held by Mason CJ and Wilson J (at [30]) that: Equity will come to the relief of a plaintiff who has acted to his detriment on the basis of a basic assumption in relation to which the other party to the transaction has played such a part in the adoption of the assumption that it would be unfair or unjust if he were left free to ignore it … Equity comes to the relief of such a plaintiff on the footing that it would be unconscionable conduct on the part of the other party to ignore the assumption.
Mere failure to fulfil a promise does not of itself amount to unconscionable conduct and mere reliance on an executory promise to do something, resulting in the promisee changing position or suffering detriment, does not attract the doctrine. Mason CJ and Wilson J (at 524) considered that:
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Something more would be required … this may be found, if at all, in the creation or encouragement by the party estopped in the other party of an assumption that a contract will come into existence or a promise will be performed and that the other party relied on that assumption to his detriment to the knowledge of the first party.
Brennan J agreed that the object of promissory estoppel is not the fulfilment of a promise but the avoidance of an unconscionable detriment. It operated as a sword (to generate a legal action) as well as a shield (to defend an action) and could create a liability independently of the formation of a contract. Brennan J held (at [34]) that to establish a promissory estoppel it is necessary to prove that: 1.
The plaintiff assumed or expected that a particular legal relationship will exist between them, and, in the latter case, that the defendant is not free to withdraw from the expected legal relationship.
2.
The defendant has induced the plaintiff to adopt that assumption or expectation.
3.
The plaintiff acts or abstains from acting in reliance on the assumption or expectation.
4.
The defendant knew or intended him to do so.
5.
The plaintiff’s action or inaction will occasion detriment if the assumption or expectation is not fulfilled. And:
6.
The defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise.
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The implications of the decision are that it may be dangerous to lead a party to believe that a contract will be entered into, encouraging that party to carry out acts which would be required to be carried out under the contract and knowing full well that the other party will suffer loss from carrying out those acts if the contract is not proceeded with.
Dowell v Tower Corporation [1991] ANZ Conv R 177 [6.1260] The plaintiff who was about to buy a business was anxious to ensure that he would obtain a new lease after the existing lease of the business premises expired. The landlord indicated verbally that it would do this provided the tenant complied with the existing lease. It confirmed this representation by letter. The plaintiff purchased the business and the landlord refused to grant a new lease even though the tenant had complied with the terms of the existing lease. The High Court of New Zealand held that the landlord was estopped from denying the promise and that the plaintiff was entitled to damages as a consequence.
Legione v Hately [1983] HCA 11 [6.1270] The Legiones entered a contract to sell their property to the Hatelys. When the Hatelys failed to settle the purchase on the date required under the contract, the Legiones’ solicitors issued a notice to complete expiring on 10 August. (The consequence of failing to comply with such a notice entitles the vendor to rescind the contract.) On 9 August the Hatelys’ solicitor telephoned the office of the Legiones’ solicitor and spoke to the person handling the matter, telling her that the Hatelys had arranged finance for the purchase, but that the financing bank could not settle until 17 August. The person handling the matter said to the Hatelys’ solicitor: “I think that that will be all right but I will have to get instructions”. On 11 August, the Legiones’ solicitor issued a notice of termination of the contract based on the Hatelys’ failure to settle on 10 August. The High Court found that the statement made by the Hatelys’ solicitors was too vague to ground an estoppel. 228
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Chapter 6 Contracts: Concepts of Agreement
Foran v Wight [1989] HCA 51 [6.1280] The Forans entered a contract to purchase land from the Wights that required completion by
22 June, time being of the essence. Prior to completion the Forans were required to register a right of way. On 20 June the purchaser’s solicitors indicated that they wished to settle on 22 June. The vendor’s solicitors said that they could not settle on that date because the right of way was not registered and asked the purchaser’s solicitors whether the matter could be settled after 22 June when the right of way was registered. The purchaser’s solicitor indicated that time was of the essence of the contract and that he would have to get instructions. The purchaser rescinded the contract the next day. The High Court held that the Wights’ solicitor had made it quite clear that it would be unable to settle in accordance with the contract and thus had absolved the Forans of any requirement to attempt to settle on the due date.
Je Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101 [6.1290] Quaglia was the tenant in a shopping centre. The centre had empty shops and when Quaglia
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experienced financial difficulties, the lessor agreed to reduce his monthly rent. No consideration was made for this promise. When Quaglia left the premises, the lessor demanded payment of the full rental owing as set out in the lease. The Full Supreme Court of South Australia by majority found that Quaglia had suffered a detriment in now being required to pay the balance of the accumulated arrears as a lump sum, whereas under the lease he was required to pay by instalments.
The doctrine of promissory estoppel as promulgated by the High Court is an important and far-reaching doctrine with great significance for the law of contract. It may be thought ironic that had the statutory action for misleading or deceptive conduct under the Trade Practices Act 1974 (Cth) (TPA) (now s 18 of the ACL) been argued, the extended doctrine of promissory estoppel might not have been developed by the High Court, the misleading or deceptive conduct action seemingly providing a more simple method of compensating the plaintiff for the loss.
Waiver of contractual rights [6.1300] Waiver of contractual rights is a relatively common commercial occurrence. One party may decide not to insist on strict performance of the other party’s obligations under the contract in order to accommodate the circumstances of the other party. In many cases this is a sensible commercial alternative to initiating breach of contract proceedings. If the parties wish to alter the terms of the original contract for their mutual benefit, this is done by an agreement to vary the contract, which requires consideration and also requires a written document. This is in contrast to a waiver which is for the benefit of one party only.
The greatest threat to the law of contract comes perhaps from the expansion of the idea of estoppel. J C Smith, “The Law of Contract –Alive or Dead?” (1979) 13 The Law Teacher 80.
Waiver is so common that it is frequently formalised in the terms of the contract. A franchise agreement may, for example, provide that: No waiver by the Franchisor of a breach of this Agreement shall be effective unless in writing and any waiver by the Franchisor of a breach of this Agreement shall not be deemed to be a waiver of a subsequent breach of the same or of a different kind hereunder and no waiver by the Franchisor of any breach under any other Franchise agreement to which the Franchisor is a party shall be construed as or deemed to be a waiver under this Agreement.
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However, the importance of the concept of waiver has been largely surpassed by the development of the equitable doctrine of promissory estoppel discussed at [6.1210].
6.7 DEFECTS IN THE CONTRACT [6.1310] Even where the basic requirements for the formation of a simple bilateral contract (offer and acceptance, intention to create legal relations and consideration) are all met, the courts will refuse to enforce the contract in certain circumstances. These circumstances include those: • where one of the parties lacks contractual capacity; • where the contract is illegal; and • where the contract does not meet the formal requirements for that type of contract.
Lack of contractual capacity [6.1320] The common law has always recognised that contracts should not be able to be enforced against certain people, for example young children and people with mental disabilities, because such people lack the intellectual ability to understand the legal consequences of entering into a contract. It has sought to protect such people by holding that they lack contractual capacity.
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Mental disability [6.1330] Contracts entered into by people affected by a mental disability cannot be enforced against them where they can prove that: • they were unable to understand the nature of the contract at the time it was made; and • the other party was aware or should have been aware of this inability. A Court of Equity can mould interests differently from a Court of Law. Lord Kenyon, Clayton v Adams (1976) 6 TR 604.
The one exception to this is that even mentally disabled people are obliged to pay a reasonable amount (not necessarily the agreed price) for essential services that the common law calls necessaries. The same rules apply to people who are drunk at the time of contracting, but such people must take steps to cancel the contract at the first reasonable opportunity after becoming sober, otherwise they will be treated as confirming (ratifying) the contract and becoming bound by it (Matthews v Baxter (1873) LR 8 Exch 132). A similar approach is adopted where a person recovers after a period of temporary insanity (McLaughlin v City Bank of Sydney [1912] HCA 16).
Kurth v McGavin [2007] 3 NZLR 614 [6.1340] The New Zealand High Court distinguished between cases where a contracting party was so drunk
they were incapable of making a valid contract, and (in the present case) those where drunkenness only affected the contracting party’s business sense. Given the counterparty in this case was unaware of the contracting party’s condition, the contract was binding (had he known, the contract would have been voidable). Nevertheless, the court held that it would be inequitable to enforce this contract because of the hardship which would greet the contracting party as a result of the sale of land, and so the would-be purchaser was entitled to damages. 230
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Chapter 6 Contracts: Concepts of Agreement
Minors [6.1350] At common law, minors were people under 21 years of age, but this has been changed by legislation throughout Australia to mean anyone under 18 years of age under age of majority legislation in each state and territory. Contracts entered into by minors can be enforced by the minor but are not generally enforceable against the minor. The common law provided two exceptions to this general rule so that minors would be able to obtain things necessary for their survival and education: • Minors were obliged to pay a reasonable amount (not necessarily the contract price) for necessaries which are goods or services that are necessary to the safety, health or wellbeing of the minor. • Minors were bound by beneficial contracts of service which are contracts, such as apprenticeships, which provide education or training and are also judged to be for the minor’s benefit.
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In the case of other contracts, a minor was not bound unless he or she confirmed (ratified) the contract after their eighteenth birthday. Furthermore, a minor could not be sued under any other rule if this was an indirect way of enforcing an unenforceable contract. Thus a minor could not be sued in the tort of deceit for fraudulently misrepresenting her or his age. However, in limited circumstances, the rules of equity could be used to compel the fraudulent minor to return property to its rightful owner. The common law rules described above have been modified in some States by legislation. The Minors (Property and Contracts) Act 1970 (NSW) replaces all the common law rules with a comprehensive code which provides that: • Any contract for a minor’s benefit is presumptively binding (s 19). • Such contracts will be enforced unless entered into while the minor was “lacking by reason of youth, the understanding necessary for participation” (s 18). • Either the minor or the other party may apply to the court to authorise the contract (ss 26, 27 and 30). • A contract that is presumptively binding on a minor which is not repudiated within a year of their eighteenth birthday binds the minor (s 31). • A guarantor of a minor’s contract is liable as if they had guaranteed an adult’s contract (s 47).
Other categories of contractual incapacity [6.1360] At common law, the concept of contractual incapacity also extended to prevent certain people from enforcing contracts although this had nothing to do with any lack of intellectual abilities. For example, both persons convicted of a crime which carried the death penalty, and foreign nationals (aliens), were denied contractual capacity as a means of preventing them from suing for breach of a contract. These examples of contractual incapacity have been changed by legislation so that now convicted felons and aliens are both treated as having full contractual capacity and consequently can sue for breach of a contract. The one remaining exception to this is that, in time of war, an enemy alien cannot sue in an Australian court.
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The law won’t enforce certain categories of contracts, regardless of the presence of consideration, the absence of breach, or anything else. One example is a contract which is deemed “contrary to public policy”. Shylock’s pound of flesh bargain would not nowadays be enforced south of the border (some Scottish courts remain very strict), and most courts would not require the loser of a bet on the Five Nations Cup to streak three times round Twickenham with a pound of sausages on his head. White and Jenks, The Official Lawyer’s Handbook (Harriman House, 1992).
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It is important to note that bankruptcy does not affect contractual capacity. The trustee in bankruptcy will take the benefit of any beneficial contract that the bankrupt entered into prior to the bankruptcy. The trustee in bankruptcy has a right to disclaim onerous contracts but can only disclaim others with the leave of the court (Bankruptcy Act 1966 (Cth), s 133). As far as post-bankruptcy contracts are concerned, there is protection for persons dealing in good faith and for valuable consideration if the contract is completed before the intervention of the trustee (Bankruptcy Act 1966 (Cth), s 126). However, because of this potential risk, it is an offence for an undischarged bankrupt to enter into some types of contracts involving more than $3,000, such as obtaining credit or leasing or hiring goods without disclosing the bankruptcy (Bankruptcy Act 1966 (Cth), s 269). If a bankrupt enters into a contract in breach of this provision, the contract is unenforceable by the bankrupt and can be rescinded by the other party. It perhaps might be argued that while not technically a matter relating to the bankrupt’s capacity, it has that effect de facto.
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Illegal contracts [6.1370] Illegal contracts fall into two categories:
Public policy is in its nature so uncertain and fluctuating, varying with the habits and fashions of the day, with the growth of commerce and the usages of trade, that it is difficult to determine its limits with any degree of exactness. It has never been defined by the courts, but has been left loose and free of definition, in the same manner as fraud. This rule may, however, be safely laid down, that whenever any contract conflicts with the morals of the time, and contravenes any established interest of society, it is void, as being against public policy. William W Story, A Treatise on the Law of Contracts (1847).
• Contracts which are illegal or void by statute. • Contracts which are illegal as a result of being contrary to public policy at common law.
Contracts that are illegal by statute [6.1380] In Equuscorp Pty Ltd v Haxton [2012] HCA 7 the High Court explained that an agreement may be unenforceable for statutory illegality in three categories of case, where (at [23]): (i) the making of the agreement or the doing of an act essential to its formation is expressly prohibited absolutely or conditionally by the statute; (ii)
the making of the agreement is impliedly prohibited by statute. A particular case of an implied prohibition arises where the agreement is to do an act the doing of which is prohibited by the statute;
(iii)
the agreement is not expressly or impliedly prohibited by a statute but is treated by the courts as unenforceable because it is a “contract associated with or in the furtherance of illegal purposes”.
In the third category of case, the court acts to uphold the policy of the law, which may make the agreement unenforceable. That policy does not impose the sanction of unenforceability on every agreement associated with or made in furtherance of illegal purposes. The court must discern from the scope and purpose of the relevant statute whether the legislative purpose will be fulfilled without regarding the contract or the trust as void and unenforceable.
Statutory provisions may affect the validity of a contract. The particular effect of a statutory provision on a contract is dependent on the presumed intention of parliament and there is no general rule that covers every situation. As with common law illegality, a distinction is drawn between contracts illegal by statute and contracts void by statute. The consequences are the same as for illegality or voidness under the common law with the qualification that, when a contract becomes void because of the effect of a statute, the statute frequently provides for the consequences. A statute may expressly outlaw certain 232
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Chapter 6 Contracts: Concepts of Agreement
types of contracts. For example, Pt IV of the Competition and Consumer Act 2010 (Cth) prohibits corporations from entering into contracts that substantially lessen competition. It is common for statutes to require that certain businesses only be undertaken by people who have the appropriate licence. Usually the statute imposes a fine on those who carry on those businesses without such a licence. Questions commonly arise as to the validity of contracts entered into by unlicensed operators.
Re Mahmoud & Ispahani [1921] 2 KB 716 [6.1390] Legislation in England restricted the sale of certain commodities. An order made under this leg-
islation stated that “a person shall not buy or sell or otherwise deal in” linseed oil unless they had a licence. A contract was entered into for the sale of linseed oil in which the buyer did not have a licence. When the buyer broke the contract by refusing to accept delivery of the linseed oil, the seller sued. The action failed. The court held that since the order expressly prohibited such a contract being formed, neither party could sue for its breach.
The modern approach of the courts is to treat these situations as simply one of statutory interpretation and to ask whether parliament intended to invalidate the contract or whether it intended the fine to be the only penalty for unlicensed trading.
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[6.1400] The Banking Act 1959 (Cth) prohibited a body corporate from carrying on the business of bank-
ing unless it had a banking licence and provided a fine of $10,000 for each day of the contravention. First Chicago, which had no such licence, lent Yango Pastoral $132,600 secured by a mortgage and a number of personal guarantees. Yango Pastoral defaulted on the loan and First Chicago sued. It was held that the loan, mortgage and guarantees were enforceable. To interpret the Banking Act as impliedly invalidating all contracts by an unlicensed bank, including both loans and deposits, would defeat the purpose of the Act which was to protect people, including depositors, from unlicensed bankers.
Many statutes do not seek to prohibit contracts but rather regulate the way certain contracts can be performed.
Master Education Services Pty Limited v Ketchell [2008] HCA 38 [6.1410] A franchisor entered into a franchise agreement in contravention of the requirements of the
Franchising Code of Conduct. If this was held to constitute an illegal contract at common law it would have been void and the franchisee would have been released from its obligations and, inter alia, not liable for royalties unpaid. The High Court held that the harsh consequences provided by the common law did not apply and that the remedies were those provided by the Competition and Consumer Act 2010 (Cth) under which the Franchising Code was prescribed. Ketchell’s case is discussed in more detail in Chapter 18.
Gynch v Polish Club Ltd [2015] HCA 23 [6.1420] A restaurant retail lease which had been granted in contravention of liquor licensing laws was not void and not unenforceable.
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St John Shipping Corporation Ltd v Joseph Rank Ltd [1957] 1 QB 267 [6.1430] The contract was to carry a cargo of grain from the United States to England. The ship was over-
loaded in contravention of the Merchant Shipping (Safety and Load Line Conventions) Act 1932 (UK). The owner of the grain refused to pay a part of the freight costs on the basis that the overloading constituted an illegal method of performing the contract. The shipping company successfully sued to recover the full freight costs. It was held that the overloading was merely incidental to the way the contract was performed. Devlin J held that having regard to the considerable commercial inconvenience that would result from the transgression, the legislature did not intend the contract to be avoided through statutory illegality.
[6.1440] Some statutes do not prohibit contracts but merely declare them to be void. For example, s 56(1) of the Unlawful Gambling Act 1998 (NSW), which is similar to legislation in other jurisdictions, provides that: Any agreement whether oral or in writing that relates to any form of gambling that is prohibited under this Act has no effect and no action may be brought or maintained in any court to recover any money alleged to have been won from, or any money paid in connection with any such form of gambling.
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The effect of this section is that no legal action can be taken against the defaulting loser; conversely the paying loser cannot recover the payment. There are, however, many forms of betting which are authorised under separate legislation. Often statutes simply declare that certain types of contractual clauses are void in which case the provision is deleted and the rest of the contract can be enforced. For example, s 64 of the ACL provides that a term that purports to exclude, restrict or modify a consumer guarantee under the ACL is void.
Contracts that are illegal at common law [6.1450] The common law has always held that certain contracts or contractual provisions are unenforceable on the basis that they offend public policy. In the case of common law illegality, the courts have identified a number of heads of illegality, which have the common theme of public policy. In Janson v Driefontein Consolidated Mines Ltd [1902] AC 484 Isaacs J in the High Court observed (at 491): Negotiation in the classic diplomatic sense assumes parties more anxious to agree than to disagree. Dean Acheson.
The “public policy” which a court is entitled to apply as a test of validity to a contract is in relation to some definite and governing principle which the community as a whole has already adopted either formally by law or tacitly by its general course of corporate life, and which the courts of the country can therefore recognise and enforce.
The community’s conception of what public policy requires will, of course, vary over time. In Nagle v Feildon [1966] 2 QB 633, Danckwerts LJ stated that: The law relating to public policy cannot remain immutable. It must change with the passage of time. The wind of change blows upon it.
In this regard, the common law also draws a distinction between contracts that are illegal and those that are void. Illegal contracts are those: • to commit an unlawful act –a crime, a tort or a fraud on a third party; • that are sexually immoral; • that prejudice public safety; 234
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Chapter 6 Contracts: Concepts of Agreement
• that prejudice the administration of justice; • that tend to corruption in public life; • that defraud the revenue. Void contracts (or more commonly contractual clauses) are those: • that attempt to oust the jurisdiction of the courts; • that tend to prejudice the status of marriage; • that constitute an unreasonable restraint of trade.
IN CONTEXT
Contracts that are sexually immoral [6.1460] The category of contracts that are “sexually immoral” provides an obvious exam-
ple of the courts being influenced by changing social attitudes. A contract for the hire of a horse-drawn carriage entered into between a prostitute and her client was held to be illegal in 1866 because the vehicle was used for the purpose of prostitution (Pearce v Brooks [1861] All ER Rep 102). Even as recently as 1938, in Fender v St John-Mildmay [1938] AC 1, the House of Lords held (per Lord Wright, at 42) that:
Gambler: Is this a game of chance? Cuthbert J Twillie: Not the way I play it. My Little Chickadee (1940).
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The law will not enforce an immoral promise, such as a promise between a man and a woman to live together without being married, or to pay a sum or give some other consideration in return for personal association. However, changed social attitudes to de facto relationships have resulted in contracts such as those to pool income, jointly acquire assets or share rent no longer being regarded as contrary to public policy (see eg Seidler v Schallhofer [1982] 2 NSWLR 80). The issue has been put beyond doubt in jurisdictions such as New South Wales where s 45 of the Property (Relationships) Act 1984 (NSW) provides that “Notwithstanding any rule of public policy to the contrary, two persons who are not married to each other may enter into a domestic relationship agreement or termination agreement” and if such agreement is otherwise valid, it may be enforced according to the ordinary law of contract.
The case of Ashton v Pratt [2015] NSWCA 12 which concerned an agreement between a man and his mistress was discussed at [6.850] in the context of intention to create legal relations. Although the Court of Appeal did not address the possible, illegality of the “contract” on the basis that it was void as contrary to public policy the Court noted the opinion of the trial judge in relation to this: [29]
Although the matter was not raised by the parties, the primary judge concluded that if a contract had been made it was void as contrary to public policy. He accepted that changes in social mores have resulted in a more liberal attitude to contracts providing for or relating to extramarital cohabitation. However, he said the old rule (under which contracts of the nature of that asserted in this case have traditionally and conventionally been held void and illegal-on the basis they are sexually immoral and/or prejudicial to the status of marriage) has not been completely obliterated.
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The primary judge, after reviewing a number of relatively recent cases, said there were two notable features which saved the contracts in those cases from illegality; first, the contracts in question did not make provision for extramarital cohabitation but made provision in respect of cohabitation which already existed and, second, they did not involve meretricious sexual services but a sexual relationship as part only of a wider relationship that included cohabitation and aspects of material support.
[31]
The primary judge stated that as far as he was aware there was no case contrary to the proposition that it is still the law that a contract to provide meretricious sexual services is contrary to public policy and illegal. He said that in the present case the arrangements were not made to facilitate continuation of existing cohabitation but to establish the “mistress relationship”. He held it was an agreement to provide meretricious sexual services and no more, and, as a consequence, was void as against public policy.
Different consequences flow from illegality and voidness. A distinction needs to be made between contracts that:
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Never put anything on paper, my boy, and never trust a man with a small black moustache. P G Wodehouse, Cocktail Time (1958).
• are illegal when formed; • are illegal when performed; and • are void.
Contracts that are illegal when formed [6.1470] These contracts are totally void so that neither party can sue on them (see Re Mahmoud & Ispahani at [6.1370]). Money or property transferred under them cannot be recovered unless the action relies on either: (i)
a claim which is independent of the illegality; or
(ii)
the illegality only arises because the person falls within a category of persons intended to be protected and he or she brings such a claim; or
(iii)
the contract has not been substantially performed and the claimant has repented of it and abandoned it.
Payne v McDonald [1908] HCA 40 [6.1480] The plaintiff claimed that the defendant held certain land for her as trustee because she had pro-
vided the purchase money. The defendant was the executor of the will of Ellen Payne in whose name the land was registered. The defendant claimed that the plaintiff had arranged for the Certificate of Title to the land to be issued in the name of the deceased to ensure that it was not available as an asset to pay the plaintiff’s creditors. This was an illegal purpose under bankruptcy law and the defendant argued that no order should be made. Evidence was given that the plaintiff had never been in a position where she was likely to have been made bankrupt. It was held that the plaintiff should succeed. The existence of an unlawful intent was irrelevant because none of it had been put into effect.
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Chapter 6 Contracts: Concepts of Agreement
Contracts that are illegal in performance [6.1490] Under this type of contract the guilty party cannot sue (unless they can recover money or property on a ground independent of the illegal contract) but the innocent party keeps all the usual rights and remedies (see St John Shipping Corporation Ltd v Joseph Rank Ltd at [6.1430]).
Contracts that are void [6.1500] This is unenforceable by either party. Where part of a contract is void, then if the void provision can be severed from the remainder of the contract the rest can be enforced. For example, a contract may have a clause which prevents an ex-employee from competing with the former employer for five years and another clause enabling that ex- employee to use the employer’s parking facilities for 12 months. If the restraint of trade clause is too wide, it may be void, yet the clause relating to use of the car park may be valid and enforceable.
A verbal contract isn’t worth the paper it’s written on. Samuel Goldwyn.
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Lack of required formalities [6.1510] As noted above, a person who has not provided any consideration in exchange for a promise cannot sue for breach of that promise unless the promise is contained in a document that meets the requirements of a deed. On the other hand, provided each party to a contract supplies consideration, the common law does not impose any requirements as to the form of the contract –it can be oral or written, or partly oral and partly written, or it may even be implied from the conduct of the parties without any words at all. This common law rule has, however, been modified by statute.
Contracts which must be evidenced in writing [6.1520] The first statutory inroad was the Statute of Frauds 1677 (IMP), which was enacted by the English Parliament in 1677 with the aim of reducing the scope for fraud by people pretending or denying that they had entered into an oral contract. For example, where the defendant has since died and there is no written record of a contract, it is very difficult for a court to decide if an alleged oral contract really was formed since the court might only get to hear one side of the story. The Statute of Frauds required certain contracts to be in writing or evidenced in writing and signed, The statute applied to several types of contracts including: • contracts for the sale of land; • contracts of guarantee; • contracts that are not performed within one year; • contracts for the sale of goods for more than £10. The Statute of Frauds became part of the received law of the Australian colonies, but it has since been modified in different ways by legislation in each State and Territory so that now the only provision that is common across Australia concerns the sale of land. The relevant provisions are:
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• Conveyancing Act 1919 (NSW), s 54A; • Instruments Act 1958 (Vic), s 126; • Property Law Act 1974 (Qld), s 59; • Law of Property Act 1936 (SA), s 26; • Conveyancing and Law of Property Act 1884 (Tas), s 36; • Law Reform (Statute of Frauds) Act 1962 (WA), s 2; • Civil Law (Property) Act 2006 (ACT), s 201; and • Law of Property Act 2000 (NT), s 221. The NSW provision, for example, provides that
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A lawyer boasts of a 300-page contract the way a sportsman boasts of a 300- pound fish. He’ll show it to his family and friends like a little boy showing off the hole he’s dug in his back garden. White and Jenks, The Official Lawyer’s Handbook (Harriman House, 1992).
No action or proceedings may be brought upon any contract for the sale or other disposition of land or any interest in land, unless the agreement upon which such action or proceedings is brought, or some memorandum or note thereof, is in writing, and signed by the party to be charged or by some other person thereunto lawfully authorised by the party to be charged.
A contract that does not satisfy the Statute of Fraud requirements is unenforceable but not invalid. This means, for example, that an oral contract for the sale of land cannot be undone if it has been fully performed but neither party can sue the other if the contract is breached. In most cases, the writing requirement will be satisfied by the formal contract for the sale of land, but as long as the material terms are in writing and mere is an express or implied acknowledgement that the agreement is intended to be contractual, the requirement of the note or memorandum in writing is satisfied. The requirement is satisfied even if the material terms are contained in several linked documents each containing part of the agreement. The requirement that the note or memorandum be signed by the party to be charged or that person’s lawfully authorised agent has been interpreted broadly so that a printed name, or initials, anywhere on the document will satisfy the requirement. Ironically, the statute which was intended to prevent fraud provided an opportunity for fraud to be perpetrated by devious defendants who could enter into contracts not complying with the requirement of writing take the benefit of that contract, and then defend the action for breach of contract brought against them on the ground that the contract was unenforceable. For this reason equity developed a doctrine of part performance under which specific performance of the contract could be ordered despite the Statute of Frauds requirements not having been satisfied, if the plaintiff had partially performed the obligations under the contract.
Contracts subject to other formal requirements [6.1530] In addition to the writing requirements originally found in the Statute of Frauds, various Commonwealth statutes require certain transactions to be conducted via written documents. Most relate to: • cheques (under the Cheques and Payment Orders Act 1986 (Cth)); • bills of exchange and promissory notes (under the Bills of Exchange Act 1909 (Cth)); • share transfers (under the Corporations Act 2001 (Cth)); 238
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Chapter 6 Contracts: Concepts of Agreement
• assignments of copyright (under the Copyright Act 1968 (Cth)); • contracts of marine insurance (under the Marine Insurance Act 1909 (Cth)). Furthermore, a variety of State and Territory statutes, and the Australian Consumer Law, prescribe forms that must be completed in certain situations to advance the cause of consumer protection.
Absence of genuine consent [6.1540] Although contract law requires an agreement between the parties, it does not require a subjective meeting of minds –a consensus ad idem –on all terms of the agreement. The common law has developed an objective theory of contract law which was expressed by Blackburn J in Smith v Hughes (1871) LR 6 QB 597 in these terms (at 607): If, whatever a man’s real intention may be, he so conducts himself that a reasonable man would believe that he was assenting to the terms proposed by the other party, and that other party upon that belief enters into the contract with him, the man thus conducting himself would be equally bound as if he had intended to agree to the other party’s terms.
There are nevertheless a number of situations in which, despite the outward appearance of an agreement, the courts will not allow the contract to be enforced against one of the parties because of circumstances surrounding the formation of the contract. These situations include:
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• where one party was induced to enter the contract by a misrepresentation by the other party; • where one or both parties only entered the contract because of a fundamental mistake; • where one party pressured the other party into agreeing to the contract (duress); • where one party possessed undue influence over the other party at the time the contract was made; • where one party engaged in unconscionable conduct in gaining the consent of the other party. Before these situations are examined, it is useful to consider the terminology used by the courts in discussing these situations. Unfortunately the courts are not always consistent in their terminology but they might hold that a particular contract is either: • void; • voidable; or • unenforceable. [6.1550] The term “void contract” is really a self-contradiction since a contract that is declared to be void is regarded as never having come into existence. It follows that neither the parties themselves nor anyone else (third parties) can acquire any rights under the contract. A “voidable contract” is one that is treated as valid in every respect except that one party has a right to change their mind and back out of (rescind) the contract. A party wishing to use this option needs to consider whether to do this very carefully. It is lost if the party Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-20 04:20:22.
… once a contract has been made, that is to say, once the parties, whatever their inmost states of mind, have to all outward appearances agreed with sufficient certainty in the same terms on the same subject matter, then the contract is good unless and until it is set aside for failure of some condition on which the existence of the contract depends, or for fraud, or on some equitable ground. Solle v Butcher [1950] 1 KB 671 per Denning LJ.
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either (i) does nothing or (ii) confirms the contract; or if (iii) rescinding the contract would harm a third party. Half the promises people say were never kept, were never made. Edgar Watson Howe.
An “unenforceable contract” is one that is treated as valid in every respect except that one party (or sometimes both parties) cannot be sued in court for breaking the contract. In some court cases, for example where the defendant is seeking to avoid paying damages for a breach of the contract, it will not make any difference whether the court declares the contract void, voidable or merely unenforceable. All such pronouncements will achieve the same result for the defendant and for that reason courts do not always stick to the explanations outlined above. In other cases, however, the difference between the three terms will be crucial. For example, if a court declares that a contract for the sale of a motor vehicle is void then any attempted “resale” by the “purchaser” to a third party has no legal effect. The original owner can recover the vehicle (under the tort of detinue) or its value (under the tort of conversion) from the third party who is then left to try to recover the purchase price from the person who “sold” them the car. If, on the other hand, the original sale of the motor vehicle is merely voidable, the third party acquires the legal ownership (title) to the car if the resale has been made before the contract is set aside by the original owner. In this situation, the original owner cannot recover the vehicle and is limited to a personal action against the original purchaser whose conduct rendered the contract voidable.
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6.8 MISREPRESENTATION INDUCING THE CONTRACT [6.1560] During the negotiations leading to the formation of a contract, each party may make various statements about the subject matter of the contract. If these statements are expressly included in the resulting written contract, they have effect as express terms of that contract. However, in most cases they are not. In that case, the law must determine whether the representation was intended to form part of the contractual obligations. If it was, it is a contractual representation, the remedy for which, if false, lies in a breach of contract action. If it was a representation which has simply induced the contract without being part of it, it is a mere representation which, if false, may give rise to a remedy in the law of misrepresentation.
Misrepresentation [6.1570] Misrepresentation may be defined as a false statement of a past or existing fact made by the representor to the representee before or at the time the contract was entered into which induced and was intended to induce the contract. A representation as to the future gives rise to no cause of action in misrepresentation.
Bisset v Wilkinson [1927] AC 177 [6.1580] The contract was for the sale of a farm. The vendor stated that the farm could carry 2,000 sheep.
The purchaser attempted to rescind the contract when this turned out to be incorrect. The court held that the contract could not be rescinded since the purchaser was aware that the vendor had never used the land for sheep farming and therefore the statement was an opinion that should not have been relied on by the purchaser. 240
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Chapter 6 Contracts: Concepts of Agreement
However, in some circumstances a statement of opinion may be regarded as also implying a statement of fact such as that the opinion is genuinely held or that the representor is aware of some facts that justify the opinion. Similarly a statement of intention usually implies that the representor currently holds that intention which is an implied statement of fact.
Edgington v Fitzmaurice (1885) 29 Ch D 459 [6.1590] The plaintiff subscribed for debentures on the basis of a prospectus. A statement in the prospectus
said that the money obtained from the issue of debentures would be used to alter the company’s premises and to expand the company’s business. In fact the directors had previously decided that the money would be used to pay off existing debts. When this was discovered the plaintiff claimed to rescind the contract. They were successful. The statement in the prospectus, although a statement of future intention, implied that the directors currently intended to use the money in the way stated, which was a false statement of fact. This was explained by Bowen LJ as follows (at 483): the state of a man’s mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man’s mind at a particular time is, but if it can be ascertained, it is as much a fact as anything else. A misrepresentation as to, therefore, the state of a man’s mind is a misstatement of fact.
Innocent, negligent and fraudulent misrepresentation
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[6.1600] Unlike an action for breach of contract in which the defendant’s state of mind is irrelevant, the action for misrepresentation depends on whether the misrepresentation was made innocently, negligently or fraudulently.
Fraud. The life of commerce, the soul of religion, the bait of courtship and the basis of political power. Ambrose Bierce, The Devil’s Dictionary (1911).
• An innocent misrepresentation is a false representation made by a person who at the time of making it believed it to be true. • A negligent misrepresentation is a false representation made innocently but without reasonable care as to its truth or falsity. • A fraudulent misrepresentation is a false representation made by a person who at the time of making it had no honest belief in its truth. Negligent misrepresentation –which gives rise to an action in negligence –is discussed at [8.960]. Fraudulent misrepresentation –which gives rise to an action in the tort of deceit –is discussed at [8.1260].
Rescission for misrepresentation [6.1610] Where a misrepresentation has induced one party (the representee) to enter a contract, the contract is voidable and thus the representee has a right to rescind the contract. However, this right will nevertheless be lost where: • With full knowledge of the true facts the representee elects to continue with the contract. • It is not possible to substantially restore the parties to their position at the time of entering into the contract (ie restitutio in integrum is not possible). • A third party has acquired, in good faith, and for value, an interest in the subject matter of the contract.
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• The contract was induced by a non-fraudulent misrepresentation and has been fully executed by the completion of a conveyance or lease, or the formal assignment of a chattel. There remains doubt whether this rule, known as the rule of Seddon’s case (after the leading case Seddon v North Eastern Co Ltd [1905] 1 Ch 326), applies in Australia. It has been abolished in the ACT (Civil Law (Wrongs) Act 2002 (ACT), s 173) and in South Australia (Misrepresentation Act 1972 (SA), s 6(1)(b)). It also does not apply to the sale of goods in NSW (Sale of Goods Act 1923 (NSW), s 4(2A)). • There has been a long delay.
Leaf v International Galleries [1950] 2 KB 86 [6.1620] Mr Leaf bought a painting of Salisbury Cathedral, a famous cathedral in England, from International
Galleries. The catalogue stated that the painting was by Constable, a famous English landscape painter. Leaf kept the painting for five years and when he attempted to sell it, it was discovered to be a fake. Leaf sought rescission of the contract with International Galleries on the basis of the statement in the catalogue. This was refused on the basis that although the statement in the catalogue had induced Leaf to purchase the painting the delay of five years meant that rescission was refused.
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Damages for misrepresentation The state of a man’s mind is as much a fact as the state of his digestion. Edginston v Fitzmaurice (1989) 2 Ch D 459 per Bowen LJ.
[6.1630] Where the representee is unwilling or unable to rescind the contract, they may in some circumstances be able to continue with the contract and instead sue for damages suffered as a result of the reduced value of the contract to them. However, to obtain damages they will have to look beyond the rules of contract, since a pre-contractual misrepresentation is, by definition, not part of the contract. • If the misrepresentation was made in trade or commerce, damages (as well as rescission) can be obtained under the ACL. • If the misrepresentation was not made in trade or commerce (eg private sales through the newspaper) then the representee will have resort to the law of torts to seek damages. If the representee can prove that the misrepresentation was made fraudulently (ie the representor knew the statement was false and intended the statement to induce the representee to enter the contract), the representee may be able to obtain damages under the tort of deceit. Where the representee can prove that the misrepresentation was made carelessly, in circumstances where a duty of care exists, they may be able to obtain damages under the tort of negligence under the Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 principle. Legislation in South Australia (Misrepresentation Act 1972 (SA)) and the Australian Capital Territory (Civil Law (Wrongs) Act 2002 (ACT)) has modified the common law rules relating to pre-contractual misrepresentations and: • provides a remedy in damages for non-fraudulent misrepresentations; • restricts the right to rescind the contract when damages would provide an adequate remedy; and • limits the effect of exemption clauses purporting to limit or exclude liability for misrepresentation.
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Chapter 6 Contracts: Concepts of Agreement
The significance of the statutory misrepresentation action [6.1640] It is apparent from the discussion at [6.1580] that the common law relating to misrepresentation provides little comfort to the person who has to rely on misrepresentation rather than breach of contract for a remedy. In practice, the plaintiff who can persuade the court that the inducing misrepresentations should be given contractual effect –which can provide the basis for a breach of contract action –may be little better off. In cases where the parties enter into a written agreement the parol evidence rule (see [6.2030]) severely limits the capacity for oral representation to add or vary or contradict the terms of a written agreement and, in any event, the written agreement is likely to contain an “entire agreement” provision –an exemption clause that, if carefully constructed, may be effective in excluding liability for representations inducing the contract.
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In these circumstances, the statutory action for misleading or deceptive conduct under the ACL which “cuts through all the refinements (of the common law) and simply creates a duty not to make misleading statements [with] abroad range of remedies for breach of that duty” (Pincus J, “Trade Practices” (1988) CLQ 2 at 2), provides valuable protection for the victim of misrepresentation. However it must be noted that these statutory remedies will not be available in non-business transactions. It should also be noted that the statutory remedy will require a court order while the common law remedy allows the “self-help” remedy of rescission.
6.9 MISTAKE [6.1650] The certainty which society demands of its law of contract would be threatened if people could be excused from contractual performance on the basis that they were mistaken about some aspect of the contract. A contract may prove to be an unwise commitment, but the fact that it was not as good a deal as imagined does not give any contractual right to be excused. This general rule was expressed by Lord Atkin in Bell v Lever Bros Ltd [1932] AC 161 at 224 as follows:
Mistake is undoubtedly one of the grounds for equitable interference and relief; but then it must be a mistake not in matters of law, but a mistake of facts. The construction of a contract is clearly a matter of law; and if a party acts upon a mistaken view of his rights under a contract, he is no more entitled to relief in equity than he would be at law. Midland Great Western Railway of Ireland v Johnson (1858) 10 ER 1509 per Lord Chelmsford.
It seems immaterial … that if he had known the true facts he would not have entered into the bargain. A buys B’s horse; he thinks the horse is sound and he pays the price of a sound horse; he would certainly not have bought the horse if he had known that the horse is unsound … A is bound and cannot recover back the price … If parties honestly comply with the essentials of the formation of contracts –that is, agree in the same terms on the same subject matter – they are bound, and must rely on the stipulations of the contract for protection from the effect of facts unknown to them.
The general rule reflects the maxim of caveat emptor (let the buyer beware). The law of contract places the obligation on the parties to protect themselves from the consequences of facts unknown to them when drawing up the contract. However, in rare situations the courts have held that certain mistakes (known as operative mistakes) will mean that the contract is void and therefore refuse to recognise that any contract arose (except in the case of a unilateral mistake as to the terms of a written agreement which is voidable: Taylor v Johnson [1983] HCA 5).
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Business and the Law [A]party who has entered into a written contract under a serious mistake about its contents in relation to a fundamental term will be entitled in equity to an order rescinding the contract if the other party is aware that circumstances exist which indicate that the first party is entering the contract under some serious mistake or misapprehension about either the content or subject matter of that term and deliberately sets out to ensure that the first party does not become aware of the existence of his mistake or misapprehension. Taylor v Johnson [1983] HCA 5 per Mason ACJ, Murphy and Deane JJ.
These situations are usually discussed under four categories: • Non est factum –a mistake as to the nature of a document that is signed. • Unilateral mistake –where one party is mistaken and the other party is aware of the mistake. • Mutual mistake –where the parties are talking at cross-purposes. • Common mistake –where both parties make the same mistake. The mistake that activates the operative mistake categories will usually be a mistake of fact, which by, in most cases, rendering the contract void has the effect that those who deal with one of the parties acquire no rights in the subject matter of the contract. The void “contract” is a nullity and no rights can be transferred under it. If the contract is merely voidable it remains on foot until it is set aside (eg for fraud or misrepresentation) and rights under it can be transferred prior to that. In cases where money is paid under a mistake of fact it can be recovered by that person in an action for restitution on the basis of unjust enrichment. Payments made under a mistake of law can be similarly recovered: David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48.
Non est factum [6.1660] The doctrine of non est factum (it is not my deed) developed at a time when many people were illiterate and originally only applied to deeds. It now applies to any type of signed document. The doctrine operates to relieve a person from the consequences of signing a document if they can show that the document is completely different from the document they thought they were signing. However, a person who understands the type of document they are signing but makes a mistake about its legal effect cannot rely on non est factum. The scope for a plea of non est factum is extremely limited because the injustice to the signer has to be balanced against the injustice to persons who rely and act on signed documents in the reasonable belief that they are valid. For this reason, if the mistaken signer was negligent in signing the document, non est factum will not operate to defeat the rights of an innocent third person who has relied on and acquired an interest through the document.
Gallie v Lee [1971] AC 1004 [6.1670] Mrs Gallie, an elderly widow had provided in her will for her house to be left to her nephew Wally
Parkin. Mrs Gallie wanted to assist her nephew in obtaining finance and, at the request of Wally and his business associate, she signed a document she was told was an assignment by gift of the house to Wally. The document was in fact an assignment of the house to the business associate who mortgaged it to a building society to pay personal debts. When he defaulted on the mortgage repayments, the building society sought to obtain possession. Mrs Gallie’s plea of non est factum, which would have rendered the assignment to the business associate, and thus to the building society, void, failed. There was held to be no fundamental difference between what she thought she was signing and what was actually signed. Both documents were transfers and the only difference was in the beneficiary of the assignment. Mrs Gallie would have failed anyway in having the assignment declared void on the ground that she was negligent in 244
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Chapter 6 Contracts: Concepts of Agreement not taking adequate precautions because she had not read the document before signing despite the fact her glasses were broken at the time. Gallie v Lee has been applied by the High Court in Petelin v Cullen [1975] HCA 24.
Petelin v Cullen [1975] HCA 24 [6.1680] Petelin, who could not read English, accepted a payment of £50 and in exchange gave Cullen
an option for six months to buy Petelin’s property at a stated price. This option lapsed six months later. Subsequently Cullen gave Petelin a cheque for £50 and asked him to sign a document that Cullen said was a receipt for the second payment. However, the document was really an extension of the option. When Cullen exercised this option Petelin refused to transfer the property and Cullen sued for specific performance. The court refused to order specific performance on the basis that the document that Petelin signed was radically different from the one he thought he was signing.
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Unilateral mistake [6.1690] If established, unilateral mistake (where one party makes a mistake which the other party knows) operates to nullify any true consent. The requirement that the party taking advantage of the other’s mistake knew or ought to have known of that mistake will generally provide the basis for a fraudulent misrepresentation action. The significance of the distinction between a unilateral mistake rendering a contract void and a fraudulent misrepresentation rendering a contract merely voidable is clearly illustrated by cases relating to mistaken identity.
Cundy v Lindsay (1878) 3 App Cas 459 [6.1700] The plaintiff despatched an order for handkerchiefs to a rogue who signed the order in such a
way as to make it appear that the order had been placed by an established and respectable company. The rogue “sold” the handkerchiefs to the defendant who had no knowledge of the rogue’s fraudulent possession of them. The plaintiff successfully recovered damages from the innocent defendant in the tort of conversion. Because the contract between the plaintiff and the rogue was void for unilateral mistake, the rogue obtained no title to the goods and could pass no title to the defendant who was therefore liable to the plaintiff in the tort of conversion. The defendant could have sued the rogue for the failure to pass title, thus contravening the implied term that the seller has the right to sell the goods (see Chapter 22), but actions against rogues are notoriously unsuccessful for practical reasons, mainly their disappearance.
Lewis v Averay [1972] 1 QB 198 [6.1710] Lewis advertised his car for sale and sold it to a rogue passing himself off as Richard Greene, a
well-known film actor of the time (who, incidentally, played Robin Hood in the Pinewood Studios television series of the same name). After the cheque had been written, Lewis asked for identification and was shown an identity pass for Richard Greene that had fallen into the rogue’s possession. The rogue then “sold” the car to Averay. When the cheque was later dishonoured, Lewis sought to recover the vehicle (in an action for detinue) or its value (in an action for conversion) from Averay, on the basis that the contract between Lewis and the
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In Lewis v Averay [1972] 1 QB 198, Averay got the car and Lewis was left to pursue an action against the rogue under the tort of deceit –an action unlikely to succeed in practice. The decision in Lewis v Averay (and a similar decision in Phillips v Brooks [1919] 2KB 243 is difficult to reconcile with Ingram v Little [1961] 1 QB 31 (see [6.1720]).
Ingram v Little [1961] 1 QB 31 [6.1720] The vendor of a car was reluctant to accept a cheque from the person with whom negotiations for
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the sale of a car had been concluded. However, on being told that the purchaser was PGM Hutchinson, a well- known and reputable businessman in the area, and after checking from a telephone directory that a person of that name lived at the address given, a cheque was accepted. In the outcome, the purchaser was not PGM Hutchinson and the cheque was dishonoured after the rogue had resold the car to the defendant. It was held that the contract was void for unilateral mistake as to identity. Pearle LJ stated: When an offeror seeks to avoid an apparent contract on the ground of mistaken identity the investigation must start with his actual state of mind. For it would be absurd if he could avoid the contract when he was not really mistaken in his own mind as to the offeree’s identity or when the apparent contract was not induced by mistake, when he was equally prepared to make the contract had he not been mistaken.
This decision was heavily criticised by Lord Denning in Lewis v Averay [1972] 1 QB 198 and, unless there are exceptional circumstances, a mistake as to identity will constitute misrepresentation only. The exceptional circumstance may be where, as in Ingram v Little, the clear intention was to deal only with a particular person and not simply the person with whom the negotiations have been conducted.
Shogun Finance Ltd v Hudson [2004] 1 AC 919
Case Study
Background
[6.1730] The cases relating to mistaken identity had never been reviewed by the House of Lords. With the modern growth of identity fraud, this case presented an ideal opportunity for a clear restatement of the law. Facts A rogue dishonestly obtained the drivers licence of a Mr Patel. The rogue approached a dealer who arranged a hire-purchase agreement between the rogue and Shogun. The dealer faxed the application 246
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Chapter 6 Contracts: Concepts of Agreement
form which had been signed by the rogue who forged Patel’s signature on it and a copy of the drivers licence. Shogun carried out credit checks on Patel and when these proved satisfactory, authorised the dealer to deliver the car to the rogue who then sold the car to Hudson. Issues Shogun argued that it had title to the car because the contract was void (ie it intended to contract with the real Mr Patel not the rogue) while Hudson argued that the contract was voidable on the basis of English legislation which would give him title if an actual contract existed. Held The House of Lords held by a 3:2 majority that where a contract is negotiated not by face-to-face dealings but by written documents the principle in Cundy v Lindsay applied. Shogun intended to contract with Mr Patel and the rogue did not intend to contract with Shogun. Thus there was no consensus ad idem. Two of the law lords (Lords Millet and Walker) thought that Ingram v Little [1961] 1 QB 31 was bad law and should be overruled. Lord Walker suggested that the presumption as to face-to-face dealings should not extend to written contracts identifying the parties. Implications
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It might be argued that Shogun lays down an authoritative principle that a seller tricked by distance fraud will be protected which may be important in an era when goods can be supplied via credit card details quoted over the Internet or telephone.
[6.1740] The cases discussed above relate to mistaken identity and may be reconciled by dividing them between situations where there are face-to-face dealings between the parties (in which case there appears to be a presumption that the parties intend to deal with the person in front of them, although this may be rebutted by the circumstances) and those where the parties are not face-to-face (when the presumption is that the person who has been induced by the mistake as to identity intends only to deal with the “genuine” person). In Taylor v Johnson, the High Court seems to be suggesting that a party cannot rely on her or his own mistake where it relates to the terms of a written contract even if the other party is aware of it to argue that the contract is void ab initio. In such a case, the contract is voidable only, that is, it is binding until it can be set aside on some equitable grounds such as unconscionable conduct. The High Court, however, has left in abeyance the question of whether this reasoning applied to informal contracts or cases of mistaken identity. Even if a contract is void at common law for unilateral mistake, equity may order specific performance of it if the person seeking the order has not contributed to the mistake and the person mistaken would not suffer undue hardship (Fragomeni v Fogliani (1968) 42 ALJR 263). Equity may also order rectification (ie correction of the document) if the mistaken party can prove that the other party was aware that a term either was or was not included contrary to the clear understanding of the parties. There is a further situation in which equity may intervene to modify the rigours of the common law. If in fact the contract is voidable for unilateral mistake, equity may set it
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aside if it would be unconscionable to allow one party to take advantage of the other party’s mistake.
Taylor v Johnson [1983] HCA 5 [6.1750] Mrs Johnson signed a written contract to sell 10 acres of land to Taylor for $15,000. She later
refused to go ahead with the contract on the basis that the price was supposed to be $15,000 per acre. Taylor sued for specific performance of the contract. The High Court held that the contract was not void on the basis of unilateral mistake but still refused to grant specific performance of the contract. The High Court held that the evidence established that Taylor “deliberately set out to ensure that Mrs Johnson was not disabused of the mistake or misapprehension under which he believed her to be acting”. The High Court stated (at 200) that: [This principle] is best calculated to do justice between the parties to a contract in the situation which it contemplates. In such a situation it is unfair that the mistaken party should be held to the written contract by the other party whose lack of precise knowledge of the first party’s actual mistake proceeds from wilful ignorance because knowing or having reason to know that there is some mistake or misapprehension, he engages deliberately in a course of conduct which is designed to inhibit discovery of it. Our comment can, for present purposes, be limited in its application to the case where the second party has not materially altered his position and the rights of strangers have not intervened.
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Mutual mistake [6.1760] At common law, mutual mistakes describes the situation where the parties negotiate at cross-purposes. The contract is void if it is not possible (on an objective basis) to determine the subject matter of the contract.
Raffles v Wichelhaus (1842) 159 ER 375 [6.1770] Raffles agreed to sell 125 bales of cotton to Wichelhaus. The cotton was due to arrive from
Bombay on the ship Peerless. The evidence showed that there were in fact two ships of that name that both carried cotton from Bombay to England about three months apart. When a dispute arose as to which ship was referred to in the contract, the court held the contract to be void for mutual mistake on the basis that there was evidence that pointed equally to each interpretation of the contract.
Common mistake [6.1780] Common mistake describes the situation where the parties make the same mistake and enter into a contract under the same mistaken belief as to a particular state of affairs. A common mistake as to the quality, nature or value of the contract will not render a contract void. The remedy of rectification is available in cases where the written contract erroneously records an agreement if the contract is rectified –rewritten –to accord with the parties’ actual intention.
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Chapter 6 Contracts: Concepts of Agreement
Bell v Lever Brothers Ltd [1932] AC 161 [6.1790] Bell was the managing director for five years at a salary of £8,000 per year of a subsidiary of Lever Brothers in Africa. He was made redundant after three years and Lever Brothers agreed to pay him £30,000 for the premature termination of his contract. After the payment was made, Lever Brothers discovered that Bell had breached his previous contract by trading on his own account and had this been known at the time, Lever Bros could have dismissed Bell without any payment. Lever Bros brought an action to recover the £30,000 on the basis that the termination contract was void for common mistake. It was held by a majority (3:2) in the House of Lords that the money was not recoverable. The reason given by Lord Atkin (at 223) was as follows: It seems immaterial that he could have got the same result in another way, or that if he had known the true facts he would not have entered into the bargain. A buys B’s horse; he thinks that the horse was unsound. If B has made no representation as to the soundness and has not contracted that the horse is sound, A is bound and cannot recover back the price.
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[6.1800] Where the subject matter of the contract has, unknown to both parties, perished at the time the contract is formed, the contract will be void due to common mistake. This rule is found in the Sale of Goods Act of each State and Territory and typically provides that “where there is a contract for sale of specific goods, and the goods without the knowledge of the seller have perished at the time when the contract was made, the contract is void”.
If mistake operates at all, it operates so as to negative or in same cases to nullify consent. Bell v Lever Bros Ltd [1932] AC 161 per Lord Atkin.
McRae v Commonwealth Disposals Commission [1951] HCA 79 [6.1810] The Commission called for tenders for “the purchase of an oil tanker lying on Jormaund Reef
which is approximately 100 miles North of Sumarai”. McRae’s tender of £285 was accepted. He spent another £3,000 in undertaking a salvage expedition but was unable to find the ship. When it was later discovered that there was no such wreck and no such reef, McRae sued the commission for his costs in mounting the expedition. In response, the Commission argued that there had been a common mistake as to the existence of the tanker and therefore no contract had arisen. This argument was rejected and damages of £3,285 were awarded. The High Court stated (per Dixon and Fullagar JJ at 410) that: [I]f the case ought to be treated as raising “mistake”, then the Commission cannot in this case rely on the mistake as avoiding the contract, because any mistake was induced by the serious fault of their own servants, who asserted the existence of a tanker recklessly.
[6.1820] A contract that is not void for common mistake, because the mistake is not sufficiently fundamental, may, according to Lord Denning in Solle v Butcher [1950] 1 KB 671, be set aside in equity where the rights of third parties are not unjustly prejudiced. The party seeking to avoid the contract must not be at fault and it would be unconscionable to allow the other party to benefit from the mistake.
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Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (The Great Peace) [2003] QB 679
Case Study
Background
[6.1830] This case clarified the obligation of parties to act promptly when discovering a mistake since failure to do so might be construed as “consenting” to the mistaken fact situation. Facts A ship suffered structural damage and required towing. The nearest tug was several days away. The defendants who owned the stricken vessel were told by a third party that the Great Peace was nearby. The defendants contracted with the owners of the Great Peace to stand alongside their ship in case the crew had to be evacuated before the tug arrived. The contract contained a minimum hiring rate and a cancellation fee equal to the minimum. The Great Peace changed course and commenced to sail towards the other vessel. In fact the Great Peace was not close to the other ship at all, but several hundred miles away. Although the defendants soon became aware of the truth, they did not cancel the contract immediately but did so after a few hours after marking arrangements with another closer ship. The owners of the Great Peace then sought payment and the defendants argued that the contract was void for common mistake.
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Decision In this case, as the distance between the two ships was not so great that it could not have been of any assistance at all, the services the Great Peace could have rendered were not radically different from those envisaged by the parties. The defendant must have thought this was so as it did not cancel the contract immediately. It was therefore liable to pay the cancellation fee. Implications The Court of Appeal thus held that for common mistake to avoid a contract the following must be present: • A common assumption as to the existence of a state of affairs; • The non-existence of that state must not be attributable to the fault of either party; • Neither party has promised the other that that state of affairs exists; • The non-existence of the state of affairs must render the performance of the contract impossible; • The state of affairs must be something which must exist if performance of the contract is possible. Importantly the Court of Appeal stated that there was no equitable jurisdiction to rescind a contract for common mistake. If a contract was affected by common mistake as outlined, the common law gave a right of recission and therefore Lord Denning’s reasoning in Solle v Butcher was wrong. The issue in Australia has yet to be determined by the High Court.
6.10 DURESS [6.1840] The courts have always felt that those who enter into a contract at gunpoint, or some less immediate threat to their safety or that of their family, should be permitted to rescind the contract provided they do so as soon as the danger has passed. At common law such contracts are said to be voidable for duress. 250
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Chapter 6 Contracts: Concepts of Agreement
Physical duress [6.1850] Where it can be shown that a threat to the personal safety or property of a party or their immediate family is the only reason that a contract was entered into, the doctrine of duress will operate to make the contract voidable. In fact, the contract will be voidable even if the threat was merely one of several reasons for entering the contract.
You can get much further with a kind word and a gun than you can with a kind word alone. Al Capone.
Barton v Armstrong [1976] AC 104 [6.1860] Barton entered into several contracts with Armstrong and was able to show that he had received
death threats prior to entering into the contracts. However, he was unable to show that he would not have entered into the same contracts in the absence of the death threats. The contracts were held to be voidable despite this inability.
Economic duress
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[6.1870] Over recent years a wider doctrine of duress –“economic duress” –has developed, under which threats to an individual’s property or other more abstract financial interests may render the contract voidable. The existence of economic duress was acknowledged by the New South Wales Supreme Court in Crescendo Management Pty Ltd v Westpac Banking Corporation (1988) 19 NSWLR 40. McHugh JA suggested (at 46) that: The proper approach is to ask whether any applied pressure induced the victim to enter into the contract and then ask whether that pressure went beyond what the law is prepared to countenance as legitimate? Pressure will be illegitimate if it consists of unlawful threats or amounts to unconscionable conduct. But the categories are not closed. Even overwhelming pressure, not amounting to unconscionable or unlawful conduct, however, will not necessarily constitute economic duress.
North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705 [6.1880] A contract to build a ship stated the agreed price in US dollars. Halfway through construction of the ship, the United States devalued its currency by 10 per cent. Hyundai Construction threatened to stop work on the project unless a new contract was signed including a 10 per cent increase in price North Ocean Shipping agreed to this but later took legal action to recover the additional 10 per cent on the grounds of economic duress. The action failed. It was held that the second contract was voidable but by delaying legal action until nine months after completion of the ship North Ocean Shipping had impliedly affirmed the new contract and consequently could not recover the additional payment. The problem in such cases is, of course, to distinguish between actionable duress and legitimate business pressure. Economic duress may arise where a threat to break an existing contract is used to negotiate a new contract. A claim of economic duress was recently argued unsuccessfully in Bustfree Pty v Llewelyn [2013] QCA 103 in relation to a deed which the plaintiff claimed she had been improperly induced to execute. She had been independently legally advised and the terms of the agreement had been negotiated.
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Business and the Law Courts of equity have never set aside gifts on the ground of the folly, imprudence, or wont of foresight on the part of the donors. The courts have always repudiated any such jurisdiction … On the other hand, to protect people from being forced, tricked or misled in any way by others into parting with their property is one of the most legitimate objects of all laws; and the equitable doctrine of undue influence has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and with the infinite varieties of fraud. Allcard v Skinner (1887) 36 Ch 145 per Lindley J.
6.11 UNDUE INFLUENCE [6.1890] The doctrine of undue influence is primarily concerned with gifts rather than contracts but it could be pleaded where a very one-sided contract arose. The doctrine has been used to set aside gifts where the court feels that the gift was not freely given. In some situations, the court will presume without evidence that a gift was not freely given. This is where the gift was between two people who were in a relationship where one person had the power to influence the other in a way the court finds unacceptable. Relationships that have been recognised to involve such power include: • doctors and patients; • solicitors and clients; • religious leader and devotees; • guardians and children. In such situations the recipient of the gift may bring evidence to show that despite the relationship, the gift was freely given. The best such evidence appears to be that the donor of the gift received independent legal advice prior to making the gift. In the absence of this or other evidence, the gift will be set aside. These situations are known as presumed undue influence. In cases where there is no preexisting relationship between the parties, it is still possible to get a gift set aside but the onus is on the person seeking to do so to bring evidence to show that the gift was not the outcome of the donor’s free will. This situation is described as actual undue influence. The leading Australian case involved presumed undue influence although the relationship was simply a long-standing friendship involving an elderly man in a vulnerable state. His son used the doctrine to get a gift set aside after his death (presumably so that it would become part of the son’s inheritance).
Johnson v Buttress [1936] HCA 41 [6.1900] Buttress gave a cottage to his long-standing friend Johnson. At the time Buttress was elderly, illiterate and recently widowed. When Buttress died, his son brought a legal action to have the gift set aside on the grounds of undue influence. The gift was set aside on the basis that since there was a relationship of trust and confidence, the gift was presumed to be the result of that influence and Johnson had been unable to rebut the presumption. Dixon CJ explained the doctrine of undue influence in these terms: The basis of the equitable jurisdiction to set aside an alienation of property on the ground of undue influence is the prevention of an unconscientious use of any special capacity or opportunity that may exist or arise of affecting the alienor’s freedom of will or judgment in reference to such a matter. The source of power to practise a domination may be found in no antecedent relation but in a particular situation, or in the deliberate contrivance of the party. If this be so, facts must be proved showing that the transaction was the outcome of such an actual influence over the mind of the alienor that it cannot be considered his free act. But the parties may antecedently stand in a relation that gives to one an authority or influence over the other from the abuse of which it is proper that he should be protected. When they stand in such a relation, the party in the position of influence cannot maintain his beneficial title to property of substantial value made over to him by the other as a gift, unless he satisfies the court that he took no advantage of the donor, but that the gift was the independent and well-understood act of a man in a position to exercise a free judgment based on information as full as that of the donee.
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Chapter 6 Contracts: Concepts of Agreement
In another case involving presumed undue influence, the court held that the right to set aside the gift was lost where no action was taken for six years after an 11-year relationship (between a religious leader and a devotee) ended.
Allcard v Skinner (1887) 36 Ch D 145 [6.1910] Ms Allcard decided to enter a religious order of which the mother superior was Ms Skinner. Two years later, in accordance with her vow of poverty she gave substantial sums of money to Ms Skinner for the purposes of the order. After 11 years Ms Allcard left the order. Six years later she took legal action to have her property returned to her. It was held that Ms Allcard could have avoided the gift when she left the order and recovered any property still in Ms Skinner’s hands but her delay of six years in taking action after leaving the order meant that she had acquiesced in the gift. [6.1920] The undue influence may in fact be that of a third party. This has been a particular problem where lenders have pressured wives to act as guarantors of the debts of their husbands.
IN CONTEXT
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The “special position” of guarantor spouses [6.1930] In Yerkey v Jones [1939] HCA 3 Dixon J stated: If a married woman’s consent to become a surety of her husband’s debts is procured by the husband and without understanding its effect in essential respects, she executes an instrument of suretyship which the creditor accepts without dealing with her personally, she has a prima facie right to have it set aside. He also stated that this applied even if she understood what she was doing but she signed the document under the undue influence of her husband.
What then is the principle? Is it that it is right and expedient to save persons from the consequences of their own folly? Or is it that it is right and expedient to save them from being victimised by other people? In my opinion the doctrine of undue influence is founded upon the second of these two principles. Allcard v Skinner (1887) 36 Ch 145 per Lindley J.
This rule was reaffirmed in Garcia v National Australia Bank Ltd [1998] HCA 48 in which the High Court pointed out that the rule was not based on the subservience of a woman to her husband but on the trust and confidence of marriage partners in each other. Business decisions were often left by the wife to the husband with very little consultation or clear explanation. The majority stated that the rule might even be extended to long-term relationships involving opposite or same-sex couples or even where the husband acts as surety for the wife.
Bar-Mordecai v Hillston [2004] NSWCA 65 [6.1940] Bar-Mordecai, a doctor, commenced a de-factor relationship with Mrs Hillston. The administrator of Hillston’s estate sought to set aside gifts made in Bar-Mordecai’s favour arguing the special relationship of doctor and patient raised a presumption of undue influence. Bar-Mordecai attempted to rebut the presumption by reference to his de-facto relationship with Mrs Hillston, some 36 years his senior, arguing further that the gifts were made by an informed, legally advised and uncoerced donor.
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Business and the Law The court held that the question at issue was not simply one of establishing the deceased’s understanding of the transactions. The appellant had to go further and demonstrate that he took no advantage of the donor – that the gifts were “the independent and well-understood act of a [woman] in a position to exercise a free judgment based on information as full as that of the donee”. The court held (at [156]) that: This is not the one way street that the appellant embraces in his primary submission challenging the findings on undue influence. The affection, sense of generosity and attraction that the deceased felt for the appellant had grown out of the doctor/patient relationship. This was historical fact. The medical role also continued to form a significant part of the dyadic relationship. This meant that the appellant continued to bear the onus of justification which the principles of equity threw upon him. The fact that the couple had moved into a pattern of living that bore many hallmarks of a husband-wife relationship did not remove the need for close investigation of the circumstances surrounding the very substantial gifts involved. It certainly did not require Equity to treat the couple in the same way it treats a married couple.
6.12 UNCONSCIONABLE CONDUCT [6.1950] Unconscionable conduct is closely related to undue influence. The common law rules relating to unconscionable conduct have to a large extent been adopted and expanded by Ch 2 of the Australian Consumer Law. Both the common law and statutory developments are discussed in detail in Chapter 20.
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IN CONTEXT
The retreat from freedom and sanctity of contract Standard form contracts (contracts of adhesion) in consumer transactions present different problems. In many cases the consumer is unaware of the precise terms of the contract and has no real choice of accepting or rejecting the terms. … [I]t may be thought that the law should simply require that the terms of consumer contracts should not be unreasonable in the sense that they go beyond what is fair protection of the legitimate interests of the parties. Sir A Mason and S Gageler, “The Contract” in P D Finn (ed), Essays on Contract (Law Book Co, 1987).
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[6.1960] The reality of the contemporary marketplace is that freedom of contract, in the
sense of freedom to negotiate an agreement, often does not exist in practice. Most contracts (certainly those that consumers make with the suppliers of goods and services) are characterised by a marked disparity in “bargaining power” which renders the weaker party’s freedom to negotiate illusory. The inequality of bargaining power that characterises relationships in the contemporary marketplace is illustrated by standard form contracts that are the most common form of contracting today. Lord Diplock, in Schroeder Publishing Co Ltd v Macaulay [1974] 1 WLR 1308 at 1316, distinguished contracts negotiated by parties with equality of bargaining power from those characterised by inequality of bargaining power. He censured the latter in forthright terms: The terms of this kind of standard form contract have not been the subject of negotiating between the parties to it, or approved by any organisation representing the interests of the weaker party. They have been dictated by that party whose bargaining power, either exercised alone or in conjunction with others providing similar goods or services, enables him to say: “If you want these goods or services at all, these are the only terms on which they are obtainable. Take it or leave it.” To be in a position to adopt this attitude towards a party desirous of entering into a contract to obtain goods or services provides a classic instance of superior bargaining power … The fact that the appellants’ bargaining power vis-a-vis the respondent was strong enough to enable them to adopt this take-it-or-leave-it attitude raises no presumption that they used it to
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Chapter 6 Contracts: Concepts of Agreement
drive an unconscionable bargain with him, but … it calls for vigilance on the part of the court to see that they did not.
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Standard form contracts are an inevitable by-product of a standardised society and do have distinct and undoubted virtues. The most obvious advantages are convenience, certainty, saving time, trouble and expense in bargaining, facilitating planning, tailoring the law to specific fields, reducing human wear and tear, cheapening administration and serving the ultimate consumer (see K Llewellyn, “Book Review” (1939) 52 Harvard Law Review 700 at 701). However, the essence of the standard form contract is the absence of real bargaining power in one party. If drawn in an enlightened manner this is no disadvantage (in practice if not in theory) and standard forms incorporating the settled practices of a trade that have emerged out of years of commercial practice are the best examples. But when the stronger party takes an unfair advantage of her or his bargaining power, the standard form contract becomes a contract of adhesion and to adhere to freedom of contract can be to countenance blatant contractual injustice. The law’s commitment to sanctity of contract was influenced by freedom of contract. If freedom to negotiate the contractual terms does not exist in practice, freedom of contract simply confers freedom to exploit superior bargaining power. In such circumstances the notion of sanctity of contract is not necessarily compelling. The greatest change in the law of contract this century has been the judicial and legislative responses to the reality of inequality of bargaining power in the marketplace in order to redress the balance between the contractually weak and the contractually strong. Particularly in relation to “consumer” contracts that are characterised by disparity of bargaining power, “contract to status” more accurately reflects the movement of contemporary Australian society. H S Maine (Ancient Law, John Murray, 1861) may not approve, but it is today regarded as an obligation of a progressive society that those disadvantaged by the classical theories of freedom and sanctity of contract are accorded special treatment because of their special status. The courts have been vigilant in developing contractual common law in order to accommodate the dramatic changes in the marketplace within existing doctrine. However, it reflects the reality of law-making within the common law system that the responsibility for significant reform falls to the legislature. Today comprehensive consumer protection legislation has been enacted to protect the contractually disadvantaged party, and the ancient maxim caveat emptor (let the buyer beware) is, at least for consumer contracts, simply a matter of historical interest today. The most dramatic example of the legislature renouncing freedom and sanctity of contract is s 21 of the ACL which simply and directly prohibits unconscionable conduct in trade or commerce whether that conduct is in the course of a B2C or a B2B transaction.
6.13 CONTENTS OF THE CONTRACT [6.1970] The “active ingredients” of a contract are called its terms. The terms of the contract encapsulate the rights and obligations of the parties to the contract, and their breach gives rise to an action for breach of contract. The contractual terms include both: • the express terms –those identified and agreed upon by the parties; and • any implied terms that may be implied into the contract either by the courts or by statute.
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The twentieth century has seen an erosion of the doctrine of caveat emptor in the common law world, due primarily to the rapid growth of consumer protection legislation in the last thirty years, and the governing legal principle can now with some justification be said to be caveat venditor (let the seller beware). K C Sutton, “Let Sellers and Manufacturers Beware” (1980) 54 Australian Law Journal 146.
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Business and the Law [T]he law of contract, unqualified and unsupplemented, would reflect the laissez-faire values of a bygone age. Nowadays, when the law seeks to uphold the values of equality, fair dealing and good faith, qualifications which mollify the harshness of contract find a readier judicial ear than in earlier times when the fact of agreement was not only the necessary, but more usually the sufficient, condition for its enforcement. Although the constraints of judicial reasoning preclude the courts from adopting a Robin Hood approach to contractual rights, the doctrines of equity, waiver and tort are at hand and are likely to be examined by a court in search of principles which might be developed to do what appears to be justice to modern judicial eyes. G Brennan, “Opening Address” (1990) 3 JCL 85.
Express terms [6.1980] The express terms of the contract are those that the parties have actually agreed to either orally or in writing. The doctrine of freedom of contract means that generally speaking the parties are free to agree on any terms they like and the role of the courts is merely to identify, interpret and apply those terms to any dispute that might subsequently arise. Today there are significant inroads into traditional principles of freedom and sanctity of contract –particularly through the broad and general prohibition of misleading or deceptive conduct and unconscionable conduct under the ACL.
Written contracts [6.1990] In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 the High Court clearly stated the general rule: Where there is no suggested vitiating element, and no claim for equitable or statutory relief, a person who signs a document which is known by that person to contain contractual terms, and to affect legal relations, is bound by those terms, and it is immaterial that the person has not read the document.
The issue in such cases is primarily one of interpreting the written terms –for rights and obligations –set out in the document. In interpreting the meaning of the terms of a contract a court will apply the following rules: 1.
If it is necessary to avoid absurdity or inconsistency then words may be supplied, omitted or corrected.
2.
If the context of the language makes its meaning doubtful, the court may hear evidence of the surrounding circumstances to clarify the meaning.
3.
As a general rule, evidence of the parties’ negotiations or intentions concerning the document should not be admitted.
4.
If the parties have refused to include something in the agreement, evidence of this can be admitted so as to refute an inference which might otherwise be drawn from the circumstance.
5.
No term can be implied which is inconsistent with the express terms of the document nor where the document shows that the parties considered it and deliberately rejected it or deliberately abstained from including it.
Natra Pty Ltd v Markhill Investments Pty Ltd [2005] FCA 552 [6.2000] The defendant sold its business of supplying servicing and repairing radiators and cooling system products. The agreement provided that excluded from the sale was “the business of the sale and servicing of industrial radiators, charge air coolers and heat exchangers carried on by the vendor under the names of ‘Abbott’s Industrial Radiators’ and ‘Abbott’s AirCoolers’ ”. The defendant proceeded to carry out radiator work on 4WD vehicles, other passenger vehicles and light commercial vehicles up to 3.5 tonnes claiming that this fell within the definition of the excluded business.
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Chapter 6 Contracts: Concepts of Agreement It was held that the agreement must be given the meaning according to the language the parties actually used. The term “industrial radiators” meant something that was different from radiators in motor vehicles and in particular radiators in 4WDs which were essentially motor vehicles for the transport of passengers. Accordingly, the defendant was in breach of the agreement and an injunction to prevent it from servicing such vehicles should be granted.
IN CONTEXT
Nobody reads terms and conditions: It’s official [6.2010] Not one customer of online computer game seller Gamestation read the terms
and conditions of sale on 1st April, the company has said. In an April Fools’ Day prank, it has claimed the legal right to the souls of all those customers. Gamestation changed its terms and conditions to say that anyone buying goods from it online on 1st April this year and not clicking on a link contained within them would forfeit their soul.
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The prank, which was designed to highlight that terms and conditions are almost never read, fooled all 7,500 customers who made a purchase that day, a company spokesman said. The new conditions said: “By placing an order via this website on the first day of the fourth month of the year 2010 Anno Domini, you agree to grant Us a non transferable option to claim, for now and for ever more, your immortal soul”. “Should We wish to exercise this option, you agree to surrender your immortal soul, and any claim you may have on it, within 5 (five) working days of receiving written notification from gamesation.co.uk or one of its duly authorised minions. We reserve the right to serve such notice in 6 (six) foot high letters of fire, however we can accept no liability for any loss or damage caused by such an act,” said the terms. “If you a) do not believe you have an immortal soul, b) have already given it to another party, or c) do not wish to grant Us such a license, please click the link below to nullify this sub-clause and proceed with your transaction.” That link led the user to a page saying that the clause was an April Fool, congratulating the user of being “so vigilant” and offering them a £5 voucher. Gamestation said that 7,500 people made online purchases on 1 April and that none of them clicked on the link, meaning that all the customers failed to check the terms and conditions closely. The retailer carried out the experiment because it had previously conducted research which indicated that as few as 12% of customers read terms and conditions when buying online. In fact its experiment showed that the situation is even worse than it had thought. Gamestation said that the prank was designed to remind customers that when it came to buying online “the devil is in the detail and … always read the terms and conditions”, according to a company statement. The results of the experiment chime with others’ findings. Computer optimisation software maker PC Pitstop tried a similar experiment. It buried a clause in its end user licence agreement (EULA) offering money to anybody who read the clause and sent an email to the address within it.
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Business and the Law When the issue is which of two or more possible meanings is to be given to a contractual provision, we look not to the actual intentions, aspirations, or expectations of the parties before or at the time of the contract, except insofar as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time- consuming but would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the contract. Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24 per Mason J.
It said that it was only after four months and 3,000 downloads of its software that somebody finally emailed the address and claimed a $1,000 reward. http://www.out-law.com/page-10929
Oral, or partly written-partly oral contracts [6.2020] Where the agreement of the parties is completely expressed in a written document which is intended to constitute the entire agreement between them, the determination of the express terms obviously presents no difficulty –the terms are contained in the clauses of the contractual document. In the case of an agreement negotiated by parties of equivalent bargaining power this is a sensible and not unrealistic outcome. However, in an age in which standard form contracts account for probably, about 99 percent of all contracts made it is hardly surprising or even unreasonable for the party presented with a standard form contract to claim that the agreement of the parties is contained not only in the written conditions but in oral representations made during negotiations but not expressly incorporated in writing the contractual document. There are three potential difficulties facing the potential plaintiff in this situation: • Was the representation contractual or non-contractual? • Did the parol evidence rule apply? • The effect of an “entire agreement” clause. Contractual or non-contractual representations [6.2030] The Court must be satisfied that the oral representations were intended to have contractual effect. The slippery test of objective intention is applied to distinguish those inducements which give rise to contractual obligations (terms) from those representations which do not give rise to contractual obligations (mere representations). An entire text could be devoted to the manner in which the courts have dealt with this problem and the subsidiary “tests” they have developed to guide this inquiry. In the final analysis, the inquiry is simply one of the parties’ intention which is spectacularly unsatisfying because, with the fullness of time, the respective positions have become so entrenched that the plaintiff clearly intended the defendant’s representation to have contractual effect, while the defendant equally vehemently intended it not to have contractual effect. It is hardly surprising that the common law adopted an objective approach rather than relying on an elusive consensus ad idem (meeting of the minds).
Oscar Chess Ltd v Williams [1957] 1 All ER 325 [6.2040] Williams bought a new car from Oscar Chess who was a dealer. As part of the purchase price, he
traded in his old Morris car. The registration book for the car stated that it was a 1948 model and he was given 258
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Chapter 6 Contracts: Concepts of Agreement a trade-in value of £290 based on this year. In fact, unknown to either party the registration book had been fraudulently altered by a previous owner and the car was really a 1937 model whose trade-in value was £175. When Oscar Chess discovered this they sued Williams for breach of contract, seeking damages to compensate them for the incorrect trade-in allowance. The action failed. It was held that even if Williams treated the statement in the logbook as a statement, it did not become a term of final oral contract. This was because Williams had less expertise in the matter than Oscar Chess who could have more easily discovered the true age of the car.
Dick Bentley Productions v Harold Smith Motors Ltd [1965] 1 WLR 623 [6.2050] Dick Bentley bought a second-hand Bentley car from Harold Smith. Harold Smith stated that the
car had only driven 20,000 miles since a new engine and gearbox had been fitted but the car had actually travelled in excess of 100,000 miles since that time. When Dick Bentley discovered this, he sued for breach of contract. It was held that the statement constituted one of the terms of the contract and therefore Dick Bentley was entitled to damages for breach of the contract. This was because the maker of the statement was in the best position to judge whether this was true and therefore both parties should have realised that Dick Bentley would rely on the statement.
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Parol evidence rule [6.2060] Even in the absence of an “entire agreement” claim, the general rule is that where the parties have recorded their agreement in a signed document which appears to represent the entire agreement of the parties, neither party is allowed to introduce evidence of oral statements that would add, vary or contradict the terms of the written contract. In fact, if the court is satisfied that the signed document represents that entire agreement, it is also unable to look at any negotiations that took place before the document was signed or even any prior drafts of the agreement.
Trust in Allah, but tie your camel. Arab proverb.
This is known as the parol evidence rule. In practice, the parol evidence rule is no longer a potent force. The courts have shown considerable ingenuity in bypassing it and are sympathetic to the argument that the writing does not express the complete agreement between the parties and that oral statements made during negotiations can have contractual effect. The oral statement may be given contractual effect as a collateral oral warranty (the consideration for which is entering into the main contract) under a separate but associated collateral contract. Or, it may be given contractual effect as a term of a contract which is found to be partly oral and partly in writing. In practice it is often difficult to distinguish on which basis the court gave contractual effect to an oral statement. Both are devices to avoid injustice by bypassing the exception-ridden parol evidence rule. Partly written/Partly oral contract [6.2070] Despite a contract being written it may be possible for the court to find that the written terms do not comprise the entire agreement and oral representations may, if promissory, be given contractual effect in a partly written/partly oral contract. Of course if the written contract contains an “entire agreement” or “four corners” clause which limits the contractual rights or obligations to the written terms (see [6.2150]) this “device” to avoid the Parol Evidence Rule is not possible.
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Van den Esschert v Chappell [1960] WAR 114 [6.2080] Immediately before signing a written contract for the purchase of a house, the purchaser
(Mrs Chappell) asked the seller (Van den Esschert) whether the house was infested by white ants. Once the seller assured her that the house was free of white ants, the purchaser signed the written contract. It was later discovered that the house was infested with white ants and she sued the seller for breach of contract, despite the fact that the written contract was silent on the matter. She was successful. It was held that the oral assurance constituted a term of the contract and thus the contract was partly written and partly oral.
Collateral contract [6.2090] The “collateral contract” is a “device” that may be available to avoid the Parol Evidence Rule. An oral representation may be enforced as a separate, collateral, contract the consideration to which is entering into the main contract. The oral representation must nevertheless be a promissory statement which does not contradict the express terms of the main contract.
J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] WLR 1078
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[6.2100] Lord Denning gave effect to an oral assurance (that containers containing delicate equipment
would be shipped below deck) as a collateral oral warranty while Roskill and Geoffrey Lane LJJ gave effect to it as a new express term which was to be included thereafter in the contracts between the parties. They treated the contract as partly written and partly oral and did not have to “have recourse to lawyers’ devices such as collateral oral warranty in order to seek to adduce evidence which would not otherwise be admissible” (per Roskill LJ at 1083). Instead they could look at all the evidence to determine what the bargain was that was struck between the parties and against this background the promise plainly amounted to an enforceable contractual promise.
I read part of it all the way through. Samuel Goldwyn.
[6.2110] In Australia the effectiveness of the collateral contract device is limited by the refusal of the High Court to depart from the proposition that a collateral contract cannot be inconsistent with the main contract.
J J Savage & Sons Pty Ltd v Blakney [1970] HCA 6 [6.2120] The purchaser of a speed boat was disappointed when it did not achieve the speed he had expected. The contract did not specify the expected speed and the action was based on breach of a collateral contract based on representations in letters and conversations as to what speed a particular hull with a particular powerplant may achieve. In rejecting the collateral contract claim on the basis that the representation relied on has not a promissor’s representation the High Court clearly explained the purchaser’s options in such a case: On receipt of the letter there were three courses open to the respondent. He could have required the attainment of the speed to be inserted in the specification as a condition of the contract; or he could have sought from the appellant a promise – however expressed, whether as an assurance, guarantee, promise or otherwise – that the boat would attain the speed as a prerequisite to his ordering the boat; or he could be content to form his own judgment as to the suitable power unit for the boat relying upon the opinion of the appellant of whose reputation and experience in the relevant field he had, as the trial judge found, a high regard.
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Chapter 6 Contracts: Concepts of Agreement
Hoyts Pty Ltd v Spencer (1919) 27 CLR 133 [6.2130] Spencer was the lessee of commercial premises. He sub-let the premises to Hoyts for four years under a written sub-lease, one clause of which stated that Spencer could terminate the lease by giving four weeks’ notice. Hoyts later argued that it only signed the sub-lease after Spencer orally promised not to use this clause unless he was forced to do so by the owner of the premises. When Spencer later gave notice under the clause without being required to do so by the owner, Hoyts sued alleging breach of a collateral oral contract. The action failed. It was held by the High Court that the oral promise could not constitute a collateral oral contract since it was inconsistent with the express terms of the written contract.
IN CONTEXT
Abolition of the parol evidence rule [6.2140] The Draft Australia Law of Contract which proposes a codification of the general rules of contract law recommends the abolition of the parol evidence rule.
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The so-called parol evidence rule, a rule of some antiquity, purports to exclude extrinsic evidence of the parties’ intentions where a contract is in writing. Its ambit has been redefined so many times, and its circumventions are so numerous, that even the High Court has been unable to maintain a consistent approach in applying it. It is often raised as a technical defence, and can consume a considerable portion of court time. In the 21st century, written communications are so various and prolific that it is no longer helpful or realistic to restrict extrinsic evidence when determining the content or meaning of a written contract.
Entire agreement clauses [6.2150] Written contracts, especially standard form contracts, frequently include an “entire agreement” clause which purports to limit the terms of the contract to those contained in the written document. The purpose of such a clause is to stop a party “threshing through the undergrowth and finding in the course of negotiations some (chance) remark or statement (often long forgotten or difficult to recall or explain) on which to found a claim” (per Lightman J in Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyds Rep 611 at 614). In particular it is designed to exclude liability for representations or statements made prior to the coming into being of the document itself. An example of such a contract clause is: This Agreement is the entire understanding and agreement between the parties hereto concerning the matters the subject of this Agreement. XYZ warrants that it has not been induced to enter into this Agreement in reliance upon, or as a result of, any representations, warranties, statements, promises or inducements whatsoever made by ABC or any other person other than such as are contained in this Agreement and that no representations or terms not expressly contained and recorded herein shall be of any force or effect.
The impact of the statutory misleading or deceptive conduct action [6.2160] In practice, the vagaries of the common law in this area have been supplanted by the remedies available under the ACL in respect of misleading and deceptive conduct
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When one speaks of the intention of the parties to the contract one speaks objectively –the parties to the contract cannot themselves give direct evidence of what their intention was –and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Reardon-Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 per Lord Wilberforce.
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in contravention of s 18. The effect of the statutory action was noted at [6.1640] and is discussed in detail in Ch 19. Today, oral representations inducing contract are rarely pursued under the common law. The statutory action bypasses the three potential difficulties discussed at [6.1640] facing a plaintiff seeking a remedy in respect of a representation made in negotiations, and the common law in this area is largely of historical interest only.
IN CONTEXT
When does a conversation become a contract? [6.2170] There is a common misconception that oral discussions do not give rise to binding agreements; however, provided the essential elements of a contract exist, oral conversations can form binding agreements and a court will apply an objective test as to whether or not a contract exists. Oral negotiations There is a common misconception that oral discussions do not give rise to binding agreements.
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At common law, there is generally no requirement that a contract should be in any particular form or be in writing. Provided the essential elements of a contract exist, oral conversations can form binding agreements and a court will apply an objective test as to whether or not a contract exists. When negotiating or discussing the terms of a proposed agreement, it is important that parties consider the following: 1.
has there been offer and acceptance?
2.
has any consideration been provided (in the form of money or services)?
3.
are the essential terms of the agreement specifically clear and certain? has a complete agreement been formed? Are there are essential terms which have not yet been discussed or any other terms which are still being negotiated?
4.
does each party have authority or capacity to enter into the contract?
5.
is there an intention to create legal relations? for example, have the words “subject to contract” have been used?
If parties view their oral negotiations through the prism of contract law and understand the essential elements that make up a contract, disputes as to whether or not an oral agreement has been reached, or what the terms of that oral agreement are, can be avoided. Oral variations to written contracts Once parties move to executing a written contract, it is common for that contract to include a term to the effect “this agreement may only be amended or varied in writing signed by all parties” (an “anti-oral variation clause”). Such a clause is important to set the minimum requirements needed to effect change of the contract and encourage the parties to follow a process. It also protects against accidental 262
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Chapter 6 Contracts: Concepts of Agreement
and inadvertent variations (and unfounded allegations that casual conversations amounted to a variation). However, these clauses do not prohibit oral conversations from varying the terms of written contracts (save for in particular circumstances) – in fact, such a clause will not apply if the parties have, by agreement, varied that requirement, and courts appear reluctant to reject an oral variation if it is clearly intended to be binding, even if the written contract contained an anti-oral variation clause, although a court will consider the parties’ express written intention that no oral variations should be effective. This reflects the long-established principle of freedom of parties to contract by whatever means. In the recent UK case of Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396, the court stated an amendment falling short of pre-agreed amendment requirements (such as the requirement of variations to be in writing signed by both parties) would still be effective, provided it could be demonstrated the parties waived those requirements. An example of this might be one party engaging in conduct that amounts to a clear representation that it agrees to the variation, and the other party acting on that representation. Whilst it is beneficial for parties to have the freedom to agree by whichever means they choose to undertake, parties should be aware of the potential impact of post-contractual oral conversations even if an anti-oral variation clause exists.
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Pre-contractual oral representations If a promise has been made but it is not a binding contract, equity may come to your assistance. Pre-contractual representations may give rise to an estoppel, binding a party to their conduct, if the key elements of equitable estoppel are satisfied. These are: 1.
Creation or encouragement of an assumption by party A that a ‘particular legal relationship’ would be established or that ‘an interest’ would be granted;
2.
Detrimental reliance on that assumption by party B; and
3.
It would be unconscionable for party A to depart from the assumption relied upon.
Equity may intervene to give rise to a promissory estoppel, if a clear, precise and unambiguous representation was made.
“Did you have a contract with the plaintiff?” “Yes,” replied the witness. “What kind of a contract was it?” “An oral one,” replied the witness. “Will you please produce it?” Court transcript, Gus Edwards, Legal Laughs: A Joke for Every Jury (Hein, 1993).
The recent case of Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd & Anor [2016] HCA 26 involved a five year commercial lease with no option to renew. A statement was made by the lessor (Crown) to the lessee (Cosmopolitan) to the effect they would be “looked after at renewal time”. It was a condition of the lease that substantial refurbishments would be undertaken, and therefore the lessee was keen to ensure the benefit of significant financial outlay on those refurbishments would be preserved past the five year term. 1.
At first instance, the Victorian Civil and Administrative Tribunal held a collateral contract existed which Crown was estopped from denying, therefore Crown was obliged to offer a renewal for five years.
2.
On appeal, the Supreme Court of Victoria found the statement did not give rise to an enforceable obligation pursuant to a collateral contract, and no estoppel arose as the representation was not sufficiently promissory.
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3.
The matter eventually went to the High Court where it was held:
a) There was no collateral contract on the basis: • The statement did not have the quality of a contractual promise; • The statement was no more than “vaguely encouraging”; and • There is no enforceable agreement to renew a lease unless the essential terms are agreed. b) No estoppel existed because: • The promise was not sufficiently detailed, and no reasonable person would have relied on it; and • A “clear, precise and unambiguous” statement was required for a promissory estoppel. This case is a reminder that the best practice is to ensure that all oral promises are included as terms in the written contract. Parties should never assume that a promise will be honoured based on a verbal promise. Whilst equity may come to a party’s aid, this will involve costly litigation and being able to prove that all of the elements of equitable estoppel are met. Conclusion
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Parties should be careful when negotiating orally and be mindful of the elements required to form a binding oral contract. If you intend to rely on an oral agreement, take witnesses with you and make file notes of your conversations. It is always best to formally document an oral agreement as soon as possible after oral negotiations. This will force the parties to turn their minds to all aspects of the agreement and will provide clarity and certainty about rights and obligations. Some initial outlay in properly documenting an agreement may save you costly litigation in the future. Ensure that any oral promises made are included as terms in the written agreement -never assume an oral promise will be otherwise honoured. Fiona Lymant and Christina Kafalias, McCabe Lawyers (21 September 2017)
Implied terms The judicial task is not to discover the actual intentions of each party, it is to decide what each was reasonably entitled to conclude from the attitude of the other. McCutcheon v David MacBrayne Ltd [1964] 1 WLR 125 per Lord Reid.
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[6.2180] In addition to the express terms, the contract may contain implied terms – terms which have not been agreed by the parties, but which nevertheless impose obligations on them. Various statutes imply terms into different types of contracts. In addition, the courts have been willing to imply terms into contracts where they have felt this was necessary to give effect to the apparent purpose of the contract.
Terms implied by the courts [6.2190] There are many reasons why the express terms might not record the whole of the agreement between the parties. In oral contracts, the parties are typically very brief and generally fail to discuss any contingencies that might affect the contract. Even in
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Chapter 6 Contracts: Concepts of Agreement
written commercial contracts the courts are often invited to imply terms into contracts to resolve disputes that are not covered by the express terms. This may particularly arise where contracts are signed with blanks left in them which are later completed by one of the parties. Terms may be implied by the courts to fill in gaps in the contract where the circumstances show that this is what the parties intended. Such circumstances include: • where there is a prior course of dealing between the parties; • where there is an established trade custom. Such a custom must be sufficiently well known so that it could be objectively assumed that all persons in the industry would consider themselves bound by it. In Goodman Fielder Consumer Foods Ltd v Cospak International Pty Ltd [2004] NSWSC 704, evidence was given that there was a custom in the glass bottling industry for the user and the supplier to work together to sort out teething troubles when a supplier supplied bottles for a user’s production line. The court implied such a term in the contract, making the denial of an opportunity by Goodman Fielder to Cospak in remedying a fault in its production line, a breach of contract; and
Study your mathematics or some accountant is going to beat you out of your money. Don’t wait until you get famous to try to read a contract.
George Foreman.
• where implication of the term is necessary to give business efficacy to the contract. The most important of these is where it is necessary to imply a term in order to give business efficacy to the contract.
The Moorcock [1886-90] All ER 530 Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
[6.2200] The contract was for a ship called The Moorcock to unload its cargo at a wharf owned by the
defendant. The wharf was in a tidal harbour. When the tide went out the ship settled on the bottom and was damaged by a rock submerged beneath the mud. The owner of the ship sued the defendant for breach of contract alleging that, although the matter was never discussed, the contract included an implied term that the harbour bottom was safe for shipping. The action was successful on the basis that the implication of the term was necessary to give business efficacy to the contract.
[6.2210] The circumstances in which terms will be implied to give a contract business efficacy were described by the High Court in Hospital Products Ltd v United States Surgical Corp [1984] HCA 64 (the facts of which were very complicated and unnecessary to relate). The court stated five conditions that must be satisfied before a term can be implied on this basis. The term must (at [25]): 1.
be reasonable and equitable;
2.
be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
3.
be so obvious that “it goes without saying”;
4.
be capable of clear expression;
5.
not contradict any express term of the contract.
The effect of the fifth requirement is that the court will not imply a term on the basis of “business efficacy” where a standard form contract or any other written contract contains a clause that purports to exclude all implied terms.
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Canterella Bros v Andreason [2005] NSWSC 1157 [6.2220] The supplier of Vittoria coffee entered into a written agreement with a coffee shop to supply a coffee machine and grinder. The written contract had two blanks in it, namely the term of the contract and the amount of coffee to be purchased per week. Both of these were filled in by the supplier after it had been signed by the coffee shop. The question arose whether the agreement was terminable at will rather than at the expiration of three years as inserted in the agreement and whether, ignoring the quantity written into the agreement, it could be argued that there was an implied term that the shop would buy all of its coffee from the supplier.
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It was held that: 1.
As far as the three-year term was concerned, that this period had been orally stipulated by the plaintiff, was assented to either expressly or by silence on the part of the defendant and that the defendant had given the plaintiff authority to fill in the blank in agreement once the machine had been delivered and the date of commencement had been established.
2.
There was an implied term that the coffee shop would buy all of its supplies of coffee from the supplier. The agreement would have no business efficacy if it was merely an agreement to supply an expensive machine in the hope that the coffee shop would make some of its purchases from the plaintiff. This was related to the fact of the difficulty of cleaning the machine each time different coffees were used. The clause could be implied alternatively from trade custom.
[6.2230] In recent years the courts have moved towards a wider construction of the necessity test so that rather than stating that the term should be incorporated in the contract only if the contract would be ineffective without it, the term should be incorporated because in light of contemporary conditions it is reasonable to incorporate such a term (Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234). Most of the disputes in the world arise from words. Morgan v Jones (1773) Lofft 160 per Mansfield CJ.
An implied term of good faith [6.2240] There is increasing judicial support for a term of good faith to be implied in certain contracts –not in fact as necessary to give business efficacy to the contract but in law as a necessary incident of the contract. This development has been most evident in relation to relational contracts (such as franchising) which give rise to an ongoing relationship as opposed to transactional contracts (such as the sale of a business) which simply give effect to a transaction. In 1999 Finkelstein J stated in the Federal Court in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903 that “in appropriate contracts, perhaps even in all commercial contracts, such a term will ordinarily be implied: not as an ad hoc term (based on the presumed intention of the parties) but as a legal incident of the relationship”. In 2001 the NSW Court of Appeal in Burger King Corporation v Hungry Jack’s Pty Limited [2001] NSWCA 187 was also of the opinion that a duty of good faith should be implied in law. In Overlook v Foxtel [2002] NSWSC 17 Barrett J in the Supreme Court of New South Wales went so far as to state that a term requiring the exercise of good faith “is now in [NSW] a legal incident of every [commercial] contract”. Today an obligation of good faith in franchise relationships is imposed under the Franchising Code of Conduct (see Chapter 13).
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Chapter 6 Contracts: Concepts of Agreement
Overlook v Foxtel (2002) Aust Contract Reports 90-143 [6.2250] Overlook was a resupplier of TV content including certain non-English language programs. Foxtel
and Optus both provided pay-TV services in Australia. Overlook contracted to supply certain non-English speaking channels to Optus. An employee of Optus who had been involved in setting up the arrangement with Overlook went to work for Foxtel and became involved in negotiations between Foxtel and Overlook for the supply of non-English-speaking channels to Foxtel subscribers. There were discussions about the price for which the package would be charged which included an amount of $19.95 per month, upon which Overlook based its projections of revenue. The written agreement made no mention of this or any other price and stated “Foxtel shall pay to Overlook licence fees calculated at 65 per cent of the gross subscription revenue paid by the residential and commercial subscribers to the Channel”. Foxtel commenced charging $19.95 per month for the package, but reduced this to $9.95 per month when the take-up rate was not as expected. Overlook, suffering a decline in revenue, sued Foxtel on various grounds including alleging that there was an implied term in the contract that Foxtel would act in good faith and that it had broken this provision by deliberately depriving Overlook of revenue by reducing the price of the service.
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It was held: 1.
That while there was an implied obligation of good faith, this did not amount to the subordination of one party’s interests to the other as would be required in a fiduciary relationship. It was a duty to recognise the legitimate interests of both parties in the contract.
2.
The cases in which good faith had been implied related to the exercise of some right or power under the contract. In this case Foxtel was not exercising a power under the contract or performing a contractual obligation. The issue was whether the implied obligation of good faith would prevent one party from engaging in an act which the law would ordinarily allow as part the freedom to otherwise engage in a commercial activity.
3.
There was no obligation on Foxtel to ensure that Overlook’s customer base in Optus was maintained. The good faith obligation did not prevent Foxtel from engaging in competition with Optus, nor was there any rule that efforts to achieve greater market share should be abandoned if trading is close to budget.
4.
Foxtel had acted honestly and reasonably and the duty of good faith had not been breached.
Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187 [6.2260]
Burger King granted Hungry Jack’s its sole franchise in Australia. After disputes between the parties, they entered into an agreement that required Hungry Jack’s to open a number of new outlets each year, subject to the approval of Burger King. The agreement set out in detail the different types of approval needed, the factors to be taken into account on which the approval was based, but provided that the granting of the approval was in the sole discretion of Burger King. When Burger King refused consent to the opening of further outlets, Hungry Jack’s argued that there was an implied term of good faith in the contract and that this had been broken by Burger King. It was held that there was evidence to show that the refusal to consent was not based on the factors set out in the agreement but was part of a plan by Burger King to prevent Hungry Jack’s from expanding, so that it could operate its own network of outlets. Accordingly since its conduct was aimed at preventing Hungry Jack’s from performing its part of the agreement, it had acted in breach of its duty of good faith.
[6.2270] The other issue that arises in this context is whether the obligation of good faith applies in all contracts or only in contracts of a particular type. Many of the cases have concerned franchises or distribution agreements and Wilmot, Christensen and Butler Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-20 04:20:22.
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(Contract Law (2nd ed, OUP, 2005) p 291) suggest that it is more appropriate to confine such a term to “relational” contracts: Commercial contracts that are typically regarded as relational are distributorships, agency relationships, partnerships, joint ventures, long term leases and franchise agreements … A common feature of these contracts (unlike spot or discrete contracts) is that it is difficult to optimally allocate all of the risks at the time of contracting due to the possibility of unforeseen contingencies and also the common desire of one party to retain control. The success or otherwise of the relationship may well depend on a level of future cooperation in both performing and planning. The formation of a relational contract is marked by expectations of loyalty and interdependence which then become the basis for the parties’ rational economic planning. As both parties reasonably expect that mutual cooperation will promote their economic interests, a party to this type of contract does not (rationally) intend to assume the risk of opportunistic behaviour as may be the case in the traditional adversarial context.
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Terms implied by statute
… if contractual good samaritanism is to be introduced into Canadian common law, it should be done as part of a global rethinking of the very concept of a contract, a process that can only be undertaken by the legislature. It is only in this way that the tensions, latent and overt, between the good faith obligation and the more traditional contract doctrines can be reconciled. To introduce a good faith performance doctrine into the existing law of contract would be to condemn it to an uneasy half-life, where its potential reach would always exceed its grasp. P Girard, “Good Faith in Contract Performance: Principle or Placebo” (1983) 5 Supreme Court Law Review 309 at 327.
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[6.2280] The most common category of implied terms have been those implied by statute. The earliest example of consumer protection legislation was the Sale of Goods Act 1893 (UK) which provided the model for the State and Territory Sale of Goods Acts throughout Australia. In 2010, the implied terms of the State and Territory Sale of Goods Acts in so far as they apply to consumers have been replaced by Consumer Guarantees under Pt 3-2 of the Australian Consumer Law, which operate as statutory obligation rather than implied terms.
Variation of contract [6.2285] Contracts may contain provision for variation of the terms. Common examples are loan documents which contain provisions for increases in the interest rate to be paid on the loan. If the contract does not contain a variation provision, then the parties may agree later to vary the contract, but that variation must be supported by fresh consideration or be done by deed as the agreement to vary is in itself a “mini- contract”. If a statute requires a contract to be in writing, any variation of such a contract must also be in writing. The doctrine of promissory estoppel (see [6.1210]) may also be relevant here, particularly where one party leads another to believe that a contract has been varied.
6.14 EXEMPTION AND SIMILAR CLAUSES [6.2290] Exemption or exclusion clauses are contractual terms which seek to exclude liability that would otherwise arise under a contract. For example: We advise that all activities do carry a degree of risk and that by participating in the activity provided by the operator you are expressly assuming those risks personally and are releasing the operator and its officers and employees from any liability, claims losses damages or expenses caused by any event including but not limited to: • Personal injury or death; • Property loss or damage; • Acts which may be construed as negligent or accidental; • Any other loss, damage suffering emotional or nervous disorder.
[6.2300] Limitation clauses are closely related, but seek to limit liability rather than exclude it altogether. For example:
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Chapter 6 Contracts: Concepts of Agreement In the event that we commit any breach of this contract of any nature whatsover our liability to you for each breach will not exceed $500.00.
[6.2310] Qualification clauses provide rights that may only be exercised subject to using a particular procedure. For example: In the event that you claim that we have breached the contract, you must notify us in writing sent to us by Australia Post Express Post which must be posted by you no later than 5 business days after the alleged breach has taken place.
[6.2320] The law of contract is based on the doctrine of freedom of contract and the common law recognises that parties are free to enter a contract on their own terms. Where an exclusion clause is freely negotiated between parties of equal bargaining power it can be seen as a useful way of allocating risks for insurance purposes. For example, in the case of a supplier in Sydney selling equipment to a buyer in Perth, an exclusion clause is a convenient way to clearly place the risk of damage or non-delivery on one party who can then insure against that risk and factor the costs of insurance into the pricing equation. However, in the typical consumer contract, where inequality of bargaining power characterises the relationship, exemption clauses are of greater concern as there is little chance for the involuntarily assumed risk to be passed on or covered by insurance.
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The unhealthy combination of standard form contracts and exemption clauses has not escaped the scrutiny of the judiciary. In Suisse Atlantique Société d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] AC 361, Lord Reid stated (at 406) that: Exemption clauses differ greatly in many respects. Probably the most objectionable are found in the complex standard conditions which are now so common. In the ordinary way the customer has no time to read them, and if he did read them he would probably not understand them. And if he did understand and object to any of them, he would generally be told he could take it or leave it. And if he then went to another supplier the result would be the same. Freedom to contract must surely imply some choice or room for bargaining.
IN CONTEXT
Judicial treatment of exemption clauses [6.2330] The capacity for injustice recognised by Lord Reid led to the development of a
number of “devices” to render exemption clauses ineffective. The ongoing dialogue between the courts and the drafters of exemption clauses was for many years a feature of contract law. The attitude of the courts to unfair exemption clauses in consumer contracts – especially of the standard form type that have not been freely negotiated –is one of hostility. One writer has gone so far as to say that “it is no exaggeration to say that any loophole will be seized upon if it enables justice to be done” (P S Atiyah, The Sale of Goods (FT Prentice Hall, 1990) p 117). The judicial rejection of exemption clauses prompted increasingly sophisticated drafting until clauses of several hundred words were not uncommon. The problem was that the “game” was played according to the overriding rules enshrined in the principles of freedom and sanctity of contract. Although judicial displeasure with such exemption clauses was activated by concern for the lack of any real freedom to contract, the common law’s commitment to the principle of freedom of contract negated the most effective judicial response (ie the outright rejection of them on the ground that they operate unfairly).
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Today the classical theories of freedom and sanctity are not held in such awe by the courts and, more importantly, a number of legislative initiatives control the worst excesses of abuse of superior bargaining power. Section 21 of the ACL prohibits unconscionable conduct in consumer and business transactions. Harsh and inappropriate exemption clauses are an obvious category of unconscionability. A discussion of the effectiveness of exemption clauses involves three questions: 1.
Does the clause have contractual effect?
2.
On its true construction does it protect the party relying on it from the consequences of the breach?
3.
Has it been rendered ineffective by any statute?
The contractual effect of exemption clauses [6.2340] As with any other clause, an exemption clause has no effect unless it is a term of the contract. An exemption clause can become a term of the contract in three ways: • by signature; • by reasonable notice; or • by a course of dealing.
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Signature [6.2350] Signing is the most obvious and direct manner in which an exemption clause is incorporated into a contract. Once the contract is signed, it does not matter whether or not the exemption clause has been specifically drawn to the parties’ attention or not.
L’Estrange v Graucob [1934] 2 KB 394 [6.2360] Mrs L’Estrange bought a cigarette vending machine from Graucob on terms which were contained in a written document called a “sales agreement”. Mrs L’Estrange signed the document without reading it. One clause of the document stated, “This agreement contains all the terms and conditions under which I agree to purchase the machine specified above and any express or implied condition, statement or warranty statutory or otherwise not stated herein is hereby excluded”. The machine did not work and Mrs L’Estrange sued Graucob relying on the statutory implied term in the English sale of goods legislation that goods are reasonably fit for their purpose. She was unsuccessful. The reason given (per Scrutton LJ at 403) was that: When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not.
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52 [6.2370] Alphapharm used an agent (Thomson) to arrange for the collection and storage of flu vaccines. Thomson obtained a quotation from Toll for the transport and storage of the goods. The quotation indicated that Thomson needed to complete a credit application before Toll undertook the work. Thomson’s operations manager was handed a document entitled “application for credit”. Immediately above the place for signature were the words, “Please read the conditions of contract overleaf prior to signing”. The conditions contained 270
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Chapter 6 Contracts: Concepts of Agreement an exemption clause relating to the carriage of the goods. The operations manager signed the document without reading it. The High Court held that Alphapharm was bound by the exemption clause, Toll had not misrepresented the document in any way and Thomson’s operations manager had time to read it before signing it. The rule in L’Estrange v Graucob (see [6.2360]) had been adopted so that contractual obligations could be determined by what a reasonable person would take them to mean, rather than what one or both parties thought they meant.
Where the party seeking to rely on it misrepresents the effect of the exclusion clause, the clause will not be effective even if it is in a signed document.
Curtis v Chemical Cleaning & Dyeing Co [1951] 1 KB 805 [6.2380] Mrs Curtis took a white wedding dress decorated with beads and sequins to be dry-cleaned. She was asked to sign a docket headed “Receipt”. Mrs Curtis asked why she had to sign the docket and the shop assistant replied that it exempted the drycleaner from liability for damage to the sequins. Mrs Curtis signed the docket. When her dress was returned with stains on it, she sued the drycleaner which denied liability on the basis of the clause on the ticket which stated “the company is not liable for any damage, however arising”. Mrs Curtis was successful. The reason given (at 810 per Lord Denning) was that:
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In my opinion when the signature to a condition, purporting to exempt a person from his common law liabilities, is obtained by an innocent misrepresentation, the party who has made that misrepresentation is disentitled to rely on the exemption.
Reasonable notice [6.2390] Reasonable notice of an exemption clause will operate to incorporate that clause in an unsigned contract. If the party relying on the exemption clause has done what is reasonable to bring it to the attention of the other party, then it does not matter if the other party did not actually have notice of it. In Parker v SE Railway (1877) 2 CPD 416 the test was stated to be whether the party relying on the clause had done “what was reasonably sufficient to give the plaintiff notice of the conditions”. Whether notice is reasonable will depend on the steps taken to give notice and the nature of the exempting condition. To satisfy the requirement of reasonable notice it may be necessary to do more to bring the existence of the clause to the attention of a person who would not expect a “ticket” to contain contractual terms (such as a mere receipt provided by a dry-cleaner –see Causer v Browne [1952] VLR 1) than if a document which presumably and reasonably contained contractual terms was presented to the customer (such as a parking station ticket –see Mendelsohn v Normand Ltd [1969] 3 WLR 139). The law relating to the incorporation of unsigned exemption clauses is now relatively well understood and signwriters across Australia have undoubtedly benefited from the notices that usually adorn parking stations, dry-cleaning shops, ski-ticket sales offices and other similar outlets which warn that the tickets issued are subject to conditions displayed on the ticket or elsewhere.
[The rule that a person is normally bound to all the contents of a document he or she has signed] seems to be based on the importance of a formal signature and the need to exclude an inquiry into the reality of assent. A Mason and S Gageler, “The Contract” in P D Finn (ed), Essays on Contract (Law Book Co, 1987).
Another relevant factor is the nature of the exempting condition. In J Spurling Ltd v Bradshaw [1956] 1 WLR 461 at 466 Denning LJ commented that: Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-20 04:20:22.
271
Business and the Law Comparatively few people regard the everyday transactions we all make as proper contracts, comparable with the awfully solemn ritual involved in acquiring a place to live. But buying an evening paper or a ride on a bus are all contracts too. Generations of people dissatisfied with what they have bought have really created the English law of contract. Anthony Nicholson, Esprit de law
[T]he more unreasonable a clause is, the greater the notice which must be given of it. Some clauses I have seen would need to be printed in red ink on the face of the document with a red hand pointing to it before the notice could be held to be sufficient.
The more unusual or unexpected a clause, the higher will be the degree of notice required to incorporate it. In the case of a parking station ticket, the steps taken to exclude liability for loss or damage may not be reasonable to exclude liability for personal injury (Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163). This approach will also apply to clauses that are particularly unusual, even if they are not exemption clauses. In Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1988] 1 All ER 348, the court found that a late return fee charged by a photo library which exceeded the industry norm by over 40% was so unusual that something should have been done to draw it to the borrower’s attention. As this had not been done in the instant case, the clause did not form part of the contract. It is also clear that reasonable notice of an exclusion clause must be given before or at the time of contracting, otherwise the clause is not incorporated into the contract.
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Olley v Marlborough Court [1949] 1 KB 532 [6.2400] Mr and Mrs Olley arrived at the Marlborough Court Hotel, paid for a week in advance and then went up to their hotel room. There was a notice on the wall of the room that stated that the hotel was “not responsible for articles lost or stolen unless handed to the manageress for safe custody”. Later Mrs Olley locked the door, went downstairs and hung up the key in the reception office. While she was out, someone took the key and stole her fur coat. When she sued, the hotel relied on the notice to avoid liability. The hotel was liable. The notice in the hotel room was ineffective because it was not visible at the time the contract was formed which was at the reception desk when the Olleys arrived.
A similar result was arrived at where a person entered a car-parking building for the first time.
Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163 [6.2410] Mr Thornton drove his car to the entrance of a car-parking building. He received a ticket from the machine and drove up the ramp. The ticket stated that it was issued subject to “conditions of use” which were displayed on the premises. Notices displayed inside the parking building exempted the owners from liability for personal injuries. Mr Thornton was injured and sued. He was successful. The contract was formed when Mr Thornton received the ticket. At this point, reasonable steps had not been taken to bring the notice to Mr Thornton’s attention. It seems likely that Mr Thornton only succeeded because he had not frequented that parking building previously. As Denning LJ pointed out (at 160): In the present case the offer was contained in the notice at the entrance giving the charges for garaging and saying “at owner’s risk” ie at the risk of the owner so far as damage to the car was concerned. The offer was accepted when the plaintiff drove up to the entrance and … the ticket was thrust at him. The contract was then concluded, and it could not be altered by any words printed on the ticket itself. In particular, it could not be altered so as to exempt the company from liability for personal injury due to their negligence.
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Chapter 6 Contracts: Concepts of Agreement
Ebay International AG v Creative Festival Entertainment Pty Ltd (2006) Aust Cont Rep 90-243 [6.2420] The promoters of the Big Day Out concerts were concerned at the level of scalping that was occur-
ring in relation to their concerts, particularly with the use of eBay and other online sites as a means of onselling the tickets. The tickets themselves were originally sold either online from Ticketmaster or over the counter. Creative therefore added a condition on the back of each ticket which stated that it would be cancelled if resold at a profit and that the condition specifically prohibited sale via online market sites. This condition was added to all tickets issued after a particular date and was different from the information available on the website prior to that date. While the case revolved around whether this conduct was misleading and deceptive, there was some consideration as to whether the clauses formed part of the contract between a purchaser and Creative. In that regard it was argued by Creative that in either case the contract was not formed until the person had actually read the ticket after receipt and considered whether to accept or reject it –thus there was no obligation to draw the terms to the person’s attention. Held: that the condition did not apply to the tickets. A reasonable person purchasing via the website would believe that the transaction itself was the contract. The information on the website was not sufficient to draw the attention of customers to the unusual terms in the contract, while the notion that over-the-counter purchasers could “review” the ticket and return it ignored the commercial reality of the transaction, especially since one of the conditions of purchase was that no refunds were available.
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[6.2430] The ferry company operated a ferry between Balmain and Sydney. Entry to the ferry wharf was
through turnstiles which required a coin (one penny) to be inserted for them to operate. The ferry company had placed a sign above the turnstiles stating, “A fare of one penny must be paid on entering or leaving the wharf. No exception will be made whether the passenger has travelled on the ferry or not”. Robertson, a lawyer, missed the ferry and attempted to leave the wharf without paying another penny. He was detained by the ferry employees but was able to slither out in an unguarded moment. He then sued the ferry company for false imprisonment. It was held that as Robertson had often travelled on the ferry before, he was aware of the conditions of travel and was bound by them as he had reasonable notice of them. He was therefore liable to have paid the amount if he wished to leave the wharf. Accordingly, the ferry staff were justified in detaining him for non-payment. The case illustrates the principle that a prior course of dealing between the parties will often be effective to confer contractual status on a notice that might be ineffective to bind first-time users such as the Olleys and Mr Thornton.
[6.2440] A prior course of dealing between the parties may operate to confer contractual status on an exemption clause which is neither signed nor in respect of which reasonable notice has been given. In Balmain New Ferry Co Ltd v Robertson [1906] HCA 83, the clause in question was not an exemption clause but rather the opposite –a clause which attempted to require payment whether or not a service had been provided. The Balmain Ferry case is featured in George Blaikie’s Scandals of Australia’s Strange Past (Seal Books, 1969) under the heading “The Expensive Penny”. Blaikie brings the case to life in a more lively style than the matter-of-fact prose of the courts which heard the dispute (the Supreme Court of NSW at first instance and on appeal, the High Court and
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the Privy Council) and the authors are indebted to George Blaikie for his permission to reproduce his version of the case.
IN CONTEXT
The expensive penny [6.2450] At a quarter to eight on the evening of 5 June 1905, Mr Archibald Nugent
Robertson and his fiancee, Miss Mercy Murray, proceeded to the Balmain Ferry Company’s wharf at the bottom of Erskine Street, Sydney, to take a ten-minute ferry trip over a narrow arm of Sydney Harbour to Balmain. The ferry company collected all fares, inwards and outwards, at the Erskine Street wharf. Passengers going to Balmain paid a penny at the single IN turnstile; passengers coming from Balmain paid a penny at the single OUT turnstile. It was all very simple. Gallantly Mr Archibald Nugent Robertson produced two pennies and ushered Miss Mercy Murray through the IN turnstile. It was the unhappiest thing he ever did. No sooner had the pennies clinked into the slot than the couple realised that a ferry was just drawing away from the wharf. They had missed it. The night was cold and dark. They did not feel like waiting another twenty minutes. “There’s another ferry operating from another wharf”, Mr Robertson said. “Let’s go and catch that.”
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It was then that he discovered that there was no way off the wharf except through the OUT turnstile, where it would be necessary to produce two more pennies. As this would have meant a total payment of fourpence for services never rendered or enjoyed, Robertson, full of friendliness, went up to William Anderson, who stood on duty at the OUT turnstile, and explained the position. “We aren’t going on your ferry now”, he said. “How can we get off the wharf?” Anderson looked at him coldly. “There’s only one way out through the turnstile on payment of a penny.” He also drew attention to notices, posted inside and outside the wharf, that Mr Robertson and Miss Murray had not noticed. A fare of 1 d must be paid on entering or leaving this wharf. No exception will be made to this rule whether the passenger has travelled by ferry or not. By Order Robertson, being a barrister-at-law, knew a thing or two, or thought he did. With some patience, and certainly with no anticipation of receiving a fee, he expressed this legal opinion to Mr William Anderson. It was to the effect that a person who paid double for a single service he hadn’t received ought to have his head read. The attendant didn’t seem to follow the argument very clearly. He pointed again to the notices and said: “Them is our instructions and you won’t get off the wharf any other way.” This made Mr Robertson, barrister, angry. He was sure of his legal rights, and he wasn’t going to be held prisoner by any ignorant clot. Without further ado, he tried to push his way through the OUT turnstile without production of any penny. Anderson shouted for assistance and got in the barrister’s path. Up galloped the IN turnstile assistant, Penson, quite a husky character. What with Mr Anderson pushing Mr Robertson from the front, and Penson grappling with him from the rear, a fine old scuffle was soon taking place, with no one getting anywhere, Penson further aggravated the situation by clenching his fist and waving it under the barrister’s nose.
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Chapter 6 Contracts: Concepts of Agreement
More than two hundred people quickly gathered to watch the scrapping. It soon became general knowledge that the point at issue was a penny fare. The judgment of the mob was that any well-dressed man who took a ride on a Balmain ferry and then refused to pay a penny was a very mean character indeed. “Why don’t you pay your fare?” jeered the crowd, siding with Anderson and Penson, who, in turn, were putting their faith in the printed notices. Angered by the interjections, Robertson made another attempt to break through the barrier of bodies and turnstile. He failed. Miss Mercy Murray, meanwhile, was not enjoying the scrap. In fact, she was quite embarrassed. Robertson, not wishing to see her suffer, and also seeing in her a chance of winning a victory, produced a penny and paid for her to leave the wharf. Once the required penny had fallen into the slot, Anderson and Penson stood aside to let her pass. They then re-formed their ranks to bar the exit of the non-penny-paying barrister. Robertson now instructed Miss Murray to find a policeman and bring him back as quickly as she could. Away went the lady at considerable speed, looking everywhere for a policeman. Then Robertson, not wishing to waste any time standing round waiting for outside aid, returned to the task of trying to force his way out through the turnstile. Anderson continued to resist him.
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It took Miss Murray a good twenty minutes to get back with a policeman, by which time Mr Robertson was looking pretty scuffed up. Explaining to the policeman that, being a barrister, he had the law of the matter at his fingertips, he insisted on receiving protection from violence and also release from imprisonment on the wharf. The policeman read the notices on the wharf. “You’ll have to pay your penny fare to get out, and then you can enter a protest.” That wasn’t the sort of nonsense Robertson had been waiting twenty violent minutes to hear. “I refuse to be further detained”, he declared. “I’m going!” Then he made as though to push through the OUT turnstile. When the attendants moved to counter the manoeuvre, the barrister, quick as a flash, changed direction and slithered out through an opening, eight-and-a-half inches wide, beside the turnstile. He was free! The attendants, feeling there was nothing more they could do, then returned to their lawful function of collecting pennies. Robertson stormed home and furiously worked through his law books to make sure of the best action he could take to punish people who fancied they could imprison free citizens and force them to pay double for things they didn’t get. In the end he decided that a writ for false imprisonment and assault, with a £500 claim for damages, would be best. In went the writ to the Supreme Court, and six months later the hearing began before a judge and jury. The judge summed up briskly to the jury. Mr Robertson, he said, had not paid merely to go on to the wharf owned by the Balmain Ferry Co, but also to travel. When he failed to get what he paid for –the ferry trip –he had simply wished to go away. It was quite unreasonable that there should not be some means of exit from the wharf for people who, having gone on it, didn’t wish to go for a trip. The jury, taking only twenty minutes to decide that this was a very sound argument, awarded £100 damages … Light was the step of Mr Archibald Nugent Robertson as he left the Supreme Court. He had proved his argument and had no objection of receiving £100 for an hour’s catch-as-catch- can wrestling. The Balmain ferry people, however, left the court with heavy hearts. If the
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In a number of cases … there are judicial observations to the effect that exempting clauses, no matter how widely they are drawn, only avail a party when he is carrying out the contract in its essential respects. In my view, it is not right to say that the law prohibits and nullifies a clause exempting or limiting liability for a fundamental breach of a fundamental term. Such a rule of law would involve a restriction on freedom of contract, and in the older cases I can find no trace of it. In each case not only have the terms and scope of the exempting clause to be considered but also the contract as a whole. The Suisse Atlantique [1967] 1 AC 361 at 367 per Viscount Dilhorne.
verdict was sound, they were in a sorry pickle. They would have to employ turnstile-watchers at the Balmain wharf as well as the Erskine Street one and that would cost a fortune. It was very distressing. They sought a stay of proceedings and appealed to the Full Bench of the Supreme Court of New South Wales claiming that the judge had wrongly instructed the jury. They asserted that any assault to enforce a just and legitimate demand was justified assault, and that the demand for a penny had been just and legitimate. In May 1906 the Full Bench of the Supreme Court got to work on the Balmain Ferry Penny case. To the three judges, it seemed important that the night being dark, Mr Robertson and his fiancee had not been able to see clearly the company’s notices about hopping on and off the wharf. The couple had walked unsuspectingly into a trap and been held prisoner. Water round three sides of the wharf had provided “prison walls” that barred them from leaving. The court apparently felt it would have been ridiculous to expect Mr Robertson and his friend to win their liberty by plunging into the harbour in midwinter and swimming over to Balmain. The appeal was dismissed, with costs against the ferry company. Once more Mr Robertson was triumphant … The Balmain Ferry Company, now desperate, decided on just one gamble; it appealed to the High Court of Australia, employing an expensive array of counsel to plead its cause. Mr Robertson, full of confidence, also gathered round him a big crowd of important legal eagles. On 9 October 1906 the hearing opened. Mr Robertson decided to speak for himself, for he felt he was more expert on the issue than the barristers he had employed –and he had not been shy of employing expensive lawyers. All the old evidence was flogged out again, and the same old lines of argument –and it seemed certain that the same old result would be reached. Mr Robertson related with many a flourish how he had been imprisoned against his will by men who were trying to force an extra penny out of his pocket. There had been guarded turnstiles in front of him and water round the other three sides. No prison could have been more secure. All went smoothly until the High Court delivered its judgment. Then the judges began saying the most amazing things. It was ridiculous, they declared, that Mr Robertson should have considered himself a prisoner; he could have got off the wharf with ease. All he had to do was step on the ferry and, bingo, he would have been off the wharf. He had contracted to go on the ferry, and could have gone ahead with that project. Furthermore, the High Court declared, as the ferry wharf was private property, the Balmain Ferry Company was quite entitled to ask a penny of anyone going off it or on it. And it didn’t matter threepence if that person took a ferry trip or not. And finally, said the judges, the men at the turnstiles had been completely justified in forcibly resisting Robertson’s attempts to leave the wharf without sparring up his penny. Therefore they upheld the appeal. You could have knocked Mr Robertson down with a turnstile. He had been in no way prepared, psychologically or financially, to receive such an adverse verdict. Costs being high against him, he was faced with ruin. But, a fighter through and through, he appealed to the Privy Council. Three years later the Law Lords of England got around to considering the matter. They were amazed to discover that a case involving the payment of a penny had come to them from the
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Chapter 6 Contracts: Concepts of Agreement
other side of the world. They expressed themselves even more amazed at Mr Robertson’s case. “The man’s argument is completely unreasonable,” they declared unanimously. “Of course he should have paid the penny. We dismiss this appeal.” The Balmain Ferry Company thereupon went on gathering in its pennies in the old way – and all ferry companies operating on Sydney Harbour still use the same collection system, catching customers coming or going at the same point. Mr Robertson, overwhelmed by debts, never recovered from the legal punishment he had taken, and his law practice never quite flourished again; maybe because people felt that he was a trifle shaky on the finer points of law. He was obliged to take work as a Crown prosecutor, a function not eagerly sought in those days by successful practitioners. He died in 1922, aged sixty-six, still a melancholy man, and without having much patronised the Balmain Ferry Company since the night he refused to pay his expensive penny.
In commercial contracts negotiated between businessmen capable of looking after their own interests … it is, in my view, wrong to place a strained construction on words in an exclusion clause which are clear and fairly susceptible of one meaning only. Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 per Shaw LJ.
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The prosaic principle of the “Expensive penny” case is simply that, in the words of Griffiths CJ (Balmain New Ferry Co Ltd v Robertson [1906] HCA 83; (1906) 4 CLR 379 at 386): If the plaintiff were aware of the terms he must be held to have agreed to them when he obtained admission. If he had been a stranger who had never been on the premises it would have been sufficient for the defendants to prove that they had done what was reasonably sufficient to give the plaintiff notice of the conditions of admittance. In this case, however, it appeared that the plaintiff had been on the premises before, and was aware of the existence of the turnstiles and of the purpose for which they were used. It was therefore established that he was aware of the terms on which he had obtained admittance, and it follows that he had agreed to be bound by them.
The interpretation of exemption clauses [6.2460] Even if an exemption clause is found to be part of the contract, it will not defeat a claim for damages unless the wording of the clause covers the type of breach that occurred. The Australian approach in the construction of such clause is as stated in Darlington Futures Pty Ltd v Delco [1986] HCA 82 at [16]: [T]he interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears, including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity.
Thus an exemption clause must be examined firstly for its language and when that language is not clear, the clause is construed contra proferentem. This is the primary rule to be applied and all other rules of construction can only be used as a subsidiary to this. However, an exclusion clause will cover only a breach that has occurred within the scope of the contract –it will only cover acts within the “four corners” of the contract (see [6.2500]).
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Alex Kay Pty Ltd v General Motors Acceptance Corp & Hartford Fire Insurance Co [1963] VR 458 [6.2470] Alex Kay carried on a business of hiring cars out to the public. Its insurance policy with Hartford
contained a clause exempting Hartford from any liability for any loss or damage arising from “any breach of contract”. Alex Kay hired a car to Mr Houmatsio and when he subsequently disappeared with the car, it claimed on the insurance policy. The insurance company refused the claim on the basis that the loss arose due to Mr Houmatsio’s breach of the hire contract. It was held that the clause was ambiguous. It could refer to breaches of the hire contract by Alex Kay, breaches of the hire contract by the hirer or any breaches of contract whatsoever. Given the ambiguity, the contra proferentem rules meant that the first meaning –the one least favourable to the insurance company – had to be adopted. Consequently the clause did not apply and the claim could not be refused.
Goodman Fielder Consumer Foods Ltd (formerly Meadow Lea Foods Ltd) v Cospak International Pty Ltd [2004] NSWSC 704 [6.2480] The wording “to the full extent permitted by law all other warranties or liabilities imposed or implied
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by law or by statute are expressly negatived” contained in the contract were held to be wide enough to cover any claim made in negligence. The court said that looking at the contract as a whole, it could be seen to be one between two large corporations “who must be presumed to have the ability to manage their own risk” (at [89]).
The common law ought never to produce a wholly unreasonable result. Cartledge v Topling [1943] AC 772 per Lord Reid.
In contract law, the prolific output of legislatures, courts and commentators has produced a disturbing degree of complexity. Rules and qualifications designed to give precision exist in such numbers as to produce uncertainty, cost and delay in the resolution of disputes. Law Reform Commission of Victoria, An Australian contract code (Discussion Paper No 27, 1992).
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[6.2490] There are a number of other rules which have been applied in the construction of such clauses. Each of these must be read by firstly looking at the wording of the clause to see if the wording is clear. These rules include: 1.
If a party wishes to exclude liability for negligence, this must be clearly expressed or be clearly implicit in the meaning of the words used. In Davis v Pearce Parking Station Pty Ltd [1954] HCA 44, the High Court found that the words “parked at the owner’s risk” and excluding liability “for loss or damage of any description” were enough to protect the car park from liability when the parked vehicle was stolen due to its negligence. The words were sufficient to alert the plaintiff to the fact that she should have insured the vehicle to cover such an event.
2.
If no such wording is used, the courts must look to see if the wording is wide enough to exclude liability for negligence, with any ambiguity construed contra proferentem.
3.
Where the clause is wide enough to cover a claim in negligence, it may not be wide enough to cover a claim that is made on some other basis for example breach of contract (White v John Warwick & Co Ltd [1953] 1 WLR 1285).
4.
The four corners rule –a party who undertakes an obligation under a contract and has breached that obligation cannot rely on conditions which were intended as a protection only if it had carried out the contract properly.
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Chapter 6 Contracts: Concepts of Agreement
Sydney Corporation v West [1965] HCA 68 [6.2500] West parked his vehicle in the council’s car park and was issued with a ticket which had to be
presented on exiting. The ticket excluded liability for loss or damage to the vehicle however caused. A thief approached the ticket office, claimed he had “lost” his parking ticket for the vehicle and was issued with a duplicate. He then broke into West’s vehicle, presented the ticket at the exit and drove off. West sued the council for breach of duty in taking care of the vehicle. The High Court held that the exemption clause did not apply. Barwick CJ and Taylor J said that the clause did not cover a loss which was caused by an unauthorised act of the council ie the delivery of the car to a third party. 1.
Whether a clause in a contract excuses any breach of contract, even misperformance, will be a matter of construction of the clause, although the court is unlikely to favour such a construction.
In TNT Ltd v May and Baker Ltd [1966] HCA 46, the High Court reaffirmed that the question “is to be resolved by construing the language that the parties used, read in its context and with any necessary implications based upon their presumed intention”. It follows that the more extreme the liability sought to be excluded the more difficult it is to conclude that this was the parties’ intention without clear words to that effect.
Nissho Iwai Australia Ltd v Malaysian International Shipping Corp Berhad [1989] HCA 32
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[6.2510] A container of prawns was stolen from the wharf after it had been unloaded from the defendant’s ship. This meant that there had been a breach of the fundamental obligation under the contract of carriage which was to deliver the goods. The bill of lading (document containing the terms of carriage) excluded liability for “any loss or damage to the goods”. The plaintiffs argued that this clause could not protect the shipping company from complete failure to deliver the goods since this would defeat the whole object of the contract. The High Court held that, provided the words of the clause were wide enough to include events that defeated the main purposes of the contract, the clause could be effective to cover such breaches.
Exemption clauses rendered ineffective by statute [6.2520] It is quite common for statutory provisions to render exemption clauses ineffective in so far as they attempt to negate the effect of the statute. For example, s 64 of the ACL renders ineffective any clause in a contract that attempts to negate the effect of terms of the consumer guarantees provided under the ACL and s 21 prohibits unfair contract terms, see Chapter 20.
Whittet v State Bank of NSW (1991) 24 NSWLR 146 [6.2550] Mrs Whittet agreed to give a mortgage to the bank to secure her husband’s overdraft. The transaction was entered into on the basis that it was to secure a fixed sum and before she signed the document, her solicitor was informed by the bank that it was to be so limited. The mortgage document in fact was for all monies due by Mr Whittet. Held: The bank was estopped from recovering more than the fixed amount.
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6.15 THE DOCTRINE OF PRIVITY OF CONTRACT [6.2560] A very basic rule of contract law is that only the parties to the contract can acquire rights or liabilities under the contract. This rule is known as the doctrine of privity of contract. It means that contracts are private arrangements that can only affect the people who agree to them. Other people, known as third parties or strangers to the contract, cannot incur obligations nor can they acquire any rights under the contract. The doctrine works well in most instances but it can produce strange results where for example A and B enter into a contract the main purpose of which is to grant a benefit to C. This is exactly what happened in the leading case on the doctrine of privity of contract.
Tweddle v Atkinson [1861] 121 ER 762
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[6.2570] William Tweddle got engaged to Miss Guy. Their fathers entered into a contract under which each would pay William £100 after the wedding. Mr Guy died before paying the money. So William sued the executor of Mr Guy’s deceased estate (Mr Atkinson). The court held that William was not entitled to the money since he was not a party to the contract that was breached. According to the doctrine of privity, William’s father, John, could have sued Mr Guy since he was a party to the contract. However, he would only be entitled to nominal damages (see [6.2810]) since he personally did not suffer any loss as a result of the breach. In summary, William suffered a loss but could not sue. John could sue but had not suffered any loss. It might be thought this type of problem is limited to family arrangements but this is not the case as is shown by the following case that went to the High Court.
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1985) 165 CLR 107
Case Study
Background
[6.2580] Blue Circle Southern Cement Ltd commenced a construction project at one of its cement
factories. It faced the possibility that it might be sued by someone who was injured on the construction site. It took out an insurance policy with Trident that covered any liability of Blue Circle, its head contractor, subcontractor or suppliers of materials that might arise if someone was injured on the site. Facts Hammond was working on the site when he was injured. He brought a claim against McNiece Brothers, which was the head contractor for the project. When McNiece Brothers claimed to be indemnified under the insurance policy, Trident refused the claim on the basis that McNiece Brothers were not a party to the insurance contract. Issues The main issue was whether the doctrine of privity of contract precluded any claim by McNiece Brothers.
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Chapter 6 Contracts: Concepts of Agreement
Decision The majority of the High Court decided that McNiece was entitled to claim on the insurance policy even though he was not a party to the contract. Implications The implications of the case are far from clear. All the judges acknowledged that the doctrine of privity of contract would produce injustice in some cases. However, there was no consensus as to the solution to this problem. Four judges were prepared to accept, in differing ways, that the doctrine should be reconsidered. For example, Mason CJ and Wilson J took the view (at 123) that it was: the responsibility of [the High] court to reconsider in appropriate cases common law rules which operate unsatisfactorily and unjustly.
The opposing view was represented by Dawson J, who declared (at 158) that: [It] is one thing to expand the law or to change its direction by the application of recognised principles to new situations. It is quite another thing to confront the law head-on by the rejection of a rule which has stood for a century or more.
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The case is frequently cited as an example of the need for joint majority judgments through which the development of the law by our highest court can be more clearly directed.
[6.2590] To prevent the same problem arising again the Commonwealth Parliament passed s 48 of the Insurance Contracts Act 1984 (Cth), which states that beneficiaries under insurance contracts can enforce the terms of the contract even if they are not parties to the contract. Other statutes also have the effect of overcoming the privity doctrine in certain contexts. For example, the Cheques and Payment Orders Act 1986 (Cth) confers rights on a holder in due course to sue on the cheque. Queensland, the Northern Territory and Western Australia have all adopted legislation which abolishes the privity rule and enables third parties to enforce contracts for their benefit (Conveyancing Act 1919 (NSW), s 36C; Property Law Act 1974 (Qld), s 55; Law of Property Act 2000 (NT), s 56; Property Law Act 1969 (WA), s 11). [6.2600] The courts have developed a limited number of exceptions to the doctrine of privity. These include: • where a promise in a contract is made to two or more people jointly but the consideration is provided by only one of them, the other promisees can still sue for breach of the contract (Coulls v Bagots Executor & Trustee Co Ltd (1967) 119 CLR 460); • where the third party can argue that the promise is held in trust for the third party; • where one party promised the other to protect a third party and then refused to do so and as a consequence became unjustly enriched (Trident Insurance case).
To admit a third party’s right to sue into the common law, it would be necessary to postulate a new source of legal rights and obligations arising independently of contract and equity and to create a new set of rules prescribing the availability of the rights and the limits of the obligations to which the third party promise gives rise. (Dissenting) in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44 per Brennan J.
• under the rules relating to assignments or novation (see [6.2640]) • under certain rules relating to real property (see Chapter 11)
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Apart from this, a third party may be able to rely on: • the law of tort; • whether the promisor has engaged in misleading or deceptive conduct.
Hill v Van Erp [1997] HCA 9 [6.2610] A solicitor was instructed by a client to prepare a will in favour of the plaintiff. The solicitor failed
to ensure that the will was properly executed so that the will was invalid. When the client died, the plaintiff discovered that she received no benefit under the will. Held: The solicitor had been negligent in having the will signed and under the law of negligence owed a duty of care to the beneficiary. (The fact that there was no contract between the plaintiff and the solicitor was immaterial.)
Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Pty Ltd [1993] FCA 265 [6.2620] Accounting Systems (AS) entered into a contract with another company (CD) under which it
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assigned to it copyright in a computer program. The contract contained a clause warranting that AS was entitled to do so and that there was no claim or potential claim relating to the copyright outstanding against it. This statement was misleading or deceptive because there was such a claim made. CD licensed the program to CCH relying on the fact that CD was entitled to do this because it had the right to use the program. When CCH found out that CD had no right to use the program, it sued AS for breach of s 52 of the TPA to recover money it had spent in anticipation of being able to use the program. Held: The statement in the contract was misleading and deceptive and CCH, in relying on that statement, was entitled to damages. The fact that CCH was not a party to the contract between AS and CD was not relevant to its entitlement to damages under s 52 of the TPA.
6.16 CONTRACTS NEGOTIATED THROUGH AGENTS [6.2630] In a contractual context, an agent is a person who is authorised to enter into contracts on behalf of another person called the principal. The contract that results is between the principal and the other party (called the third party) and the agent drops out of the picture. Agency is discussed in Chapter 17. Under the law of agency, it is possible for a person to contract both personally and as an agent. This possibility has been exploited in connection with exclusion clauses in contracts
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Chapter 6 Contracts: Concepts of Agreement
for the carriage of goods. Such clauses usually provide that the shipping company is not liable for any loss or damage to the goods and neither are any employees or subcontractors of the shipping company that may be involved in unloading, storing or transporting the goods. The clause also states that this clause is being negotiated on behalf of any such employees or subcontractors who might be involved. The effect of such clauses is that the employees and subcontractors gain the protection of the exclusion clause should they be sued by the owner of the goods for example under the tort of negligence (Lifesavers (A Asia) Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431).
6.17 ASSIGNMENT AND NOVATION [6.2640] An “assignment” is an arrangement under which a party to a contract (the assignor) transfers some or all of the rights or benefits under that contract to a third party (the assignee). “Novation” is a transaction whereby, with the consent of all parties concerned, a new contract is substituted for an existing one. Assignment and novation are discussed in detail in Chapter 7.
It must be accepted that, according to our law, a person not a party to a contract may not himself sue upon it so as directly to enforce its obligations. For my part, I find no difficulty or embarrassment in this conclusion. Indeed, I would find it odd that a person to whom no promise was made could himself in his own right enforce a promise made to another. Coulls v Bagot’s Executor and Trustee Co Ltd (1967) 119 CLR 460 at 478 per Barwick CJ.
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6.18 ENDING THE CONTRACT [6.2650] Once both parties to a contract have done everything they agreed to do under the contract, their obligations to each other come to an end. Once this point is reached, it is said that the contract has become discharged through performance. However, sometimes the obligations of one or both parties will be discharged at an earlier point of time. The most common situations in which this occurs are: • discharge by performance; • discharge by agreement; • discharge by operation of law; • discharge by frustration; • discharge by breach.
Discharge by performance [6.2660] The most common way in which a contract becomes discharged is simply by each party fully performing all their obligations under the contract. The general rule is that contractual obligations must be performed exactly as agreed. A rather extreme example of the court applying this general rule is found in the following case.
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In Re Moore & Co and Landauer & Co [1921] 2 KB 519 [6.2670] A contract for the sale of tinned fruit stated that they would be packed in boxes of 30 tins each.
The seller delivered the correct number of tins but they were packed in boxes of 24 tins each. The court held that the seller had not properly performed their obligations under the contract and consequently the buyer was entitled to reject the entire consignment.
Discharge by agreement [6.2680] Obligations under a contract can be discharged by an agreement between the same parties. This agreement may be part of the original contract or it may be part of a subsequent agreement. The original contract may include a clause stating that the obligations of both parties will come to an end:
Counsel: Did you answer to the questions put to you –tell anything or things that you are not sure of? In fact not sure of but said something to make it look as if you were? That you knew things you didn’t know?
• on the happening of a certain event (a condition subsequent) or • that neither party is obliged to perform their obligations under the contract unless a particular event occurs (a condition precedent).
Witness: What are you talking about? Court transcript, Law Society Journal (October 1983).
Another way that contractual obligations can become discharged is by a later agreement between the same parties. For this later agreement to effectively discharge the obligations under the original contract, the later agreement must also meet the requirements of a binding contract. This means that each party will either have to supply consideration or else the agreement will have to be contained in a deed.
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• Where both parties have outstanding obligations, the agreement to release the other party from these obligations constitutes sufficient consideration on each side. • Where only one party has outstanding obligations, they will have to provide some other type of consideration in order to enforce the agreement or else make sure that the agreement is contained in a deed. The same principles apply where a later agreement is designed not only to discharge the outstanding obligations under the original contract but also to replace these with different obligations. However, complications can arise from the requirement that certain contracts, such as contracts for the sale of land, have to be in writing to be enforceable. If the original contract was not required to be in writing it can be discharged, substituted or varied orally. If the original contract was required to be in writing it can be discharged orally but its substitution or variation must be in writing.
Discharge by operation of law [6.2690] In some situations the obligations of a party under a contract will come to an end due to the operation of some rule of law. These situations include: • merger; • bankruptcy; • fraudulent alteration of a written contract; and • Limitation Acts. 284
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Chapter 6 Contracts: Concepts of Agreement
Merger [6.2700] Merger refers to situations where the law treats one legal right as being assimilated by another similar right. The best-known example of this in a contractual context occurs when a person wins a court case based on a contractual right to payment. The person now has a right to be paid under the court judgment. Their previous right to be paid under the contract is said to be merged with their right to be paid under the court judgment. They can no longer sue under the contract but have to take legal action under the court judgment if they do not receive payment.
Bankruptcy [6.2710] Bankruptcy is a legal process that enables a person who is unable to pay all their debts to make a clean start. The process involves sale of the debtor’s assets and distribution of the proceeds among their creditors. At the end of the process, the bankrupt person has no further liability to those creditors. The dissolution of the company on a winding up also discharges outstanding debts.
Force Majeure –an irresistible force that prevents you from fulfilling your contractual obligations –such as a storm, flood, war or the realisation that you could make a much bigger profit elsewhere. White and Jenks, The Official Buyer’s Handbook (Harriman House, 1992).
Material alterations to a written contract
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[6.2720] Where it can be proved that one party to a written contract has fraudulently altered the written contract in a significant manner, the law penalises this type of fraudulent behaviour by refusing to allow the fraudulent party to enforce the contract. This means that the other party is, in effect, freed of their outstanding obligations.
Limitation Acts [6.2730] For a variety of practical reasons, the law discourages people from waiting too long before bringing legal action for breach of a contract or other types of actions. This policy is found in the Limitation Acts that apply in each State and Territory. Generally, legal action based on a breach of a simple contract must be started within six years (three years in the Northern Territory) of the day on which the cause of action arose. This is the first day on which the person could have started legal action. In most cases it is the date on which the plaintiff first became aware that they would suffer some loss due to the contract having been breached. In the case of contracts contained in a deed, the limitation period is 12 years, except for Victoria and South Australia (15 years) and Western Australia (20 years). Although expiry of the limitation period does not discharge the whole contract, it effectively removes the right to sue for breach of the contract, which is nearly the same thing.
Act of God … The late JA MacLachlan of Harvard used to define it, impiously but usefully, as “that which no reasonable God would do”. A Leff, “The Leff Dictionary of Law: A Fragment” 94 Yale Law Journal 1855.
Discharge by frustration [6.2740] There are a variety of reasons why a person may not fully perform their obligations under a contract. One of these could be that something unexpected has happened since the contract was formed so that the person is completely unable to do what they had previously promised. The early attitude of the courts to this situation was that such bad luck was not an excuse that justified escaping the obligations imposed by the contract.
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This approach lasted over 200 years in England but was changed in 1863 when the English courts developed the doctrine that the obligations of both parties to a contract would be discharged in certain circumstances.
Taylor v Caldwell (1863) 122 ER 309 [6.2750] The contract was one to hire a hall for a concert. After the contract was formed but before the night
of the concert, the hall burnt down without any fault of either party. The court decided that the contract was not breached by the failure to provide a hall on the agreed night. Instead, the court held that the contract had become discharged on the night of the fire. The fire was an entirely unforeseen event beyond the control of either party and its effect was to frustrate the purpose of the contract.
[6.2760] The doctrine of frustration operates to discharge both parties of all obligations outstanding at the date of the frustrating event. It only applies where the contract makes no provision for such an event. In Taylor v Caldwell the court limited the application of the doctrine to circumstances where the event makes performance of the contract by one party impossible. However, later cases have held the contract to be discharged by frustration even where performance is not really impossible.
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Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24 [6.2770] The construction company won a tender to build an underground railway. In submitting the tender,
it had assumed that it would be able to work 24 hours a day, seven days a week on the project because this would have been true if the State Rail Authority had done the job itself. However, after work began on the project, local residents obtained a court injunction that prevented the construction company working at night and on weekends. This meant that the project would cost more than the price quoted in the tender. Codelfa argued that the contract became discharged due to frustration when the court injunction was granted. The court held that although performance by Codelfa was not really impossible, the effect of the injunction was to make their obligation “radically different” from those they assumed when they entered into the contract. This was enough to frustrate the contract. This meant that Codelfa was entitled to claim payment for the project at a higher rate based on the principle of quantum meruit, which is unavailable where the work involves a breach of a contract.
Davis Contractors v Fareham UDC [1956] AC 696 [6.2780]
The contract involved a construction project for the local council. The contractor argued that the contract became frustrated due to the absence of skilled labour for the project. The English court held that the contract was not frustrated in these circumstances. The court held that it is not sufficient that unexpected events caused the obligations of one party to become more onerous or inconvenient or expensive. Lord Radcliffe said (at 729) that: [I]t is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.
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Chapter 6 Contracts: Concepts of Agreement
[6.2790] The doctrine of frustration cannot be applied where there is a specific provision in the contract that covers the unexpected event, or where the event should have been foreseen or where it is self-induced. At common law, the effect of the doctrine of frustration is to cancel the obligations under the contract as from a particular date –the date of the frustrating event. However, all rights and liabilities that have accrued up to that date remain enforceable. This can sometimes produce unfair outcomes. For example, payments that have already been made prior to the date of frustration cannot generally be recovered and payments accrued at that date remain payable unless the court believes the frustration of the contract has resulted in a total failure of consideration. To overcome the possibility of unfair outcomes, South Australia and New South Wales have each passed a Frustrated Contracts Act (Frustrated Contracts Act 1978 (NSW); Frustrated Contracts Act 1988 (SA)). These Acts allow a court to adjust the rights and liabilities of the parties that have accrued before the frustrating event so that neither party is unfairly prejudiced by the frustrating event.
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Of course the parties can themselves deal with possibly frustrating events in their agreements. Commercial contracts frequently involve force majeure clauses –which constitute an express agreement as to how risk is to be allocated should part or non-performance order as a result of certain specified events. A clause can cover what happens if performance of the contract is affected by circumstances outside the control of the parties for example: In the event that the singer becomes ill so as to not be capable of performing on the dates set out in this contract, the contract between the parties shall be at an end as and from the date that the promoter receives a medical certificate from the singer’s medical practitioner certifying she is unable to perform.
Discharge by Breach [6.2800] The breach of a major term if a contract does not automatically affect its validity. It continues to be valid and binding until rescinded by the innocent party. This is discussed at [6.2820].
6.19 REMEDIES FOR BREACH OF CONTRACT [6.2810] Given the great variety of contracts varying from those that last a few seconds, such as buying a newspaper, to those that last decades, such as leasing a farm, it is not surprising that there are many different ways in which a contract can be breached. However, any particular breach of contract can be classified as follows: • actual breach or anticipatory breach; • total breach or partial breach.
No doubt there are many simple contractual undertakings, sometimes express but more often because of their very simplicity … to be implied, of which it can be predicated that every breach of such an undertaking must give rise to an event which will deprive the party in default of substantially the whole benefit which it was intended that he should obtain from the contract. And such a stipulation, unless the parties have agreed that breach of it shall not entitle the non- defaulting party to treat the contract as repudiated, is a “condition”. Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 at 69 per Diplock LJ.
The remedies available to the innocent party depend on the type of breach. The main remedies available are: • termination of the contract; • damages.
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Contractual terms are generally classified as either conditions (major terms) or warranties (minor terms). In simplistic terms, a serious breach of contract (a breach of condition) allows the innocent party to treat the contract as discharged as well as conferring a right to damages; whereas a minor breach of contract (a breach of warranty) simply gives rise to an entitlement to damages.
Termination of the contract Total breach [6.2820] Perhaps the simplest way in which a contract can be breached is where one party indicates in advance that they do not intend to perform any of their obligations under the contract. This breach would be classified as an anticipatory breach in that it is clear that the contract will be breached but the time for performance has not yet arrived. It would also be classified as an example of a total breach in that the party has indicated that it will not perform any of their obligations.
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In this situation the innocent party has a choice. He or she can if they wish terminate the contract. All they need to do is inform the other party that they have made this decision. Once this has happened the innocent party cannot change their mind. The effect of their decision is that both parties are discharged from any outstanding obligations. If the innocent party has already suffered some loss they are entitled to sue for damages as well as terminating the contract. Unfortunately it is common to describe the above situation as one in which the innocent party has a right to rescind the contract due to repudiation by the other party. This description is confusing because, in this context, the term “rescind” does not generally mean, as it does in other contexts, a right to return the parties to their original position. It simply means the right to terminate the contract prior to the obligations under the contract being fully performed.
And it is the general intention of the law that, in giving damages for breach of contract, the party complaining should, so far as it can be done by money, be placed in the same position as he would have been in if the contract had been performed … That is ruling principle. It is a just principle. Wertheim v Chicoutimi Pulp Co [1911] AC 301 at 307 per Lord Atkinson.
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Another way in which a contract can be breached is by the failure of one party to perform their obligations when the time for performance arrives. This would be classified as an example of actual breach as opposed to anticipatory breach. If the failure involves all the obligations under the contract (total breach), the same principle applies. The innocent party can choose if they wish to terminate the contract and can also sue for damages if they have already suffered some loss. It is important to note that termination does not require an order of the court, but is a matter entirely for the innocent party to act on. The only risk that a party runs in deciding to terminate a contract, is that if the termination is wrongful, the other party may institute legal proceedings for damages for wrongful termination and possibly a declaration by the court that the contract is still in existence.
Partial breach [6.2830] The position is more complicated, however, where the party in breach has (or, in the case of anticipatory breach, intends to) properly performed some of their obligations but not others. They may, for example, perform all their obligations but not by the
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Chapter 6 Contracts: Concepts of Agreement
agreed deadline. Alternatively, they may meet the deadline but not perform to the agreed standard. If the actual or anticipatory breach of contract relates to some of a party’s obligations under the contract, the innocent party can sue for damages when they can show that the breach has caused them a loss. This is dealt with at [6.2850]. However, the question remains whether, in the case of partial breach, the innocent party has the right to terminate the contract and thus is relieved from performing their own obligations under the contract.
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The general rule in the case of a partial breach is that the innocent party has no right to terminate the contract and must therefore continue to perform their own obligations under the contract. They merely have the right to sue for damages or, in exceptional cases, to seek another remedy. However, the general rule is subject to the exception that if the partial breach is a very serious one, then the innocent party can also choose to terminate the contract in the same way as cases of total breach. The obvious problem that arises is how to decide if the breach in question is serious enough to allow the innocent party to terminate the contract if they choose to do so. The courts have developed two approaches to this problem. The first approach is to examine the term of the contract that has been broken and decide whether this is a very important term or not. The courts use the term condition to describe terms that are very important in the context of the contract as a whole and therefore presumably give the innocent party a right to terminate the contract in the event of a breach. Other terms are classified as warranties. In Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632, Jordan CJ explained (at 641) that: The question whether a term in a contract is a condition or a warranty, that is, an essential or non-essential promise depends upon the intention of the parties as appearing in or from the contract.
Under this approach it does not matter whether the consequences of breaching the term are serious or not. All that matters is whether the term that was breached was an important one or not. Consequently, even trivial breaches of a condition allow the innocent party to terminate the contract, but breach of a warranty does not, no matter how dramatic the consequences might be to the innocent party. An example of a trivial breach of a condition being held to allow the innocent party to terminate the contract is found in the following case.
Associated Newspapers Ltd v Bancks [1951] HCA 24 [6.2840] Bancks, the creator of the Ginger Meggs comic character, had a contract with Associated Newspapers to produce a full page comic strip each week which would be published on the front page of the paper’s comic strip section. It was moved without notice to the third page. It was held that the obligation that had been breached was a condition which allowed Bancks to rescind the contract and contract with a competitor (at [8]): The plaintiff would not have employed the defendant unless it had been assured that the defendant would perform his promise, and the defendant would not have made the promise unless he was assured that his work would be published in a particular manner. Obviously it was of prime importance to the defendant that there should be continuity of publication so that his work should be kept continuously before the public, that his work should be published as a whole and not mutilated, and that it should be published on the most conspicuous page of the comic section.
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Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 [6.2850] The contract was an advertising contract under which Luna Park agreed to rent advertising space
on three trams in Sydney for a three-year period. Each tram carried a different advertisement for Luna Park, which was an amusement park. One clause of the written contract stated that each of the three trams would be on the tracks and thus in public view for at least eight hours each day. After two years, Luna Park sought to terminate the contract on the basis that although each advertisement had been in public view for an average of eight hours each day, it was not true that each sign had been in public view for eight hours everyday as was stated in the clause. The court agreed with this outcome. It noted that it was unlikely that Luna Park could prove that it had suffered any loss due to this breach but it decided that the clause was indeed a condition of the contract which had been breached and therefore Luna Park was entitled to terminate the contract after two years and thereby avoid paying the advertising fees for the third year. As this case shows, breach of a condition gives the innocent party a choice whether to terminate the contract early and sue for damages or to affirm the contract in which case the innocent party is obliged to continue with their own obligations but can still sue for damages.
[6.2860] However, in some cases the nature of the breach may mean that further performance of the contract becomes impossible. In this case, discharge is automatic.
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The Tramways Advertising case highlights that even trivial breaches of a condition allow the innocent party the choice of terminating the contract whereas very serious breaches of a warranty give no such right. The second approach is that rather than classifying the term of the contract itself as a condition or warranty, the court looks at the seriousness of the consequences of the breach. For example, a faulty component in a complex machine may be a less serious breach if discovered in time, or a more serious breach if it causes significant damage. Terms which fall into this category are called intermediate or innominate terms. In Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26 Lord Diplock explained such terms in this way (at 70): There are, however, many contractual undertakings of a more complex character which cannot be categorised as being “conditions” or “warranties” … Of such undertakings all that can be predicated is that some breaches will and others will not give rise to an event which will deprive the party not in default of substantially the whole benefit which it was intended that he should obtain from the contract; and the legal consequences of a breach of such an undertaking, unless provided for expressly in the contract, depend upon the nature of the event to which the breach gives rise and do not follow automatically from a prior classification of the undertaking as a “condition” or a “warranty”.
In that case the obligation of seaworthiness was classified as innominate “because a breach of the obligation might be trivial, making damages an adequate remedy, or grave, in which event it should have effect as a breach of condition … nothing less than a serious breach of an innominate term entitles the innocent party to treat the contract as at an end”.
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Chapter 6 Contracts: Concepts of Agreement
Wickman Ltd v Schuler AG [1974] AC 276 [6.2870] The contract appointed Wickman for 10 years as the sole distributor in England of large metal
presses made by Schuler in Germany. The presses were used by car manufacturers to make panels. A clause of the written contract stated that Wickman would visit each car manufacturer in England every week. This clause was stated to be a condition of the contract. Another clause stated that each party had the right to terminate the contract if the other party failed to remedy a breach of the contract after 60 days of being informed in writing to do so. Schuler attempted to terminate the contract on the basis that Wickman had failed to undertake the agreed visits and that this term was a condition of the contract. The court held that the term was not a condition in the technical legal sense. Rather it was an intermediate or innominate term. The consequences of breaching the term were not serious enough to justify Schuler’s attempt to terminate the contract early. He could only have done so if Wickman had failed to remedy the breach after being given 60 days’ notice to do so. Lord Simon stated (at 264) that: It has now been made explicit that there lies intermediate between conditions and warranties a large innominate class of contractual terms (any breach of which does not give rise to a right in the other party to terminate the contract, but only a material breach, immaterial breaches merely giving rise, like breaches of warranty, to a right to claim damages).
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Damages for breach of contract [6.2880] The basic principle of contract law is that every breach of contract gives the innocent party a right to claim compensation (damages) for the injury or loss they have suffered as a result of the breach. These damages are aimed at putting the plaintiff in the position that he would have been if the contract had been performed so that punitive damages cannot be awarded for a breach of contract. It is also important to note that the compensation is limited to a loss by the plaintiff. If the defendant were to make a profit on his breach of contract and yet cause no loss to the plaintiff, no damages would be payable. Damages are also awarded on the basis of “once and for all”, that is, there is no right to return to court and claim further losses after the claim has been dealt with by the court. The only exception to this is either if there is a different claim or the breach continues after the original action. Thus:
In contract, damages are awarded with the object of placing the plaintiff in the position in which he would have been had the contract been performed –he is entitled to damages for loss of bargain (expectation loss) and damage suffered, including expenditure incurred in reliance upon the contract (reliance loss). Gates v City Mutual life Insurance Society Ltd (1986) ATPR 40- 666 at 47,366 per Mason, Wilson and Dawson JJ.
• A sues B for breach of a condition of the contract and recovers damages; • A can later sue B for breach of a separate warranty in the contract and recover damages for such breach; • A promises to provide B with football jerseys at a certain price for two years. A fails to provide the jerseys at the end of the first year. B can sue for any loss he sustains at the end of the first year and bring a subsequent action for any loss from the end of the first year to the end of the second year. This right is in addition to any right that the innocent party may have to terminate the contract that was discussed at [6.2780]. The general right to damages is, however, subject to any valid exclusion or limitation clause in the contract.
Remoteness of loss [6.2890] The first problem that needs to be addressed is the concept of a “loss that is a result of the breach”. A breach of contract can lead to a whole chain of events some of
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which may be predictable and some of which may not. For example, if a taxi is late in arriving to take a person to the airport they might miss the plane. If they catch a later plane they might have to pay a surcharge on the ticket; they might also get home to find that their car has just been stolen from the airport car park. In the boot of the car was a valuable painting that they had purchased on the way to the airport. If the taxi had been on time they could have avoided the surcharge, the theft of the car and the loss of the painting. In that sense, the breach of contract by the taxi company caused all these losses. But is the taxi company obliged to compensate the person for all these losses? To address questions such as this, the courts have developed a rule concerning the remoteness of the loss. According to this rule, known as the rule in Hadley v Baxendale, compensation will not be awarded for losses that are too remote. The plaintiff of course bears the legal burden of proving causation.
Hadley v Baxendale (1854) 156 ER 145 [6.2900] The contract involved the delivery of a broken crankshaft that was used to run a mill. The broken
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crankshaft was to be used as a template for the manufacture of a new one. Under the contract, the crankshaft was supposed to be delivered within 24 hours but, in fact, it took seven days. This was clearly a breach of the contract. During these seven days the mill stood idle and Hadley claimed damages for breach of contract equivalent to the profits lost during those seven days. Baxendale admitted the breach of contract but denied liability for this amount on the basis that it was reasonable for him to assume that the mill had a replacement crankshaft. The court held that the lost profits were not recoverable. Alderson B (at 151) stated that: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, that is, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it.
Better break your word than do worse in keeping it. T Fuller, Gnomologia: Adagies and Proverbs (1732).
[6.2910] The rule in Hadley v Baxendale has been interpreted as containing two “limbs”. The first limb compensates the innocent party for losses that are reasonably foreseeable. The second limb compensates the innocent party for a loss attributable to special circumstances known to the defendant at the time of contracting.
Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 [6.2920] The plaintiff purchased a boiler which was to be used in its dry cleaning and dying business. The
defendant knew the nature of the plaintiff’s business and the plaintiff had told the defendant that the boiler would be put to use “in the shortest possible time”. When the plaintiff went to collect the boiler from the defendant, it found it was damaged and refused to take it until it was fixed. This took five months. The plaintiff claimed that the lack of the boiler meant that it was unable to undertake (a) general new business and (b) a number of lucrative dyeing contracts for a government department. The court awarded damages for the general loss of business because this might have been reasonably expected, but not for the government contracts because the defendant did not know about them.
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Chapter 6 Contracts: Concepts of Agreement
Difficulty in assessment [6.2930] In some cases it will be difficult to assess damages with any precision. In such cases, the award will merely be a rough estimate of the likely loss. In Howe v Teefy (1927) 27 (NSW) 301, Street CJ stated (at 306) that: [The court] is not relieved from assessing the loss merely because the calculation is a difficult one or because the circumstances do not admit of the damages being assessed with certainty.
The very definition of a good award is that it gives dissatisfaction to both parties. Goodman v Sayers (1820) 2 Jac & W 249 at 259 per Plumer MR.
The duty to mitigate [6.2940] The innocent party has a duty to mitigate their losses. This means that they are required to take all reasonable steps to minimise the amount of their loss. If they fail to do so, they will not receive compensation for the portion of the loss that could have been avoided by reasonable steps.
Burns v Man Automotive (Aust) Pty Ltd (1986) 161 CLR 653
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[6.2950] The plaintiff was a haulier and the defendant was supplier of prime movers. The defendant
arranged the sale of a prime mover to a hire purchase company which in turn hired the prime mover to the plaintiff. At the time of the transaction Man warranted that the engine of the prime mover had been reconditioned, when in fact it had not. Furthermore it knew that the plaintiff was not well off and that he intended to use the prime mover for interstate haulage. The prime mover kept breaking down, but although the plaintiff was unable to afford a reconditioned engine, he was able to use the truck to carry goods in his home state of Queensland between June 1978 (when he discovered the defect) and the end of 1979 when the truck was repossessed by the finance company for lack of payments. The plaintiff claimed that he had to keep on incurring losses because he could not afford either to fix the truck or replace it. Held: While the plaintiff was entitled to the loss of profits from the date he entered into the hiring agreement up to the date he discovered the defect (June 1978), he was not entitled to loss of profits from that date on. While the majority of the High Court found that this loss was too remote, Gibbs CJ said that the plaintiff should have mitigated his damages by terminating the agreement when he discovered the defect in the vehicle and that it was unreasonable for him to have continued to use it after that date.
[6.2960] However, if the plaintiff has done something which has added to its losses it may recover this from the defendant if in all the circumstances it has acted reasonably. There are various types of damages that are awarded by the courts.
Loss of profit [6.2970] In the case of the sale of goods or real property the normal measure of damages is the difference between the contract price and the replacement value, less the contract price: • A agrees to sell B a home unit in a block for $500,000. A defaults and B buys the unit next door which is similar in all respects to that which B should have sold to A. B has to pay $550,000 for the unit. B’s damages from A will amount to $50,000.
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• A agrees to sell B a home unit in a block for $500,000. A defaults and B buys the unit next door which is similar in all respects to that which B should have sold. B pays $450,000 for the unit. B has sustained no loss. • A buys a machine to print magazines from B. The machine is faulty. A is unable to print magazines for X which terminates its contract with A. A may be able to sue X for the loss of profits on the contract.
Loss of money spent in anticipation of the contract being performed
McRae v Commonwealth Disposals Commission [1951] HCA 79 [6.2980] The Commonwealth awarded a salvage contract to the plaintiff in relation to a tanker which was
reputedly aground on a reef in Papua New Guinea. The plaintiff equipped a vessel to carry out the contract and sent it from Sydney to the area. In fact the tanker did not exist. It was held that in the circumstances there was an implied promise in the salvage contract that the tanker was in existence and that as this promise had been broken, the plaintiff was entitled to recover the costs of equipping the vessel and sending the ship to the area.
Loss of a chance or opportunity
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Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54 [6.2990] Amann entered a contract with the Commonwealth to provide coastal surveillance flights over
northern Australia for three years. Amann purchased certain aircraft to do this which needed to be modified to carry out the contract. Amann began the flights but not all of its aircraft were ready to service the contract and none of them complied with the required contract specifications. The Commonwealth terminated the contract, but did so in a manner which was not provided for in the contract and therefore its termination was wrongful. Amann accepted the termination, but then sued for damages. Amann claimed that it would not have made any profit in carrying out the original contract, but would have done so if the contract was renewed and that the prospect of it being renewed after three years ought to be taken into account in relation to the measure of damages. It was held that because the company would have had the appropriate equipment and personnel in place, the chances of renewal would have been strong, even though there was no obligation on the Commonwealth to renew the contract. Accordingly, this chance was in reasonable contemplation of the parties in accordance with the second limb of the rule in Hadley v Baxendale and should be taken into account in measuring the damages.
Costs of rectifying defective work [6.3000] This is subject to the principle that it must be reasonable to incur such costs.
Ruxley Electronics Ltd v Forsyth [1995] 3 WLR 118 [6.3010] The defendant constructed a swimming pool for the plaintiff but at an incorrect depth. The plaintiff
sued for damages. It was held that as the pool had been properly constructed it was unreasonable to demolish it and replace it with a pool built to the required depth.
294
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Chapter 6 Contracts: Concepts of Agreement
Damages for disappointment and distress [6.3020] The general rule is that damages are not recoverable for any inconvenience or mental distress that might flow from a breach of contract. However, this rule is now subject to an exception where the main purpose of the contract is to provide relaxation and enjoyment and this is not achieved.
Baltic Shipping Co v Dillon (1993) 111 ALR 289 [6.3030] The contract was to provide a holiday on a cruise ship. The ship hit a reef while off the coast
of New Zealand and sank soon afterwards. Mrs Dillon was injured and sued Baltic Shipping. The High Court awarded her damages which included a refund of the cruise fare as well as $5000 for “disappointment and distress at the loss of entertainment” on the basis that the contract had promised enjoyment and relaxation.
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Nominal damages [6.3040] Although every breach of contract confers the right, subject to any exemption clause, to sue for damages, where no actual loss can be proved nominal damages –token amounts that in effect acknowledge the breach –are awarded. In the Tramways Advertising case (see [6.2850]), Luna Park was unable to prove the number of days Tramways failed to display the advertisement as required by the contract. While it was able to terminate the contract, it received nominal damages for the breach. In such cases the cost of the legal action will outweigh the token amount received, particularly as the normal order for costs being awarded to the successful party will not be granted if the case is considered to be frivolous or vexatious.
Liquidated damages and penalties [6.3050] The parties can provide in their agreement for the damages that are to be paid on a subsequent breach. Such damages are known as liquidated damages (as opposed to the unliquidated damages calculated and awarded by the court in a breach of contract action), and provided that the amount specified is a genuine pre-estimate of actual loss and not a penalty clause (where the sum specified is extravagant and unconscionable), it will be enforced (O’Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3, see [7.510]).
Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71 [6.3060] Ringrow purchased a service station from BP and at the same time entered into another agreement with BP that it would purchase BP petrol only, the contract of sale of the petrol station contained an option whereby if Ringrow bought petrol from another company, BP would have the option of buying back the service station at a market value as assessed by an independent valuer, but would not include any component for goodwill. When Ringrow commenced to buy petrol from another supplier, BP exercised its option. Ringrow argued that the option clause was void as a penalty because it required a transfer of property for less than the damage actually suffered by BP ie that the true value of the property had to be looked at in light of the goodwill which Ringrow had built up while operating the service station.
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295
Business and the Law It was held that: (1)
There was nothing in the law relating to penalties that required a proportionality between the sum to be paid and the loss suffered.
(2)
That a penalty is a payment which is extravagant and unconscionable in comparison to the greatest loss that could be incurred. In normal circumstances, a comparison is made between the amount of unliquidated damages that could be recovered and the sum agreed to be paid on the breach. Thus here a comparison between the price to be paid by BP (market value less goodwill) with the value of the property (market value including goodwill) was appropriate. In this case, there was evidence that the goodwill had hardly any value and the clause was therefore not penal.
Deposits and part-payment [6.3070] If a sum has been paid as a deposit to “guarantee” performance, it is forfeited if the person giving it does not perform. However, the deposit also acts as part-payment and where the “deposit” is excessive (the cases suggest that, except in special circumstances, a deposit in excess of 15% is excessive) equity will grant relief against forfeiture and order its return, leaving normal damages principles to settle the appropriate level of compensation.
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Contributory negligence When an individual goes into a supermarket today to look at a can of beans, that can of beans has a lawyer, an advertising department, a package design department, a marketing research department, and a whole range of other specialists behind it all committed to selling, all given the task of telling us we should buy that can of beans. As individuals, we stand there on our own … with no buying agent, no lawyer, no marketing department, no research group, nothing. J S Turner, “How to Serve Consumers and Make a Profit” in Consumerism: A New Force in Society (Lexington Books, 1976).
296
[6.3080] In Astley v Austrust Ltd [1999] HCA 6 the High Court held that the defence of contributory negligence (which operates to reduce damages for negligence to the extent that the plaintiff contributed to the damage: see Chapter 10) was not available to a law firm which was negligent in the advice it gave to a trustee company. In addition to breaching its tortious duty of care the law firm also breached its implied contractual duty to exercise reasonable care. In the absence of agreements to the contrary the High Court held, contrary to previous practice, that where a person sues in contract and in negligence, damages could not be reduced pursuant to apportionment legislation. Legislation to overcome this effect of Astley v Austrust has now come into effect in all States and Territories. This amended apportionment legislation restores the position prior to Astley v Austrust [1999] HCA 6 to allow for the reduction of damages for contributory negligence whether or not the action is framed in contract or in tort.
Other remedies for breach of contract [6.3090] There are other remedies that are sometimes awarded in contractual disputes. These include: • specific performance; • injunction; • rectification; • restitution.
Specific performance [6.3100] Specific performance is an equitable remedy under which the court requires a party to perform the obligations imposed by the contract. Being an equitable remedy, it is ordered at the courts discretion and will not be granted:
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Chapter 6 Contracts: Concepts of Agreement
• when damages would be an adequate remedy; • where the court needs to constantly supervise the agreement; • where it would cause undue hardship; or • to enforce contracts of personal service. The only common situation in which the order is granted is in relation to contracts for the sale of land. For historical reasons the courts view each piece of land as unique such that compensation by way of damages would not be an adequate remedy for breach of such contracts.
JC Williamson Ltd v Luckey & Mulholland [1931] HCA 15 [6.3110] JC Williamson Ltd made an oral agreement with Luckey and Mulholland allowing them to sell
sweets in their theatre for five years. The agreement had implied conditions that Luckey and Mulholland would ensure that they would supply adequate staff to do this who would be uniformly dressed in a manner approved by Williamson, that staff would be placed at appropriate locations within the theatre and that an adequate supply of confectionery would be available to meet patrons’ requirements. Williamson repudiated the agreement. The High Court held that specific performance of this contract was not available as it would require constant supervision to ensure its terms were met.
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Injunction [6.3120] Injunctions to prohibit parties breaching their contractual obligations or, conversely, compelling performance of contractual obligations (known as mandatory injunctions) may also be granted. Injunctions are also an equitable remedy within the discretion of the court and, as with specific performance, will not be granted if damages would provide an adequate remedy or undue hardship would result.
Lumley v Wagner (1852) 1 DeG M & G 604; 42 ER 687 [6.3130] Wagner was hired by Lumley to sing opera in his theatre for three months. The contract also pre-
vented her from singing elsewhere without Lumley’s consent. Wagner was offered an engagement at a rival theatre at a higher fee. She threatened to break her contract. The court granted Lumley an injunction preventing Wagner from singing at the rival’s theatre, although it would not compel her to sing for Lumley.
Rectification [6.3140] Rectification is an order requiring correction of a written document where the court is satisfied that it is an inaccurate record of the agreement reached between the parties. It is important to note that this provides another exception to the parol evidence rule and in fact may even defeat an “entire agreement” clause if the court is convinced that the written document did not in fact represent the entire agreement. However, there is a heavy onus of proof on the party seeking rectification that the written document does not reflect a common intention.
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Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23 [6.3150] At an auction sale of some real estate, the auctioneer stated that the seller would finance part
of the sale price by a mortgage over the land. The buyer then signed the contract to purchase the property, although there was no reference to the terms announced by the auctioneer in the contract. The buyer believed that there was an error in the contract as did the seller. The buyer sought rectification of the contract on the basis that part of the true agreement between the parties was the auctioneer’s statement. Held: Rectification would not be ordered since the written document did not in itself contain any mistake and both parties were clear as to its contents.
Restitution [6.3160] Restitution is a convenient label for a variety of situations in which the court will order the return of property or the payment of money. Unlike an action for damages for breach of contract, restitution is based on the idea that a person should return a benefit that he or she has received and which the courts say is unjust that he or she should retain. The type of contractual matters in which this doctrine usually applies are: • where there has been a total failure of consideration; • where money has been paid or property transferred under a void or unenforceable contract;
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• where money has been paid as a result of a mistake.
Rowland v Divall (1923) 2 KB 500 [6.3170] The plaintiff purchased a motor vehicle from the defendant. There was an implied condition in the contract that the defendant had a good title to the car. This was not the case since the vehicle had been stolen from its true owner and had been sold to the defendant. Some four months later the true owner located the vehicle and reclaimed. It was held that the buyer was entitled to recover the price he had paid for the car, even though he had obtained four month’s use of it. There was, in the circumstances, a total failure of consideration.
David Securities Pty Ltd v Commonwealth Bank of Australia [1992] HCA 48 [6.3180] A borrower paid money to the lender in addition to the interest on its loan under a clause in the
mortgage that was found to be void because of a provision in the Income Tax Assessment Act 1936 (Cth). The borrower sought to have these payments deducted from its outstanding amount. It was held that there was no difference between money paid under a mistake of fact or a mistake of law. The only relevant factor was whether the payee was unjustly enriched and it was immaterial whether the mistake was due to compulsion or undue influence.
However, a plaintiff will lose the right to recover where a payment is made voluntarily which will include circumstance where the plaintiff is prepared to make the payment without contesting the claim. 298
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Chapter 6 Contracts: Concepts of Agreement
Quantum meruit [6.3190] A person who has received the benefit of services rendered after a contract has been terminated or where such services have been rendered on the basis that a contract was to come into existence may be liable to pay a reasonable remuneration (quantum meruit) for such services. A quantum meruit is essentially an action for judgement of the reasonable value of the services performed and is based on the law of restitution and the principles of unjust enrichment. Such claims can arise in various circumstances –where the contract does not fix a price, where work is carried out prior to terms being settled, where work is done outside the scope of a contract, where work is done under a void unenforceable or terminated contract.
Leading Edge Investments Pty Ltd v Te Kanawa (2007) Aust Cont Reps 90-250
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[6.3200] A promoter had the idea of staging a series of concerts starring Dame Kiri Te Kanawa, a famous
opera singer, and John Farnham, the well-known pop star, together. He approached Dame Kiri’s agent and entered into negotiations. The negotiations reached the stage where a formal contract was sent by the agent to the promoter but there were disagreements about its content and it was never signed. In addition Dame Kiri had concerns about John Farnham’s performance style and was angered by the fact that he did not turn up to an arranged meeting with her in New Zealand. While the negotiations were proceeding the promoter incurred expenditure including the preparation of promotional material and arranging of a helicopter flight for Dame Kiri to attend a meeting to discuss the proposed schedule of concerts. Dame Kiri then advised that she did not wish to proceed with the concert arrangement. Held: While no contract existed, the parties had assumed that there would be a contract entered into. The promoter had provided services which were beneficial to the project and in the interests of both parties and had an expectation of payment for these services. Dame Kiri had withdrawn from the project without any fault on the part of the promoter and therefore he was entitled to be paid a reasonable amount on a quantum meruit basis.
QUESTIONS 1.
“The principle that parties should ordinarily fulfil their contractual obligations not only underpins the law of contract, but comprises a basic assumption on which our society and its economy and well-being depend”: Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61 per Kirby J at [74].
Discuss this proposition.
2.
What is “freedom of contract”? To what extent is it appropriate today? What are the practical and legal limitations on the principle?
3.
What are “standard form contracts”? What problems may they give rise to?
4.
John has three cars –a blue car, a red car and a green car –which he inherited from his father. He needs to sell them to pay debts owing under an unsuccessful business venture.
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John contacted Anita who he has been told is interested in buying the blue car. Anita asks John to drive the car to her house so she can have a good look at it. John drives the car to Anita’s premises for her to assess but before negotiations are complete John gets a telephone call requiring him to go immediately to his accountant’s office to sign some important documents. Anita asks John to sign a document “giving me the right of first refusal to buy the car” before he leaves. Because John is in such a hurry he simply signs the document at the bottom without reading it. When he returns to Anita’s premises later in the day he learns that the document he signed was a contract of sale of the blue car to Anita for $10,000 which is considerably less than John expected to get for it. John’s solicitor, Claire, is a keen car collector who is interested in buying John’s red car. The red car has been valued at about $60,000 because it is a rare model. Claire offers John $30,000 for it. Although John is very unhappy with this price he reluctantly agrees to sell it to Claire at this price because Claire’s support will be necessary to him in resolving his current financial difficulties and John does not want to risk upsetting her. John sells his green car to Nigel, a car dealer. They agree on a price of $30,000. Nigel produces a 10 page written contract for John to sign. John tries to read the contract but it is written in very legalistic language that he cannot really understand. He advises Nigel that he needs to talk to his solicitor first. Nigel says “Sure. Go ahead. But my offer to buy at $30,000 is open only until close of business today”. Because John urgently needs the $30,000 to pay a debt he decides to sign the contract. The next day Nigel advises that he is withdrawing from the contract pursuant to a contractual term in fine print on the 9th page. Advise John as to any legal action he may have against Anita, Claire and Nigel. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
WEB REFERENCES Australian Government Business Entry Point http://www.business.gov.au Working with contracts http://www.treasury.gov.au
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7
7
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Contracts in Business Andrew Terry THE BUSINESS CONTEXT In Law in a Changing Society Wolfgang Friedmann spoke of the “pathetic contact” between contract law as it is taught in the text books and contract law in the real world of business. There is only one law of contract. The contract laws outlined in Chapter 6 apply to all contracts –whether business- to-business (B2B), business-to-consumer (B2C) or private. Of course there is a range of legislative provisions which have been enacted to redress the vulnerability of consumers which are today enshrined primarily in the Australian Consumer Law although it must be appreciated that the most powerful of these provisions –the prohibition of misleading conduct (s 18) and unconscionable conduct (s 21) apply to all contracts –B2B and B2C –in trade or commerce. But despite the general application of the mass of contractual doctrine and principles and rules and exceptions which have developed through the common law over the last few hundred years it would be foolish, as Friedmann has pointed out, to assume that contracting in the robust environment of business throws out the same challenges that it does in private or consumer transactions. The reality is that a number of issues arise primarily in the commercial context and it is the object of Part 1 of this chapter to address these issues. Part 2 outlines the nature of and operation of several special types of contracts in business, including sale of goods, guarantees, e-contracts and insurance. The specialised nature of these contracts has led to the development of specialised laws relating to their function and operation.
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PART 1 –ISSUES IN BUSINESS CONTRACTING ........................................................................................................ 304 7.1 A CONCLUDED AGREEMENT? .......................................................................................................................... 304 [7.10]
The problem ................................................................................................................................................. 304
[7.20]
The general principles ................................................................................................................................ 304
[7.30]
Uncertainty, incompleteness and lack of contractual intent ............................................................... 305
[7.80]
Conditional/subject to contracts .............................................................................................................. 308
[7.110]
Memorandum of understanding ............................................................................................................. 309
[7.120]
Heads of agreement .................................................................................................................................... 309
[7.150]
Letters of comfort ........................................................................................................................................ 311
7.2
NEGOTIATING THE AGREEMENT ..................................................................................................................... 316
[7.180] Estoppel ......................................................................................................................................................... 316 [7.200]
Misleading or deceptive conduct ............................................................................................................. 318
[7.280]
“Without prejudice” negotiations ............................................................................................................ 321
[7.300]
Letters of intent ........................................................................................................................................... 322
[7.320]
Agreements to negotiate in good faith .................................................................................................... 323
7.3
The battle of the forms ............................................................................................................................... 325
[7.380]
Incorporation by reference ........................................................................................................................ 326
[7.400]
Implied terms ............................................................................................................................................... 327
[7.410]
Time of the essence ..................................................................................................................................... 328
[7.420]
Interpreting the contract ............................................................................................................................ 328
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THE TERMS OF THE AGREEMENT ..................................................................................................................... 325
[7.360]
ADJUSTING THE BARGAIN .................................................................................................................................. 330
[7.430]
Side letters .................................................................................................................................................... 330
[7.440] Variations ...................................................................................................................................................... 330 [7.450] Waiver ............................................................................................................................................................ 331 7.5
DEALING WITH THE CONTRACT ...................................................................................................................... 331
[7.460]
Assignment of contractual benefits ......................................................................................................... 331
[7.470] Novation ........................................................................................................................................................ 332 [7.480] Subcontracting ............................................................................................................................................. 332 7.6
WHEN IT ALL GOES WRONG ............................................................................................................................. 333
[7.490] Guarantees ................................................................................................................................................... 333 [7.500] Indemnities ................................................................................................................................................... 333 [7.510] Penalties ........................................................................................................................................................ 333 7.7
STANDARDS OF BUSINESS CONDUCT ........................................................................................................... 334
[7.520]
Commercial best practice .......................................................................................................................... 334
[7.530]
Misleading and unconscionable conduct ............................................................................................... 335
[7.540]
An implied obligation of good faith in commercial contracts ............................................................ 335
[7.550]
Fiduciary duties in commercial relationships ....................................................................................... 336
PART 2 –PARTICULAR BUSINESS CONTRACTS......................................................................................................... 338 7.8
SALE OF GOODS ..................................................................................................................................................... 338
302
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Chapter 7 Contracts in Business
7.9
E-COMMERCE .......................................................................................................................................................... 338
[7.590]
Regulating the methods of e-commerce ................................................................................................. 341
[7.630]
Regulating the practices of e-commerce in Australia .......................................................................... 344
[7.870]
Regulating international e-commerce .................................................................................................... 356
7.10 GUARANTEES .......................................................................................................................................................... 359 [7.910]
Nature and function of a guarantee ........................................................................................................ 359
[7.920]
The contract of guarantee .......................................................................................................................... 359
[7.930]
Guarantee v indemnity .............................................................................................................................. 360
[7.940]
Creation of guarantee ................................................................................................................................. 360
[7.950]
Liability of the guarantor ........................................................................................................................... 361
[7.960]
Rights of the guarantor .............................................................................................................................. 362
[7.970]
Discharge of the guarantor ........................................................................................................................ 362
[7.990]
“Unfair” guarantee contracts .................................................................................................................... 364
[7.1010]
Letters of credit ............................................................................................................................................ 366
[7.1020]
Letters of comfort ........................................................................................................................................ 366
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7.11 COMMON LAW RESTRAINTS OF TRADE ....................................................................................................... 366 [7.1040]
The common law test .................................................................................................................................. 367
[7.1050]
Covenants cannot protect against mere competition .......................................................................... 368
[7.1070]
Offending covenant can be severed ........................................................................................................ 368
[7.1080]
Agreements between employers and employees ................................................................................. 369
[7.1090]
Agreements between independent contractors .................................................................................... 370
[7.1110]
Sale of business agreements ..................................................................................................................... 371
[7.1120]
Agreements between partners ................................................................................................................. 372
[7.1130]
Trading agreements between manufacturers and retailers ................................................................ 373
7.12 INSURANCE CONTRACTS ................................................................................................................................... 373 [7.1150]
The insurance contract ............................................................................................................................... 374
[7.1160]
Insurance legislation .................................................................................................................................. 374
[7.1170]
Types of insurance ....................................................................................................................................... 374
[7.1200]
Special features of the insurance relationship ...................................................................................... 376
[7.1270]
Modifications to the duty of disclosure by the ICA .............................................................................. 380
[7.1350]
Remedies of the insurer ............................................................................................................................. 383
7.13 NEGOTIABLE INSTRUMENTS AND FINANCIAL TRANSACTIONS ........................................................ 384 [7.1410]
The nature of negotiable instruments ..................................................................................................... 385
[7.1430]
Bills of exchange .......................................................................................................................................... 386
[7.1570]
Promissory notes ......................................................................................................................................... 388
[7.1600] Cheques ........................................................................................................................................................ 390 [7.1725]
Consumer credit .......................................................................................................................................... 394
[7.1740]
The bank-customer relationship .............................................................................................................. 395
[7.1770]
Disputes with banks ................................................................................................................................... 396
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PART 1 ISSUES IN BUSINESS CONTRACTING 7.1 A CONCLUDED AGREEMENT? The problem [7.10] Standard form contracts are features of business as well as consumer contracts with the qualification there may be the opportunity in the business context –particularly if the parties enter the contract with something approaching equal bargaining power – to negotiate changes to the terms. Indeed the problem of the “battle of the forms” (see [7.360]) reflects the reality that business frequently contracts on its own standard terms which causes problems when the respective terms are not compatible. A common reality is nevertheless that business people often contract “casually” –coming to some sort of consensus as to the big picture but leaving the detail for another day or someone else: “my people will talk to your people”. The most common issue relating to business contracts is probably whether there is indeed a contract in existence and in such cases issues of uncertainty and incompleteness and contractual intent are frequently raised and usually overlap.
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The general principles I know that you believe you understand what you think I said, but I’m not sure you realise that what you heard is not what I meant. R M Nixon, quoted in Australian Business (5 September 1990).
[7.20] A useful summary of the principles on formation of contract was given by the NSW Court of Appeal in Mushroom Composters Pty Ltd v IS & DE Robertson Pty Ltd [2015] NSWCA 1 –a case in which the question was whether there was a binding contract between the supplier of straw and a mushroom composter. Sackville AJA (MacFarlan and Gleeson JJA agreeing) summarised the principles as follows (at [59]-[64]): First, in Australia the “objective” theory of contract has been accepted … in determining whether a binding contract has been concluded, the law is concerned not with the parties’ subjective intentions … what matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe … Secondly, it is not necessary … to identify a precise offer or acceptance; nor is it necessary to identify a precise time at which an offer or acceptance can be identified … The questions to be asked are: “in all the circumstances can an agreement be inferred? Has mutual assent been manifested? What would a reasonable person in the position of the [plaintiff] and a reasonable person in the position of the defendant think as to whether there was a concluded bargain?” Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61 (Heydon JA). Thirdly, an agreement that is incomplete will not give rise to an enforceable contract … An alleged contract will fail for incompleteness if, even though the parties have used clear language, a term which is regarded as essential as a matter of law has not been agreed … If the parties have not agreed on all essential terms, for example because they have left one such term to be settled by future agreement, the contract is incomplete no matter what the parties themselves may think … Moreover, if the parties have not reached consensus on the essential terms of the contract, there will be no binding contract notwithstanding that one of the parties has commenced work referable to the agreement … Depending on the circumstances, non-contractual remedies, for example on restitutionary principles, may be available but the contract itself is incomplete and therefore unenforceable.
304
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Chapter 7 Contracts in Business Fourthly, for an agreement for the supply and sale of goods to constitute an enforceable contract, the parties must agree as to price, although they may leave the price to be determined by a third person or by an agreed mechanism. Thus, if a contract for the supply or sale of goods expressly provides for the price to be agreed between the parties, there is no concluded contract.
Uncertainty, incompleteness and lack of contractual intent [7.30] Uncertainty, incompleteness and lack of contractual intent are factors which will render a “contract” unenforceable. In the business context they frequently overlap. The courts will nevertheless attempt to give effect to commercial agreements. The guiding proposition is that of Lord Wright in Hillas & Co Ltd v Arcos Ltd [1932] All ER 494 (at 268): Business people often record the most important agreement in crude and summary fashion, modes of expression sufficient and clear to them in the course of the business may appear for those unfamiliar with the business far from complete or precise. It is, accordingly, the duty of the court to construe such documents fairly and broadly, without being too astute or subtle in finding defects.
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Uncertainty [7.40] The role of the courts is to interpret and give effect to contracts and not to rewrite them. Uncertainty will prevent the existence of a binding contract if the court cannot find a “meeting of the minds” –consensus ad idem. In The Upper Hunter County District Council v Australian Chilling & Freezing Co Ltd [1968] HCA 8 Barwick CJ stated that (at [9]): a contract of which there can be more than one possible meaning or which when construed can produce in its application more than one result is not therefore void for uncertainty. As long as it is capable of a meaning, it will ultimately bear that meaning which the courts, or in an appropriate case, an arbitrator, decides is its proper construction: and the court or arbitrator will decide its application. The question becomes one of construction, of ascertaining the intention of the parties, and of applying it … So long as the language employed by the parties, to use Lord Wright’s words in Scammell (G) & Nephew Ltd v Ouston (1941) AC 251 is not “so obscure and so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention”, the contract cannot be held to be void or uncertain or meaningless. In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements. Thus will uncertainty of meaning, as distinct from absence of meaning or of intention, be resolved.
The business of the law is to make sense of the confusion of what we call human life –to reduce it to order but at the same time to give it possibility, scope, even dignity. Archibald MacLeish.
Incompleteness [7.50] In Thorby v Goldberg [1964] HCA 41 the High Court approved the general principle expressed by Sugerman J in the NSW Court of Appeal decision appealed from: It is a first principle of the law of contracts that there can be no binding and enforceable obligation unless the terms of the bargain, or at least its essential or critical terms, have been agreed upon. So, there is no concluded contract where an essential or critical term is expressly left to be settled by future agreement of the parties.
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This proposition has received wide judicial support. In the words of Viscount Dunedin in May & Butcher Ltd v The King [1934] 2 KB 17 at 21, there “must be a concluded bargain”: a concluded contract is one which settles everything that is necessary to be settled and leaves nothing to be settled by agreement between the parties. Of course it may leave something which still has to be determined, but then that determination must be a determination which does not depend upon the agreement between the parties. In the system of law in which I was brought up, that was expressed by one of those brocards of which perhaps we have been too fond, but which often express very neatly what is wanted: “Certum est quod certum reddi potest.” Therefore, you may very well agree that a certain part of the contract of sale, such as price, may be settled by some one else. As a matter of the general law of contract all the essentials have to be settled. What are the essentials may vary according to the particular contract under consideration. We are here dealing with sale, and undoubtedly price is one of the essentials of sale, and if it is left still to be agreed between the parties, then there is no contract.
If the incompleteness relates to non-essential matters it is not necessarily fatal to the court upholding a contract. The courts can imply terms to give “business efficacy” to the broad agreement of the parties or fill the gaps by reference to past dealings or trade custom.
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Lack of contractual intent “When I use a word” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean –neither more nor less”. “The question is,” said Alice, “whether you can make words mean so many different things.” “The question is,” said Humpty Dumpty, “which is to be master –that’s all.” Lewis Carroll, Through the Looking Glass (1871) Ch 6.
[7.60] An agreement will not be enforceable unless there is an intention to be bound, an intention to create a binding legal relationship. If, in the words of Lord Wright in Scammell v Ouston [1941] 1 AC 251, “the parties never in intention nor even in appearance reached an agreement” there is no contract. Contract law is nevertheless grounded in objective theory and it is the objective appearance not the subjective intention of a party that is determinative. The clearest modern expression of objective theory is that of the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52: It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.
The parties can expressly state their intention (“this agreement is intended to bind the parties”) or expressly renounce such intention (“this agreement is not entered into as a formal or legal agreement but is only …”). In the cases that come before the courts on this issue the intention is rarely expressly stated and must be determined having regard to the principles discussed at [7.20]. It is determined objectively, by drawing inferences from what they said and did in the course of their dealings. What would each party, by its words and conduct, have led a reasonable person in the position of the other party to believe.
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Chapter 7 Contracts in Business
IN CONTEXT
General principles in determining whether an informal agreement is intended to be binding
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[7.70] The mere fact that the parties contemplate the execution of a formal contract, sub-
sequent to an informal agreement, does not mean that the informal agreement is not presently binding. The fact that the parties contemplate the drawing up and execution of a formal contract is a consideration which may point to the conclusion that no presently binding agreement was intended until that formal contract is executed. The existence of matters of importance in which the parties have not reached consensus in their informal agreement will render it less likely that they intended immediately to be bound before the execution of a formal document. Even where the parties have agreed on the “major matters”, their subsequent conduct may indicate that they did not intend to be bound until the other issues between them were resolved in a formal document … In order to determine in what areas the parties were, and were not, in agreement, and what matters they considered necessary in order for an agreement to exist, it is legitimate to examine their subsequent conduct. Where correspondence between the parties after an informal agreement refers to important terms and conditions not mentioned during that informal discussion, it may more readily be inferred that the earlier discussion was simply a preliminary negotiation and not a binding agreement. Depending on the size, importance and complexity of the subject matter, the less formal the initial agreement, the less likely it will be that it was intended to be legally binding and enforceable. Thus, an oral discussion which contemplates a subsequent formal written agreement is less likely to have been intended to have been immediately binding. It is necessary in every case to consider the nature and importance of the transaction which the parties contemplate. Where the agreement concerns a large sum, or concerns a significant transaction, it is less likely to have been intended to be presently binding. Depending on the subject matter, where the parties have not used solicitors but intended to do so for the drawing up of their formal agreement, that may also be a factor which will point to the non-existence of a binding agreement until the contemplated formalities have been agreed. Where a binding agreement is said to have been formed as a result of correspondence, it is necessary to look at that correspondence as a whole. It is wrong to isolate any part of the correspondence from the rest in order to prove or disprove the existence of a binding agreement. The same approach should be taken to the analysis of words and phrases within the correspondence. Reference to an “agreement” having been reached does not necessarily prove the existence of a presently binding contract. Conversely, references to a “proposed agreement”, and similar expressions, will not necessarily mean that no agreement presently exists. It is a question of how the words are to be interpreted in their context, and in the light of the correspondence, viewed as a whole. Geebung Investments Pty Ltd v Vorga Group Investments (No 8) Pty Ltd (1995) 7 BPR 14 at 551 per Kirby P
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Conditional/subject to contracts [7.80] Contracts, particularly sale of land contracts, are frequently made subject to or conditional on a contingency occurring or not occurring. Agreements may be made “subject to solicitor’s approval” or “subject to finance” or “subject to contract” or subject to some other contingency. Such clauses give rise to two particular questions: What is the purpose of the clause? Is it intended to express the parties’ agreement that there is no contract until the event occurs, or simply that there is no obligation to perform?
2.
What is the content of the clause? In other words, in what circumstances will the condition be regarded as fulfilled?
In relation to the first question, the authorities suggest that for contingencies other than “subject to contract” the intention does not prevent the formation of a contract and is relevant only in relation to its performance. A “subject to finance” clause is unlikely to impact on the formation of a contract but operates as a condition precedent to the obligation to perform the contract. Whether or not the condition can be regarded as fulfilled is the second question. When the formula is “subject to contract” the issue is more complex as the contingencies if unfulfilled may prevent a contract arising or it may simply go to performance. Masters v Cameron [1954] HCA 72 is the leading authority on the effect of “subject to contract” clauses.
Law is the key to everything. J Geia, Australian Financial Review (10 July 2015).
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1.
In relation to the second question the issue is that of what constitutes satisfaction of the condition precedent. In Meehan v Jones [1982] HCA 52 for example the “subject to suitable finance” clause was held not to act as an “insurance policy” to allow a party who had not made reasonable efforts to obtain finance on reasonable terms.
Masters v Cameron [1954] HCA 72 [7.90] This case was discussed at [6.720]. The High Court held that “subject to contract” clauses could fall into three categories: 1.
The parties have reached final agreement on the terms of their bargain, intend to be immediately bound, but want those terms to be set out in a more precise but not materially different form.
2.
The parties have reached finality and do not intend to alter their agreement, but want to defer performance of all or part of it until it has been incorporated into a formal document. And:
3.
The parties do not intend to make a concluded bargain unless and until they sign a formal contract.
Since Masters v Cameron the courts have recognised a fourth category (see Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235):
4.
The parties intend to be bound immediately but also expect to make a further contract in substitution of the current agreement which may contain additional terms.
[7.100] In Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235, it was stated (at [56]) that: … in a case where the parties have expressly or impliedly indicated that there will be a further agreement, it is a question of construction whether the execution of a further contract is a 308
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Chapter 7 Contracts in Business condition of the bargain or else is merely an expression of the desire of the parties as to how their transaction will be completed.
It was recognised that even where the wording used by the parties indicates an intention to be bound, the contract may still be void for uncertainty if the parties have left vital matters to be agreed upon later. In other words, the parties may intend their agreement to be immediately binding but it will fail if matters essential to the contract are not yet decided (such as the identification of the all of the parties to the contract, the property covered by the agreement or how the price will be determined). The Court of Appeal in Helmos considered that the law should adopt a practical, commercial approach in an attempt to uphold bargains made between business people with extensive knowledge and appreciation of how the contract would operate. In this case, the sale of two restaurants was not void merely because essential supply and storage contracts were not yet completed. It is therefore apparent that the fact that the parties intended to later embody their agreement in a formal contract does not deny the existence of an agreement, with the intention to be immediately bound. A clear statement of principle was made by McHugh JA in GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631:
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the decisive issue is always the intention of the parties which must be objectively ascertained from the terms of the document when read in the light of the surrounding circumstances … If the terms of a document indicate that the parties intended to be bound immediately, effect must be given to that intention irrespective of the subject matter, magnitude or complexity of the transaction.
The lesson for business is, as is so often the case, for the parties to specify, in clear and unambiguous terms, the status of their agreement.
Memorandum of understanding [7.110] A memorandum of understanding (MOU) is used as a preliminary step towards forming a binding agreement at a later stage. Its purpose is usually simply to demonstrate intent in exploring a potential contractual relationship at a later stage or to record a broad understanding. The parties must nevertheless appreciate that attaching the label “memorandum of understanding” to a document is not necessarily determinative of its legal effect. The court will look at the relevant conduct of the parties and the terms of the documentation and may determine that the documentation in fact enshrines an enforceable agreement. The parties should, in clear and unambiguous language, clarify the actual legal status of their agreement.
Heads of agreement [7.120] A Heads of agreement is a document which usually summarises the matters on which the parties have agreed and are intended to form the basis of later formal contract. In Helmos Enterprises Pty Ltd v Jaylor Pty Ltd [2005] NSWCA 235, the NSW Court of Appeal held that this arrangement was a fourth category to the Masters v Cameron categories. The court pointed out that, under the fourth category, if the future essential terms could not be added to the contract it would fail. The court also pointed out that the use of the words
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[T]he gentleman’s agreement, reported to have been defined by Mr Justice Viasey as “an agreement which is not an agreement, made between two persons, neither of whom is a gentleman, whereby each expects the other to be strictly bound without himself being bound at all”. R E Megarry, A second miscellany at law (1933).
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Business and the Law He’s a businessman … I’ll make him an offer he can’t refuse. Mario Puzo.
“subject to contract” may not be as strong a determinant where the subject matter of the contract is not land. In that case the parties had entered into negotiations to purchase a restaurant. The court found that the particular agreement fell within the “fourth category” under which the parties were bound by an agreement which they intended to be binding while expecting to make a contract in substitution for it containing additional terms. While the idea behind a “heads of agreement” may be not to create an enforceable document, the court will always look at the relevant conduct of the parties and the terms of the documentation to see if in fact these documents do amount to binding agreements. The court may well be influenced in this regard by the idea that normally parties entering commercial arrangements will do so on the basis that they should be legally bound by then. However, as Kirby J pointed out in Geebung Investments Pty Ltd v Varga Group Investments No 8 Pty Ltd (1995) 7 BPR 14 the Court will look at a number of factors in this determination. A document entitled “heads of agreement” may well constitute an enforceable agreement in its own right, if the parties are seen to act in accordance with its provisions. The parties should clearly clarify the legal status of the agreement in the document.
Lifestyle Appliances Ltd v Autel TV Services Ltd (2005) 8 NZBLC 99-588
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[7.130] The defendant wished to purchase the plaintiff’s retail appliance business. Both parties signed
a heads of agreement recording that the defendant would buy the plaintiff’s shares for NZ$1.8 million. The heads of agreement stated that the parties would negotiate and sign a formal agreement for the sale. The parties then discussed and renegotiated the original agreement so that there was a sale of assets rather than of shares. The purchase price remained the same. The parties then undertook a stocktake and went into possession of the business. The formal agreement was prepared several weeks later and was signed by the defendant as purchaser. It contained a calculation of the final amount payable based on the financial position of the business approximately at the date of possession. The defendant then learnt that one of the suppliers to the business would not continue to supply it after it was bought by the defendant. This had the effect of considerably reducing its value. The defendant then said that it was withdrawing the offer made to purchase the business contained in the later document. The defendant claimed that the heads of agreement document was not binding because it was subject to a formal agreement being entered into.
It was held that the heads of agreement was binding. The parties acted on the basis that they had an agreement because they had not only agreed on the price but the plaintiff had let the defendant take over the running of the business and that the only basis that this could have been done was that both parties had recognised that they had a legally binding agreement.
Jingalong Pty Ltd v Todd [2015] NSWCA 7 [7.140] The principal issue in the appeal was whether a Heads of Agreement entered into by the parties constituted a binding and enforceable contract. The Court of Appeal held that:
The context in which the Settlement Agreement came into existence suggests that the parties intended to enter into a binding and immediate agreement. But there are more direct textual indications that the Settlement Agreement,
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Chapter 7 Contracts in Business objectively assessed, was intended to bind the parties immediately. The clearest indication is cl 8, which states that “These Heads of Agreement have effect unless any later deed is entered into by the parties”. It is difficult to see what purpose cl 8 could have except to make it clear that the Settlement Agreement, notwithstanding its handwritten form and lack of detail, was intended to bind the three parties. To apply the classification stated by the High Court in Masters v Cameron, cl 8 demonstrates that the parties reached finality in arranging the terms of their bargain and intended to be immediately bound to the performance of those terms, even though they contemplated that a more formal deed might subsequently be drawn up.
Letters of comfort
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[7.150] The letter of comfort is typically encountered in situations involving groups of related companies. They are often used in lieu of the holding company giving a formal guarantee to a lender as this may have accounting implications for the holding company. Where a subsidiary company within a group is seeking finance, the lender may require some assurance from the holding company that the subsidiary will receive its support, if necessary, in meeting its obligations under the loan arrangement. It has generally been accepted that such letters of comfort do not amount to guarantees and do not give rise to contractual relationships. This view was endorsed in Kleinwort Benson Ltd v Malaysian Mining Corp [1988] 1 All ER 785, in which a lender sought to enforce a letter of comfort against the holding company that had provided it. The letter contained a statement that it was the policy of the parent company “to ensure that the business of Metals [its subsidiary] is at all times in a position to meet its liabilities to you under the above arrangements”. The English Court of Appeal concluded that in the circumstances in which the letter was supplied and in the context of its other terms, the statement as to its policy was not binding on the parent; it was too vague to constitute a contract. Such letters have nevertheless been held in New South Wales to show an intention to enter legal relations unless they clearly indicate that they are not intended to do so. In Banque Brussels Lambert SA v Australian National Industries Limited (1989) 21 NSWLR 502, a letter of comfort which stated that “it is our practice to ensure that our affiliate will at all times be in a position to meet its financial obligations as they fall due” was enforced (at 523): The whole thrust of the law today is to attempt to give proper effect to commercial transactions … If the statements are appropriately promissory in character, courts should enforce them when they are uttered in the course of business and there is no clear indication that they are not intended to be legally enforceable.
In Gate Gourmet Australia Pty Ltd (in liquidation) v Gate Gourmet Holding AG [2004] NSWSC 149 the court used the objective test to see if the document showed an intention to enter legal relations. In this case the court looked at both the commercial purpose of the contract and the terms of the document itself which were clearly promissory.
Acquaintance. A person whom we know well enough to borrow from, but not well enough to lend to. Ambrose Bierce, The Devil’s Dictionary (1911).
These decisions stand as a warning, at least in the Australian context, that an intention to create legal relations should be expressly denied in such commercial situations if the provider of the letter of comfort wishes to ensure that it does not amount to a guarantee, or at least a contractual obligation to ensure that the subsidiary should perform its obligations. Misleading conduct and estoppel actions may also be available in appropriate cases.
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Australian Bridal Centre Pty Ltd v Dawes Corp Pty Ltd [1991] ATPR 41-072 [7.160] In the course of the purchase of the issued shares in a company an undertaking was given to the vendor directors that their pre-existing guarantees of the company’s debts would be replaced by new guarantees from the purchasers and that, in the meantime, they would protect the outgoing directors if a claim arose. The undertakings were oral, the purchaser having said “don’t worry, we will cover you”, and, in relation to the replacement of the guarantees by new ones, “it will be addressed in due course”. Cole J in the Supreme Court of New South Wales held that the failure to honour the undertakings amounted to misleading or deceptive conduct, and that the outgoing directors were entitled to be indemnified on the basis that “they were, in truth, misled or deceived into a course of conduct they otherwise would not have adopted”.
IN CONTEXT
Smart contracts in Australia: Just how clever are they? [7.165] Lawyers in practice today live in a world of ongoing disruption. As automation, artificial intelligence and blockchain technology assists in reducing the costs of business transactions and increases the reliability of record keeping, the adoption of smart contracts is an opportunity for lawyers to help their clients improve efficiency and to reduce the scope for disputes, and a challenge for lawyers who do not stay abreast of this area. Snapshot Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
• The adoption of smart contracts continues to grow, comprising a variety of contractual relationships, which are partly automated by computer software, and which run on blockchain technology. • While smart contracts remove the human element usually involved in the performance of a contract, they are not “smart” enough to completely avoid the need for lawyers, and have questionable validity under Australian law. • The continued rise of automated legal processes, blockchain technology and smart contracts creates significant risks for lawyers who don’t stay up to date and technologically literate. Lawyers in practice today live in a world of ongoing disruption. As automation, artificial intelligence and blockchain technology assists in reducing the costs of business transactions and increases the reliability of record keeping, the adoption of smart contracts is an opportunity for lawyers to help their clients improve efficiency and to reduce the scope for disputes, and a challenge for lawyers who do not stay abreast of this area. Blockchain-based smart contracts have been increasingly deployed across the finance and property sectors in the last two years and even more widespread adoption is expected in the coming years as greater functionality and common standards emerge. Major banks, stock exchanges, and even postal services are investing in and investigating how blockchain technology can improve their cost base and business offerings (see, for example, J Grey, “Australia Post’s digital future rises from disruption as it embraces blockchain”, Australian Financial Review (online), 10 November 2016).
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Chapter 7 Contracts in Business
Smart contracts pose important questions for contract lawyers and litigators as they require a multitude of issues to be addressed when contracts can self-execute based on complex computer code and without regard to the desires of the parties to the contract, or indeed the courts, once they are entered into. The blockchain Smart contracts currently rely on blockchain technology. A blockchain, at its most basic, is a mere database, but one running on a peer-to-peer network with no central authority controlling the contents of the database. More specifically a blockchain comprises a time- stamped block of text recording groups of transactions which are entered into by users using secure cryptographic keys. With each “block” being linked to the preceding and following blocks, the complete ledger is a “chain” of blocks where any unauthorised change to a prior block is rejected by the network. With the processing of the chain being managed on a decentralised peer-to-peer network of computers that opt-in to the network, it is almost impossible for a single bad actor to manipulate or alter the ledger of transactions already recorded in the chain.
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The most well-known blockchain is that of Bitcoin, which continues to gain both publicity and value, having increased four-fold in value this year alone. An important limitation of the Bitcoin blockchain, however, is that it is nothing more and nothing less than a complete record of all transactions involving Bitcoin transfers (with some associated data). The Bitcoin blockchain cannot by itself run code or execute the soft-ware known as “smart contracts”. Smart contracts Computer scientist Nick Szabo first posited the idea of smart contracts in 1994, as “a computerized transaction protocol that executes the terms of a contract” (Don Tapscott and Alex Tapscott, The Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World (Brilliance Audio, 2016)). It took almost 20 years for Mr Szabo’s idea to become a reality, when the group that became the Ethereum Foundation launched what has become the Ethereum blockchain, upon which almost all smart contracts run. The Ethereum blockchain was designed to enable smart contracts with all the nodes (computers) forming the network, processing not only transactions of the currency token for the network (called Ether) in the same way as Bitcoin, but also processing the code of smart contracts as they execute. In short, the Ethereum blockchain acts as a global decentralised computer. The nomenclature “smart contracts” is used for various contractual relationships, such as: 1.
an unwritten agreement, where inputs and outputs are extremely limited and trust is not required between the parties for example a vending machine;
2.
a written agreement, eg terms of use for an online service such as Netflix where automated software responds to user inputs;
3.
a written agreement incorporating the parties’ reliance on a software driven outcome, where control over the execution of the software process is in the hands of a trusted third party, such as an escrow service;
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4.
a written agreement, usually in a human language, incorporating the parties’ reliance on a software driven outcome where the software resides on a blockchain and executes without human intervention; and
5.
an agreement, written only in machine readable computer code, executed entirely without human intervention once entered into, known as “the code is the contract” or even presumptuously as “smart contract law”.
The smart contracts currently gaining popularity fall into the fourth category and contain two key elements. First, they remove human involvement in part or all of the performance of the agreement, using automated code designed to execute without reference to the contracting parties’ ex post intentions or desires. Second, they utilise decentralised blockchain technology to remove or reduce the need for a trusted third party or each party maintaining their own separate ledger of transactions, as well as to enable the automated execution of the code without potential interference from any party. These smart contracts are now being used in Australia, with a recent well publicised example being an Australian “AgTech” company, AgriDigital, running a pilot of the world’s first ever wheat sale using a pilot blockchain ledger and smart contract code (James Eyers, “Wheat farmers trial blockchain to sell grain and find it is fast and reliable”, Australian Financial Review (online), 21 December 2016). The pilot involved a high degree of interlocking technology including the parties pre-agreeing to the price for the grain, automatic weighing of the grain delivery, verification of the funds via the blockchain and an automatic release of the funds to the farmer. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Recently, several major banks and Scentre Group announced they will be managing all Westfield lease bank guarantees using a blockchain solution, which will be one of the largest implementations of a blockchain in an Australian business and which in time is likely to extend to incorporate smart contract elements (Gina Baldassarre, “ANZ and Westpac link up with IBM and Scentre Group for blockchain trial”, Startup Daily, 10 July 2017). As such applications become widespread, there will be a fundamental shift in the kind of instructions and documents available to lawyers engaged to advise on the deployment of, or disputes arising in relation to, transactions involving smart contracts. Current legal issues for smart contracts in Australia A legally enforceable smart contract must still meet all the traditional elements of a binding contract. Any duress, undue influence or unconscionable dealings could render a smart contract void at law, despite being potentially unstoppable in the digital world. Of particular concern are the most pure “the code is the contract” smart contracts, lacking any notification of their terms as the terms exist only in machine readable code. The identity of the other party to the contract, or whether that party has capacity to enter into the contract, is usually unknown. Australian courts are yet to address a smart contract dispute. Potential liability of smart contract authors When a dispute arises under a smart contract, it may be difficult to determine where liability may fall. First, the identity of the authors of a smart contract, particularly in an open source context where multiple parties have modified the code, may not be known or cannot be ascertained.
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Chapter 7 Contracts in Business
Second, the terms of use surrounding the automated parts of a smart contract are likely to be the subject of extensive written terms seeking to limit liability for the party proposing to use the smart contract in the first instance or to limit the choice of law clause to a jurisdiction most favourable to smart contract interpretation. Third when the smart contract involves a new form of organisation called a “Decentralised Autonomous Organisation” (DAO), there are further identity issues as the very nature of these new organisations is that those involved do not need to identify themselves. The relationship between these individuals within the DAO is also uncertain. While there has been no judicial consideration of just what a DAO is, it may be considered a partnership or joint venture. Inevitably, the authors of a smart contract, usually developers and/or lawyers, will be potential targets for claims if a smart contract executes in an unexpected way or contains a bug which is exploited (see for example, Jessica Sier, “The DAO hack: $US50 million lost”, Sydney Morning Herald(online), 20 June 2016). Problems in enforcing smart contracts
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The decentralised nature of blockchain technology and cross-border operations means that any court order for injunctive relief will necessarily have to deal with re-adjusting the post execution position of the parties following the contract, which will require identifying the parties to whom any adjustments must be made, which itself can be highly problematic as noted above. Further issues arise if it becomes known that a smart contract may or will behave in an unexpected way, as a court may be asked to make orders to adjust entitlements based on code which has not yet executed, but which cannot be prevented from executing. Until decided cases or legislative guidance on the validity or enforcement of smart contracts is available, lawyers and their clients should be extremely careful when drafting and signing off on smart contracts or contracts relying on automated software inputs. Understanding at what stage liability attaches for the outcome of the operation of the code will become critical for those involved in preparing smart contracts in order to manage their risks. What will the future hold? Smart contract code isn’t “smart” enough to eliminate allegations of misrepresentation, misleading and deceptive conduct, negligent coding or security bugs or government regulation which may arise. There will always be a need for lawyers to provide advice and dispute resolution services for smart contract disputes. However, one of the biggest challenges facing smart contract drafting and dispute resolution is likely to be the technological literacy of the legal profession. Lawyers with real world experience in coding and software development are rare, and those who can understand blockchain technology and deployments are rarer still. Until the day when lawyers are replaced by artificial intelligence working with smart contract code, lawyers should do their best to learn about how blockchain technology and smart contracts operate, as well as how they are being deployed and developed. Most importantly, lawyers will need to recognise their own technical limitations and seek specialist help when required. Michael Bacina
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7.2 NEGOTIATING THE AGREEMENT [7.170] In the traditional contract model there is a clear line between negotiations which lead to a contract being entered into and the contract itself. The negotiations traditionally have not attracted any legal obligation in respect of them (see [6.1520] ff, [6.1930] ff) and it is the contract itself which enshrines the contractual agreement and the associated contractual obligation. The law in this area has nevertheless evolved significantly under the influence of common law and statutory developments. The common law estoppel doctrine may prevent one party from going back on her or his word. The statutory misleading or deceptive conduct action under s 18 of the Australian Consumer Law (ACL) is a powerful, effective and versatile action providing redress in respect of misleading representation in the case of pre-contractual negotiations (s 18 is discussed in detail in Chapter 19).
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Estoppel [7.180] Estoppel is a flexible and effective doctrine, the essence of which is that “if certain requirements are met a person is precluded from taking a certain step or not permitted to deny that a particular fact is true when it is actually false” (J W Carter, Cases and Materials on Contract Law in Australia (6th ed, LexisNexis Butterworths, 2012) p 162). Estoppel can arise in the context of a pre-existing contract or where there is no proven existing relationship.
Reason is the life of the law, nay the common law itself is nothing else but reason; which is to be understood of an artificial perfection of reason, gotten by long study, observation, and experience, and not of every man’s natural reason. Sir Edward Coke, A Commentary upon Littleton (1628).
Common law estoppel is a legal doctrine that may apply when parties to an agreement have departed from the strict terms of that agreement but have not entered into a new contract to give effect to the new arrangement. McCabe Curwood (“The Non-contractual Ties that Bind” (6 September 2018) Lexology) explain that, “Essentially, common law estoppel prevents a party in this situation from enforcing its legal rights under the original agreement against the other party when it would be unjust to do so because it had induced the other party to assume that their underlying arrangement had changed. Common law estoppel only applies to assumptions about existing states of affairs and not to representations as to what will happen in the future”. It takes the form of estoppel by representation when a party makes a representation of fact about an existing state of affairs to the other party and induces the representee to accept that state of affairs as true such that it relies on that representation to its detriment. And estoppel by convention which arises when the parties have engaged in conduct based on a mutual assumption as to the terms of their legal relationship. McCabe Curwood comments that: Common law estoppel is a means of tempering the unfair results that might eventuate if parties have departed from their actual legal rights and then one of them attempts to insist that those rights be strictly adhered to. Rather than being a cause of action in and of itself, common law estoppel operates as a rule of evidence to prevent a party from denying that its legal relationship with another party had changed. In this way it allows the new arrangement between the parties to be enforced even though there is no binding contract to that effect. Accordingly, it is important that parties are mindful that they may be held to account if they knowingly depart from the terms of their contract and then attempt to insist on their actual legal rights.
Promissory estoppel or equitable estoppel in effect prevents a party from going back on her or his word. In the context of a pre-existing contract or even where there is no existing 316
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Chapter 7 Contracts in Business Be circumspect Charlie. Frank William Terry.
relationship, a promise is not enforceable unless it is provided for consideration –that is something valuable in the eyes of the law is given in return for it. However, in the High Trees case it was held that if a promise has been made with the expectation that it will be relied upon and it is indeed relied upon then the promisor cannot go back on her or his promise if it would be inequitable to allow her or him to do so. The doctrine has been applied in Australia as both a “shield” allowing a party to defend an action or as a “sword” allowing a party to bring an action. Business people must be aware that it is possible that they will be held to their promises whether or not such promises can be contractually enforced as promissory estoppel will apply where there is: the creation or encouragement by the defendant in the plaintiff of an assumption that a contract will come into existence or a promise be performed or an interest granted to the plaintiff by the defendant and reliance on that by the plaintiff, in circumstances where departure from the assumption by the defendant would be unconscionable. Ausotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 at 610).
The leading cases on promissory estoppel are noted at [6.1170] ff. The recent NSW decision noted below nevertheless provides a constructive example of the influence of promissory estoppel in a more modest fact situation.
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Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 [7.190] Workplace Safety Australia Ltd (WSA) provided online subscription packages designed to assist businesses to meet their obligations under occupational health and safety legislation. Under a Distribution Agreement, Simple OHS Solutions Pty Ltd (Simple), agreed to act as the exclusive distributor of WSA’s subscription packages. The primary issue was whether the distributor agreement was a franchise agreement subject to the Franchising Code of Conduct (see Chapter 14). A subsidiary issue was whether WSA had the right to terminate the agreement. Under the agreement, Simple was obliged to pay WSA a Customer List Fee in quarterly instalments and to subscribe 15 new customers per month. The agreement specified that if this minimum customer requirement was not met for any six-month period, WSA had the right to immediately terminate. The Director of WSA had made two representations to Simple, one prior to the execution of the agreement and one shortly after, that WSA did not expect Simple to make its sales targets initially but WSA nevertheless purported to terminate the agreement within six months on the grounds of Simple’s failure to meet the minimum customer requirement and non-payment of a quarterly instalment. The Court of Appeal held that WSA was estopped from terminating the contract. The Court’s reasoning is summarised in the head note: While a representation must be clear and unequivocal before it gives rise to a promissory estoppel, a representation may support a promissory estoppel if it is reasonable for the representee to interpret it in the manner for which the representee contends. In determining whether conduct is reasonably capable of giving rise to a representation, regard must be had to the context in which the conduct occurred and what the conduct would have conveyed to a reasonable person in the position of the representee. Although the representations by WSA’s Director did not specify the timeframe for the representations, a reasonable person in Simple’s position was entitled to proceed on the expectation that it would not be called on to meet its sales targets, and these targets would not be enforced, in the early period of the agreement. In circumstances where no notice was given that the targets would be enforced until four and a half months after the agreement was entered into, when only 15 packages had been sold, it was unconscionable for WSA to depart from the expectation it had induced by terminating the agreement for failure to sell 90 packages in the first six months
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Misleading or deceptive conduct [7.200] The efficacy of s 18 of the ACL in respect of pre-contractual misrepresentation is discussed in detail in Chapter 19. There are nevertheless some limitations on its application:
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Establishing reliance
It has never been the law that in order for conduct to contravene [s 18], it must be the sole cause of the consumer being misled or deceived. 10th Cantanae Pty Ltd v Shoshana Pty Ltd [1987] FCA 421 at [71] per Gummow J.
[7.210] The main limitation on the efficacy of the statutory action in the context of contractual negotiations is the requirement that the loss or damage for which a remedy is sought is “by conduct of another person in contravention of [s 18]” (s 236). The case law clearly establishes that there must be a causal connection between the conduct and the loss; the conduct (the representation in this context) must induce the contract; there must be a proven reliance on it. The reliance element of course applies in every case where damages are sought for misleading conduct but this element may be harder to establish in B2B as opposed to B2C contexts. This requirement was clearly explained by Fisher J in Pappas v Soulac Pty Ltd [1983] FCA 3: The applicants will only be entitled to an award of damages … if they establish that they were induced by the representation … to enter into the … contract … The question in each instance is whether they acted upon the statements … In the sense of placing reliance upon this conduct in entering into the contract. There must be a causal connection between the conduct and the loss for which they seek to be compensated.
The misleading conduct need not be the sole factor inducing the contract, but it must be a significant factor. In the circumstances of commercial negotiations such reliance cannot be assumed and there are many examples where the court has not accepted on the evidence that the misleading or deceptive statements induced the applicant to enter the contract. Some of these cases are referred to in A Terry, “Misleading or Deceptive Conduct in Commercial Negotiations” (1988) 16 Australian Business Law Review 189 at 201-202 (footnotes omitted): When experienced parties negotiate over a long period, when the applicant has made his own enquiries, when the evidence discloses that because of “extreme optimism” or for “commercial reasons” the applicant would not have acted differently even if the true facts had been fully explained, when legal advice has been received as to the rights and obligations assumed by the parties under the contract, when the misrepresentation is corrected prior to execution of the contract or when no particular significance has been placed on the conduct complained of, the court is unlikely to be satisfied that the applicant was materially influenced by the misrepresentation. The applicant is not required to prove that the misleading or deceptive conduct was the sole influence inducing him to enter the contract, but it must be a material factor affecting the decision. Rumpe v Camrol Pty Ltd provides a straightforward example … Morling J held that despite a contravention of [s 18], damages could not be awarded as the misrepresentation was not the cause of the applicant’s acting to his detriment: It was incautious, not to say reckless, of the respondents to state in the newspaper advertisement that the premises were licensed until 3 am. But I am satisfied on the whole of the evidence that, although that statement clearly amounted to misleading conduct within the meaning of [s 18] … it played no part in the decision of the applicants to enter into the agreement. By the time they signed the agreement they had been told, in effect, that they should not rely upon the statement but should rely upon their own enquiries. Those enquiries were made by them or on their behalf and the result of the enquiries was known before the agreement was signed.
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Chapter 7 Contracts in Business
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Disclaimers [7.220] It is suggested in Chapter 19 that exemption clauses, disclaimers and other exclusionary devices will rarely be effective to prevent conduct being categorised as misleading or deceptive. However, a specific disclaimer which is carefully drafted to suit a particular transaction may be effective to prevent conduct being categorised as misleading or to preclude reliance on the conduct. For example, a prospective franchisee who separately signs an acknowledgement that reliance is not placed on any matters other than expressly contained in the contractual documentation and who clearly understands the effect of the acknowledgement may find it difficult to satisfy a court that reliance was nevertheless placed on a representation made during negotiations. A cautious party will expressly ask the other party whether reliance is placed on matters not included in the contractual documentation, and will record the clear understanding of the parties in relation to each item. If for example a franchisee makes it clear that he or she is entering the agreement in reliance on a particular statement as to turnover but the franchisor simply intended this as an optimistic theoretical possibility, the parties should resolve this issue prior to contracting either by the prospective franchisor accepting clear responsibility for it or the prospective franchisee, after careful consideration, disclaiming any reliance on this statement. The possibility that this process may result in the contract not being signed is, eventually, much less costly and traumatic than the parties fighting a long, expensive and debilitating misleading or deceptive conduct action in the future. Franchisors, and other parties contracting on their own self-serving standard forms, can also protect their own interests by ensuring that the other party has obtained independent legal, commercial and financial advice which lessens the opportunity to argue that reliance was placed primarily on the franchisor’s representations.
The applicant’s negligence [7.230] A further factor is relevant to the question of reliance. It is well established that an unreasonable failure to take advantage of an opportunity to discover the true state of affairs will not of itself prevent reliance upon misleading or deceptive conduct (Neilsen v Hempston Holdings Pty Ltd [1986] FCA 100). However, as Hill J observed in Argy v Blunts and Lane Cove Real Estate [1990] FCA 51 at [91]: A case may perhaps be imagined where an applicant is so negligent in protecting his own interests that there will be a finding of fact that the representation complained of was not in the circumstances a real inducement to his entering into a contract. In such a case the element of causation between misrepresentation and damage will have been severed by the intervention of the negligence of the applicant.
And in Elders Trustee and Executor Co Ltd v E G Reeves Pty Ltd [1987] FCA 332 the court held that s 18 is not designed for the benefit of persons who fail, in the circumstances of the case, to take reasonable care of their own interests. Section 137B of the Competition and Consumer Act 2010 (Cth) (CCA) nevertheless affects the applicant’s entitlement to damages in such cases. The court may reduce the damages recoverable by a claimant for loss or damage caused by a contravention of s 18 to the extent to which the court thinks it just and equitable having regard to the claimant’s share in the responsibility for the loss or damage.
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When parties are dealing at arm’s length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would take a different negotiating stance. This does not of itself impose any obligation on the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice. Lam v Ausintel Investments Australia Pty Ltd [1990] ATPR 40-990 at 50,880 per Gleeson CJ.
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“Robustness” expected in arm’s length commercial negotiations [7.240] In General Newspapers Pty Ltd v Telstra Corp [1993] FCA 473 at [44]-[45] Davies and Einfeld JJ said that s 18: does not require arm’s length negotiations to be completely open or require full disclosure at all times. The particular facts of the case must be considered in the light of the ordinary incidents and character of commercial behaviour. Thus, in the ordinary course of commercial dealings, a certain degree of “puffing” or exaggeration is to be expected. Indeed, puffery is part of the ordinary stuff of commerce. So also is a certain degree of “put-off”, evasion or obfuscation by commercial people seeking to resist disclosing information which is confidential. Discussions in commerce are so understood.
Although the intrusion of s 18 into the traditional bargaining process is clearly established by authority, there are a number of judicial suggestions that in the case of arm’s length commercial negotiations a more “robust” approach to s 18 is appropriate. In Halton Pty Ltd v Stewart Bros Drilling Contractors Pty Ltd [1992] ATPR 41-158, Palmer AJ commented at 49,153: In commercial dealings between parties negotiating at arm’s length in their own interests one must guard against being too ready … to impose … obligations which would be quite contrary to ordinary commercial expectations.
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However, as Burchett J expressly acknowledged in Poseidon Ltd v Adelaide Petroleum NL [1991] FCA 663, “the bargaining process is not to be seen as a licence to mislead or deceive”:
He occasionally stumbled over the truth, but hastily picked himself up and hurried on as if nothing had happened. Winston Churchill.
I do not think it has ever been suggested that [s 18] strikes at the traditional secretiveness and obliquity of the bargaining process. Traditional bargaining may be hard, without being in the statutory sense misleading or deceptive. No one expects all the cards to be on the table. But the bargaining process is not therefore to be seen as a licence to deceive.
This passage was referred to by Young J in Gaffikin Marine Pty Ltd v Princes Street Marina Pty Ltd [1995] ATPR (Digest) 46-149 at 53,165 who, in relation to the comment that “traditional bargaining may be hard without being in the statutory sense misleading”, expressly noted that “when, however, statements go beyond that barrier, then there is danger of orders being made”.
Samaha v Corbett Court Pty Ltd [2006] NSWSC 1441 [7.250] If, as Ronald Reagan suggested, the nine most terrifying words in the English language are “I’m from the government and I’m here to help” then the nine most enticing words in commercial negotiations could be “I’m going to make you a very rich man”. Ronald Reagan’s proposition has never been legally tested but NSW Supreme Court has recently held that the latter proposition did not attract legal liability. In Samaha the court held that the statement “I’m going to make you a very rich man” made at the start of negotiations for a retail lease was simply “casual talk or idle chit-chat”. It amounted to “mere puffery” which no one could say was seriously relied on in making an important commercial decision. An associated statement –that the shopping centre in which the retail site under consideration was leased was “going to be the hub of the area” –was similarly treated. It was mere puffery which did not attract legal consequences. 320
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Chapter 7 Contracts in Business In strict legal terms the court’s conclusion on these enticing statements is not binding. The plaintiff abandoned reliance on them in the course of the trial so the court’s decision is obiter. The court’s opinion nevertheless provides some comfort to those negotiating retail leases or franchise agreements or other commercial relationships. Not every throwaway line attracts legal consequences –particularly if they are introductory comments of a “puffing” nature made at the start of negotiations for the purpose of attracting the interest of the other party. In the words of the leading case, Pappas v Soulac Pty Ltd [1983] FCA 3, such statements become: … irrelevant or of little, if any, significance when detailed information is subsequently given, to a potential purchaser with commercial experience. To the extent that they are essentially puffery, it is proper to be reluctant to elevate them to the status of potentially misleading conduct.
A certain robustness is expected in commercial regulations, particularly when both parties are commercially experienced. Caution must nevertheless be exercised. While puffery does not constitute misleading conduct, the line between “puffing” and “misleading” statements is not always clear. If such statements can reasonably be understood as conveying a representation of fact, if not followed by detailed information, and if made to a party without commercial experience they may attract liability.
[7.260] The above discussion has focused on misleading conduct under s 18 of the ACL but the proposition that a certain level of “robustness” is to be expected in commercial negotiations is of wider application and will be a relevant consideration in issues arising in the context of unconscionability.
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Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 [7.270] Protracted negotiations for the building and leasing of a supermarket were characterised by each
party “trying to put the other one in a corner yet reserving for himself the liberty to have an out”. When the prospective tenant withdrew after the landlord had already committed itself to expensive redesign of the project at the behest of the prospective tenant, the landlord sued. The court held that there was no contract and no estoppel: each party was a “big player” well advanced by their lawyers. Estoppel is imbued with unconscionability, which is more difficult to establish in this context. Kirby P, as he then was, stated that (at 585 and 586): we are not dealing here with ordinary individuals invoking the protection of equity from the unconscionable operation of a rigid rule of the common law. Nor are we dealing with parties which were unequal in bargaining power. Nor were the parties lacking in advice either of a legal character or of technical expertise … At least in circumstances such as the present, courts should be careful to conserve relief so that they do not, in commercial matters, substitute lawyerly conscience for the hard-headed decisions of business people.
“Without prejudice” negotiations [7.280] It is sometimes said, incorrectly, that if the words “without prejudice” are used in negotiations, they will prevent a contract arising. The words “without prejudice” do not prevent a contract from coming into effect if the offer in connection with which the phrase was used was accepted. The main use of the phrase is by lawyers negotiating a settlement of a legal claim. The idea behind it is that an offer made using these words should not be treated as an admission of the validity of the other side’s claim.
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Cleverness and commercial morality do not always march together. Justice Lockhart, Business Review Weekly (10 April 1992).
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The question of whether the words “without prejudice” in documents prepared in the context of negotiations to settle a legal claim out of court have the effect of rebutting the normal presumption was discussed in Tallerman & Co Pty Ltd v Nathan’s Merchandise (Vic) Pty Ltd [1957] HCA 10 Dixon CJ and Fullagar J expressed the legal position in these terms (at [17]): It is, of course, clear that, if, during a dispute, an offer of a compromise is made “without prejudice” and is accepted simpliciter, the fact that the offer was made without prejudice ceases to have any significance. The commonsense view, and the view of the law, is that the offeror is saying: “I make you this offer in the hope of avoiding legal proceedings between us. If you accept it, we shall both be bound. But I make no admissions and, if you do not accept it, our legal position remains unaffected.”
Needlework Warehouse Pty Ltd v Chansonette Pty Ltd [2006] FCA 1185 [7.290] A lawyer representing one party wrote a letter to the lawyer for the other party headed “without prej-
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udice save as to costs” outlining a settlement proposal. After some further discussions between the lawyers the same lawyer wrote a confirmatory letter to the other lawyer setting out the terms of settlement. Both letters contained a condition that each party would enter into a deed of release in relation to the legal action which was before the Federal Court. The lawyer for the other party faxed back an acceptance of the offer. The first lawyer then replied that the agreement was not binding but was an agreement in principle only because the terms of the Deed of Release still had to be agreed to. It was held that the words “without prejudice as to costs” did not prevent the correspondence being used as evidence of an agreement. There was in the circumstances a binding agreement between the parties. The terms of what the Deed of Release should contain could be implied in the contract by virtue of the circumstances of the case.
Letters of intent [7.300] A letter of intent, as the name suggests, is a document that states that the author intends to conclude a formal contract at a later stage. No binding contract exists before the formal documentation eventuates, other than in exceptional circumstances. They were described in Turriff Construction Ltd and Turriff Ltd v Regalia Knitting Mills Ltd (1971) 9 BLR 24 as: no more than the expression in writing of a party’s present intention to enter into a contract at a future date … and it has also been said that “save in exceptional circumstances it can have no binding effect” and that it will create no liability in regard to that future contract.
A letter of intent provides a framework for parties to explore interests, capabilities, possible interactions and availability of resources in relation to a potential connection between the parties. Where work is commenced in advance of a contract being signed, or indeed other expenses incurred such as preparatory work in preparing tenders or estimates, or preliminary design work and work done to obtain necessary approvals or consents, it is not uncommon for the party incurring the expense to request or be given a “letter of intent” which, whether or not so described, may affirm a present intention on the part 322
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Chapter 7 Contracts in Business
of the owner to enter into a future contract. In Turriff Construction a request for “an early Letter of Intent to cover … the intensive design work now commencing and for the essential early orders of subcontractors” was held to have been a contractual offer accepted by a letter from the owner simply confirming the intention to award the contract and its principal terms, but making no reference to any preliminary expenditure by the contractor. In Coogee Esplanade Surf Motel Pty Ltd v Commonwealth of Australia (1976) 50 ALR 363 Moffitt P held that a letter of intent in that case was “what it promised to be”, namely a letter of intention:
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Whatever precisely was the intent to be evidenced, it was the intent of one party … I think it is clear that the intent to be stated was that of [the party] in exercise of its powers to acquire the property by agreement. This must indicate an intention to enter into an agreement, which is an essence of this method of acquisition. The need to provide a letter of intent, ie unilateral intent, is inconsistent with there being then a contract to buy … The expression of intention to do an act by one party may, depending on the circumstances, induce a firm conclusion that the act will be done, but it would do violence to such language … to interpret it as adding to the unilateral stated intention a contractual promise by him and the other party.
A memorandum is written not to inform the reader but to protect the writer. Dean Acheson.
[7.310] On the other hand in British Steel Corporation v Cleveland Bridge & Engineering Co Ltd [1984] 1 All ER 504, a letter of intent was not considered to have created a binding contract. Engineering contractors by a letter of intent requested a supplier to commence manufacture “pending the preparation and issuing to you of the official form of sub- contract”. The supplier quoted a price and commenced work. There were many revisions of design, and negotiations as to modifications of price and as to the contract conditions to be used. Eventually, all products were delivered and the supplier sued for the price. The contractor counter-claimed for a much larger amount alleging damages for the delay in delivery. It was held that a contract could be formed from a letter of intent, and there might be express or implied terms as to quality or the time for completion under such a contract. Here, despite the work being completed, the negotiations had never reached agreement on the matters of price or time for completion. The counter-claim had to be dismissed, as there was no obligation to complete by any particular time. The supplier was entitled to be paid, not on the basis of contract, but on the basis of restitution, as otherwise the owner would have been unjustly enriched. Cautious business people will not rely on the inherent uncertainty as to the effect of a letter of intent and will clarify the nature and status of their agreement. The caution must also be given that leasing another party to believe that you will act in a particular way may give rise to an estoppel or to misleading or deceptive conduct.
Agreements to negotiate in good faith [7.320] While it is clear law than an “agreement to agree” is unenforceable because of uncertainty –the same consequence does not necessarily apply to an “agreement to negotiate in good faith”. Such agreements have traditionally been regarded as unenforceable on the same basis as an agreement to agree. In Walford v Miles [1992] 2 WLR 174, Lord Ackner at 181 commented that: A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of the negotiating party. It is here that the uncertainty lies. In my judgment,
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Business and the Law Whatever may have been the case 146 years ago, we are not now free in the twentieth century to administer that vague jurisprudence which is sometimes attractively styled “justice as between man and man”. Boylis v Bishop of London [1913] 1 Ch 127 at 140 per Hamilton LJ.
while negotiations are in existence either party is entitled to withdraw from those negotiations, at any time and for any reason. There can be no obligation to continue to negotiate until there is a “proper reason” to withdraw.
However, a majority of the NSW Court of Appeal in Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 stated that an agreement to negotiate in good faith may be enforceable in some circumstances but on the facts of that particular case the promise to negotiate was, in the context of the overall arrangements, held to be too uncertain to be enforceable. R Buckley and J Forder, “The Enforceability of Independent Agreements to Negotiate in Australia” (2005) 19(2) Commercial Law Quarterly 3, argue that such agreements should in fact be enforced because: 1.
Such agreements are being entered into more frequently by business people. A recognition of such agreements would ensure that the time and effort spent in proceeding with the negotiations will not be wasted.
2.
Business people enter into agreements on the basis that they are binding. The law needs to adapt to a situation where the parties are likely to enter complex negotiations as a normal incidence of doing business.
3.
Such a recognition would be consistent with other Australian legal developments which go to enforce commercial morality, such as promissory estoppel and [s 18 of the ACL].
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Laing O’Rourke v Transport Infrastructure [2007] NSWSC 732 [7.330] The parties were involved in the construction of an interchange at Chatswood NSW as part of the
new Chatswood to Epping railway line. The agreement contained a clause providing that in the event of any dispute arising between them, that either party could notify the other for it to be referred to resolution at a meeting of the CEO of each party. The meeting was to beheld within a stipulated time and those parties had to “meet and undertake genuine good faith negotiations with a view to resolving the dispute”. It was held that the words “good faith negotiations” offered no yardstick by which they could be judged and accordingly the clause was void for uncertainty.
More recent authority nevertheless suggests that such a clause is not necessarily uncertain:
United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177 [7.340] A dispute resolution clause in an engineering contract provided that any dispute had to be referred
to a senior representative of the principal and the contractor, who were required to meet and undertake genuine and good faith negotiations with a view to resolving the dispute (with the dispute being referred to an ADR process if not resolved). The New South Wales Court of Appeal held (at [71]) that: As a matter of language, the phrase “genuine and good faith” in this context needs little explication: it connotes an honest and genuine approach to the task. This task, rooted as it is in the existing bargain, carries with it an honest and genuine commitment to the bargain (fidelity to the bargain) and to the process of negotiation for the designated purpose.
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Chapter 7 Contracts in Business The notion of fidelity to the bargain can be seen as founded, at least in part, on the requirement of a party to do all things necessary to enable the other party to have the benefit of the contract … The encompassing of fidelity to the bargain within the concept of good faith, at least in the context at hand –the genuine and good faith negotiation of an existing dispute by reference to an existing contract –does no violence to the language used here by the parties … The parties have mutually agreed to bring an approach of genuineness and good faith to that process of seeking resolution of any such disagreement. That agreement carried with it, in ordinary language, a requirement to bring an honestly held and genuine belief about their mutual rights and obligations and about the controversy to the negotiations, and to negotiate by reference to such beliefs. These are not empty obligations; nor do they represent empty rhetoric. An honest and genuine approach to settling a contractual dispute, giving fidelity to the existing bargain, does constrain a party. The constraint arises from the bargain the parties have willingly entered into. It requires the honest and genuine assessment of rights and obligations and it requires that a party negotiate by reference to such … A party would not be entitled to pretend to negotiate, having decided not to settle what is recognised to be a good claim, in order to drive the other party into an expensive arbitration that it believes the other party cannot afford. If a party recognises, without qualification, that a claim or some material part of it is due, fidelity to the bargain may well require its payment. That, however, is only to say that a party should perform what it knows, without qualification, to be its obligations under a contract. Nothing … prevents a party, not under such a clear appreciation of its position, from vindicating its position by self- interested discussion as long as it is proceeding by reference to an honest and genuine assessment of its rights and obligations.
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The agreement was not to agree but simply to negotiate in good faith.
[7.350] However, a different result was reached in a more recent Queensland decision, Baldwin v Icon Energy Ltd [2015] QSC 12, in which it was held that neither an agreement to “use reasonable endeavours to negotiate” a gas supply agreement or an agreement to “negotiate in good faith” had sufficiently certain legal content to be enforceable. Writing of this decision Professor Duncan and Christensen (in “An Agreement to Negotiate a Contract in Good Faith –No Legal Content and Too Uncertain for Enforcement” (2015) 30(3) Australian Property Law Bulletin 37) conclude that: While the obligation “to use reasonable endeavours” is well known to Australian law and actions by parties in attempting to meet this standard can be quantified for the purposes of demonstrating breach, agreements to “negotiate in good faith” are more elusive of substance. It seems clear that a bare agreement to “negotiate in good faith” without more, will not be enough of itself to clothe an obligation with enforceability notwithstanding the substance of the potential agreement may have sufficient description to be identifiable as a final product. What was required was that the MOU needed to set out certain identifiable steps that could benchmark the process of negotiation so that either party might be in a position to judge whether the other had meaningfully engaged in negotiation. The addition of the obligation to “use their reasonable endeavours to negotiate” a GSA did not supply the gap necessary to make the MOU enforceable.
7.3 THE TERMS OF THE AGREEMENT The battle of the forms [7.360] There may be a particular problem arising from modern commercial practice where both parties may rely on standard forms –one party making an offer on its standard form with the other party accepting on its standard form with both forms containing different terms. If one party uses a form which does not prescribe that there is no contract unless it is subject to the terms contained in the form, it may be held to be an acceptance
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A contract is a mutual promise. W Paley, The Principles of Moral and Political Philosophy (1784).
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of the terms put forward by the other party. This is known as the “last shot” approach. However, the courts may look at both documents to see if they can be reconciled to form a contract rather than applying the “last shot” doctrine. As Kirby P pointed out in Reese Bros Plastics Ltd v Hamon-Sobelco Australia Pty Ltd (1988) 14 BCL 91 at 101: The legal niceties will melt away in the practical realities of commerce. It is only where … a dispute occurs that lawyers must retrospectively classify the arrangements. But they should do so by adopting a commonsense and practical approach.
Goodman Fielder Consumer Foods Ltd (formerly Meadow Lea Foods Ltd) v Cospak International Pty Ltd [2004] NSWSC 704
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[7.370] Meadow Lea required glass bottles for its “Praise” dressing. Cospak was a supplier of glass bottles. After negotiations Cospak sent Meadow Lea a letter setting out the terms of sale which contained (inter alia) (i) a clause limiting liability under the TPA and Sale of Goods Acts (SOGAs) (as it was entitled to do) and (ii) a clause which excluded liability “to the full extent permitted by law”. Meadow Lea sent an order form for the b ottles containing a term requiring that the goods would not be defective and would comply with certain of the conditions implied under the Sale of Goods Act 1923 (NSW) and “any other statutory requirement”. When Meadow Lea terminated the contract, it argued that the terms contained in its form represented the terms of the contract in accordance with the “last shot” doctrine and Cospak was liable for failure to supply bottles in accordance with those provisions. The Court held that the correct approach was to see if the two documents could demonstrate that the parties had reached a broad agreement on material points, rather than analysing the transaction on a pure offer and acceptance basis. As both documents dealt with the matter of what conditions were to be implied under the Sale of Goods Act, they could stand together but the exclusion clause prevailed.
Incorporation by reference [7.380] The contract may refer to other documents which are separate from the main contract. This “shorthand” may be used to save the preparation of a lengthy document. Sometimes the additional document will be actually supplied, sometimes the contract itself will state that the additional terms are available only on request. If the parties acted in accordance with those incorporated terms, they will form part of the contract on the basis that both parties have assented to them. However, it must be emphasised that the terms can only be incorporated in a contract before or at the time the contract is made and not later.
Never promise more than you can perform. Publius Syrus (1st century BC).
Goldman Sachs JB Were Services Pty Ltd v Nickolich [2007] FCAFC 120 [7.390] In May 2000 Goldman Sachs (GS) offered Nickolich (N) a position in its Canberra office. This was
done by a letter which confirmed a verbal offer which had been previously made and which set out details of the employment. It also required that N sign the letter of acceptance. This letter stated that N would be expected to comply with office memoranda and instructions which would be issued from time to time. At the time that N received the letter, he had in his possession a document entitled Working With Us (WWU) which set out various matters including a Code of Conduct. Certain provisions in the document required an employee to sign attachments that the employee would abide by the policies set out in relation to the particular matter. Also included in the document was a health and safety policy which contained the words “JB Were 326
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Chapter 7 Contracts in Business will take every practicable step to provide and maintain a safe and healthy work environment for all people” N complained that he was “frozen out” of certain transactions by other staff at the Canberra office and that GS had breached this provision of the agreement. One of the issues was whether the WWU document formed part of the employment agreement. It was held (by majority) that the WWU document (while it also contained matters that were not contractual) was clearly contractual and, in particular, that the term relied on was contractual in nature.
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In relation to the aspirational rather than prosaic nature of the “Healthy Work Environment” document provided, Black CJ held that (at [28]-[30]): In contending that the trial judge was wrong in finding that there was a term of this nature the appellant argued that the language was not contractual and that the statement was merely aspirational. It was said that to construe these statements in WWU as contractual terms involved giving a meaning to them that could not have been reasonably intended. As I have noted, the test is objective. What matters is what the language used, in context, would have led a reasonable person in the position of Mr Nikolich to believe. Context is very relevant. Here, it is plain that in WWU the firm was holding itself out as having a commitment, which it regarded as very important, to provide a caring and safe working environment based upon mutual respect and concern. To repeat examples referred to earlier: “The JB Were culture and ‘family’ approach means each person is able to work positively and is treated with respect and courtesy” and “Although we are aggressive in the market place, we are not aggressive with each other”. The difficulty is that the statement in issue is not explicitly contractual in its language and could be seen as merely aspirational. It appears in a document of mixed content and purposes and, although these include contractual purposes, at least the primary repository of the employment contract is unambiguously elsewhere. The context is, however, decisive. In the context of WWU as a whole, if the statement that the firm “will take every practicable step to provide and maintain a safe and healthy work environment for all people” were no more than an aspirational representation, imposing no obligation on the maker, it would be seen as an exercise in hypocrisy. The statement is a reflection of, and is central to, WWU’s expression of the “culture” of the firm and its approach to its staff, and its aspirations about the approach its employees will take to each other. The language used, taken in the context as a whole, points to the statement embodying a contractual obligation and the trial judge was correct in holding that it was a term of the contract.
Implied terms [7.400] Terms can be implied into contracts in law as a necessary incident of the contract or in fact on an ad hoc basis to give business efficacy to the contract.
Speak the truth, but leave immediately after. Yugoslav proverb.
An example of the former is the increasing judicial support at least in New South Wales, for a term of good faith to be implied in law as a necessary incident of a commercial contract (see [6.2150]). The more common implied term is that implied to give business efficacy to the contract according to the test laid down by the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 and subsequently approved and applied in numerous High Court decisions. In Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24 Mason J restated the five conditions laid down by the Privy Council (at [9]): (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
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In cases where he contract is oral or partly oral or where it is apparent that the parties have never attempted to reduce their agreement to complete written form, the implication of terms is subject to less rigorous criteria. The test was stated by McHugh and Gummow JJ in Byrne v Australian Airlines Ltd [1995] HCA 24 at [47]: In such situations, the first task is to consider the evidence and find the relevant express terms. Some terms may be inferred from the evidence of a course of dealing between the parties. It may be apparent that the parties have not spelled out all the terms of their contract, but have left some or most of them to be inferred or implied. Some terms may be implied by established custom or usage, as described above. Other terms may satisfy the criterion of being so obvious that they go without saying, in the sense that if the subject had been raised the parties to the contract would have replied “of course”. If the contract has not been reduced to complete written form, the question is whether the implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case.
Time of the essence [7.410] It is not uncommon for business contracts to provide that “time is of the essence”. That meaning was explained by Lord Parker in Stickney v Kibble [1915] AC 386 at 419 in these terms:
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At law, time was always of the essence of the contract so that if a time were fixed for completion of the contract, the stipulation had to be rigidly adhered to or the party aggrieved would have either an action for damages for breach or, if the stipulation went to the root of the contract, an immediate right to terminate.
A contract which includes a “time of the essence” clause in effect makes the specified times and dates mandatory and any delay, even if reasonable or slight, provides grounds for cancelling the contract.
Interpreting the contract [7.420] One of the most frequent practical problems arising out of commercial contracts is that of interpreting the document. In Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 the High Court stated (at [35]) that: The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.
A little inaccuracy sometimes saves tons of explanation. Saki.
The relevant principles are outlined in greater detail by Graham J in Ku v Song [2007] FCA 1189 at [49]-[55]: It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. 328
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Chapter 7 Contracts in Business References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.
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Actual beliefs and intentions are, generally speaking, irrelevant in the determination of the legal rights and obligations flowing from a written agreement … The primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, “even though the construction adopted is not the most obvious, or the most grammatically accurate”, to use the words from earlier authority … which, although spoken in relation to a will, are applicable to the construction of written instruments generally. Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. Finally, the statement of Lord Wright in Hillas and Co Limited v Arcos Limited (1932) … that the court should construe commercial contracts “fairly and broadly, without being too astute or subtle in finding defects”, should not be understood as limited to documents drawn by businessmen for themselves and without legal assistance. Where the language of a contract has a plain meaning evidence of surrounding circumstances is not admissible to assist in the interpretation of the contract. Subsequent conduct is not admissible as an aid to construction of a contract. As Lord Reid said in Whitworth Street Estates Limited v Miller (1970) AC 583 …: Otherwise one might have the result that a contract meant one thing the day it was signed, but by reason of subsequent events meant something different a month or a year later. In seeking to ascertain the intention of the parties to a written contract extrinsic evidence may not be resorted to except where such evidence may be called in aid in the interpretation of the written instrument. Clearly enough, it is not to the point to make an independent examination of extrinsic facts, even if they were within the knowledge of both parties, and upon such evidence to conclude that a particular provision was or was not of importance to the parties or to either of them. The question for determination is the intention of the parties as disclosed by the contract into which they have entered. The relevant principle in relation to resort being had on matters of construction to extrinsic evidence is to be found in the judgment of Mason J, as his Honour then was, in Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24 at 352 as follows: The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge
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The law is simply expediency wearing a long white dress. Quentin Crisp.
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7.4 ADJUSTING THE BARGAIN
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Side letters [7.430] An agreement may be varied with the use of side agreements, or side letters, which sit outside a written public agreement. Side letters are useful to vary an agreement but cannot be used secretly to mislead or conceal the true nature of an agreement or arrangement. Their operation was explained in Yulema Pty Ltd v Simmons [2015] NSWSC 640 (at [8]): Because that’s where the money is. Willy Sutton (when asked why he robbed banks).
The issue in these proceedings arises out of [an oral] side agreement made … just before ultimate consensus was reached for the [one party] to buy out the [other party’s] interests in the form of the 2009 Deed. This side agreement was a classic collateral contract, the consideration for which was entry into the 2009 Deed itself.
In ACN 151 368 124 v Pro-Pac Packaging (Aust) Pty Ltd [2017] NSWSC 913 it was held that a “side agreement” that purported to affect some of the terms of the sale agreement was without contractual effect, either because: • as a collateral contract, it was inconsistent with the sale agreement, or • that it was without consideration and therefore unenforceable.
Variations [7.440] Contracts can always be varied by the agreement of the parties. If the variation is for the benefit of both parties there is no problem with the required element of consideration –the mutual promises operate for the benefit of both parties. However, a variation may be argued to be only for the benefit of one of the parties. In such a case there is no consideration to support the variation and it may not be enforceable. For this reason contractual variations are generally made by a “deed of variation” –a deed being a form of contract that is valid and enforceable without the need for consideration. 330
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Chapter 7 Contracts in Business
Waiver [7.450] A party with a contractual right always has the option of not insisting on the other party strictly complying with an obligation. If rent is due on Monday, the landlord can waive compliance with this obligation and indicate preparedness to receive the rent on Friday. The waiver applies only in relation to the particular indulgence and does not apply to other obligations or at other times. Business contracts generally remove any doubt in relation to waiver and its effect by expressly providing for it in the written contract. If the party granting the waiver seeks to go back on it the doctrine of promissory estoppel, see [7.180], will come to the aid of the other party. Waiver of contractual rights is a relatively common commercial occurrence. One party may decide not to insist on strict performance of the other party’s obligations under the contract in order to accommodate the circumstances of the other party. In many cases this is a sensible commercial alternative to initiating breach of contract proceedings. If the parties wish to alter the terms of the original contract for their mutual benefit, this is done by an agreement to vary the contract, which requires consideration and a written document. This is in contrast to a waiver, which is for the benefit of one party only.
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Waiver is so common that it is frequently formalised in the terms of the contract. A franchise agreement may for example provide that: No waiver by the Franchisor of a breach of this Agreement shall be effective unless in writing and any waiver by the Franchisor of a breach of this Agreement shall not be deemed to be a waiver of a subsequent breach of the same or of a different kind hereunder and no waiver by the Franchisor of any breach under any other Franchise agreement to which the Franchisor is a party shall be construed as or deemed to be a waiver under this Agreement.
However, the importance of the concept of waiver has been largely surpassed by the development of the equitable doctrine of promissory estoppel discussed at [7.180].
7.5 DEALING WITH THE CONTRACT Assignment of contractual benefits [7.460] An assignment is an arrangement under which a party to a contract (the assignor) transfers some or all of the rights or benefits under that contract to a third party (the assignee). Unlike contractual rights, obligations under a contract cannot be assigned. Under an equitable assignment of contractual benefits, there are no formalities of writing or notice. The giving of notice nevertheless protects the assignee’s benefit in circumstances where it may otherwise be defeated but the assignee must join the assignor as a party to any action to enforce the right or benefit assigned. Under the conveyancing or property law legislation of the States and Territories provision is made for statutory assignments of contractual benefits which require writing and signing by the assignor and notice to the other party to the contract. Under a statutory assignment the assignment must be “absolute” (ie not by way of charge) and, except in Western Australia be for all and not merely part of the benefit. The advantage of a statutory assignment is that the assignee obtains legal title to the right assigned and can
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The Court’s opinion will accomplish the seemingly impossible feat of leaving this area of the law more confused than it found it. William H Rehnquist, dissenting opinion in Roe v Wade (1973) 410 US 133 at [173].
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enforce it in her or his own name. The statutory assignment is nevertheless, as with an equitable assignment, “subject to equities”. Contractual rights which have expressly been made non-assignable, or which are personal in the sense that performance was intended to be by a particular party, cannot be assigned. Certain contractual rights also pass by operation of law –on death, to the executor or administrator of the estate, and on bankruptcy, to the trustee in bankruptcy.
The common law evolves not merely by breeding new principles but also, when they are fully grown, by burying their ancestors. In Hong Kong Fit Shipping Co Ltd V Kawasaki [1962] 1 All ER 474 at 487 per Diplock JJ.
Under the Franchising Code of Conduct the franchisee can assign, or transfer, the contract – in layman’s terms “sell” the franchise –to a third party to operate subject to the franchisor’s approval which cannot be unreasonably withheld (cl 25, see Chapter 14).
Novation [7.470] Novation is a transaction whereby, with the consent of all parties concerned, a new contract is substituted for an existing one. This may involve a new arrangement between the same parties or substituting a different person for one of the parties. Novation provides a mechanism under which both contractual rights and contractual obligations can be transferred to a person who was not a party to the original contract. In the franchising context for example discussed at [7.460] it is clearly not very satisfactory if on an assignment the original franchisee remains liable for the contractual obligations. For this reason there is more frequently a novation under which the original franchisee is released and the incoming franchisee assumes all the rights and obligations under the franchise agreement.
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Subcontracting [7.480] A subcontract is “an agreement by a contractor and a third party for the performance by the third party of some or all of the contractor’s obligations under the contract with the principal” (Halsbury’s Law of Australia (Thomson Reuters, subscription service) at [65-745]). It is a personal legal relationship between the contractor and the subcontractor which is distinct and separate from the legal relationship between the contractor and the principal. Subcontracting is a vicarious performance –“the promisor does not perform the contract personally but instead performs it vicariously through a third party” (Carter on Contract (LexisNexis, subscription service) at [29-160]). It is of course not subcontracting when a corporation performs its contractual obligations through its employees – but it is subcontracting when the corporation contracts with third parties to perform the work. Subcontracting is very common in some sectors –in particular the building sector. Most building contracts will expressly deal with subcontracting and residual protection is provided by legislation across Australia conferring rights to secure payment to subcontractors (eg Building and Construction Industry Security of Payment Act 1999 (NSW)). Whether subcontracting is permitted depends on: • whether the contractor obtained the consent of the principal (which may be by express agreement or subsequent ratification); 332
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Chapter 7 Contracts in Business
• the nature of the ordinary contract (ordinary commercial contracts between commercial parties may be able to be subcontracted but contracts personal to the promisee –eg to paint a portrait –cannot be); and • the terms of the contract (which may provide expressly or impliedly that subcontracting is not permitted). In a subcontracting situation, the contractor remains liable under the contract with the principal if the subcontractor’s performance is not in accordance with the contract.
7.6 WHEN IT ALL GOES WRONG Guarantees [7.490] Guarantees are discussed at [7.890] ff. A guarantee is a contract in which a guarantor promises to answer to the person in whose favour the guarantee is given (“the creditor”) for a debt or obligation of a principal debtor if the debtor defaults. Guarantees are common in business, particularly in the context of smaller private companies where a director’s guarantees are invariably required. The advantages of contracting business through a corporate structure –limited liability and shareholders not liable for the company’s debts –are often illusory in practice because of the lender’s insistence on directors and/or major shareholders giving guarantees.
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Indemnities [7.500] It is very common in business contracts that one party is required to indemnify the other party for losses arising in certain contingencies. Indemnities are discussed at [7.910].
Penalties [7.510] Damages for breach of contract are usually unliquidated –they are not specified in the contract and are calculated by the Court in a breach of contract action. A contract may nevertheless stipulate liquidated damages –the amount recoverable in the event of a breach. If the liquidated damages clause is a genuine pre-estimation of loss it will be enforced even if it does not equate to the actual loss. But if the liquidated damages clause bears no relation to the probable loss it is a penalty clause and unenforceable. In Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 a liquidated damage clause which stipulated that damages of £5 were payable for each sale below a recommended price was enforced: It is just … one of those cases where it seems quite reasonable for parties to contract that they should estimate that damage at a certain figure, and provided that figure is not extravagant there would seem no reason to suspect that it is not truly a bargain to assess damages, but … a penalty to be held in terrorem.
There is no such thing as a free lunch. Anonymous.
Such provisions are illegal today through contravening the resale price maintenance provisions (s 48) of the CCA (see [22.1530]) but the underlying principles have been applied and approved by the High Court in subsequent cases. The most recent opportunity to
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apply them was in Paciocco v Australian and New Zealand Baking Group [2015] FCAFC 50 –a class action representing over 43,000 ANZ customers alleging that various bank fees were penalties and unlawful. The Federal Court held that the fee of $20 to $35 was much more than the late payments cost the bank, which was around 50 cents to 55.50 cents per late payment, and was, in law, a penalty. This decision was reversed on appeal, the Full Court holding that it was not proven that the late payment fee was, in the relevant sense, extravagant or unconscionable. Middleton J succinctly outlined the penalty doctrine (at [400]):
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The object and purpose of the penalty doctrine (controlling the use of extravagant or unconscionable terms) must always be kept in mind when determining the ultimate issue of whether a term is a penalty. Exceptions from freedom of contract, as the case law indicates, require good reason to attract judicial intervention in setting aside commercial bargains. This explains the high hurdle required in the case of a propounded penalty, such that it must be found to be “extravagant and unconscionable”. One starting point in considering whether a penalty has been imposed is to identify the commercial interests that are sought to be protected by the bargain reached between the parties. This can be achieved through a consideration of the language used by the parties, the circumstances addressed by the bargain, and the objects that the bargain intended to secure. For instance, even though a sum designated to be paid is not at all referable to any genuine pre-estimate of loss, if the sum is referable to an additional benefit, or part of the bargain for another right, and is not out of all proportion to the attainment of that benefit or right, then no intervention of the Court is necessary or appropriate to disturb that commercial bargain.
This decision was upheld by the High Court ([2016] HCA 28) which held that neither the fact that the later payment fees were not genuine pre-estimates of damage nor the fact that the amounts charged were disproportionate to the actual loss suffered by itself rendered the later payment fees penalties. The provisions were not exorbitant or unconscionable and could be justified by reference to a broad range of commercial interests.
7.7 STANDARDS OF BUSINESS CONDUCT Commercial best practice [7.520] In Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50 at [293] Allsop CJ said: Trickery and sharp practice impede commerce by decreasing trust and increasing risk. Good faith and fair dealing promote commerce by supporting the central conception and basal foundation of commerce: a requisite degree of trust. Business people understand these things. Romanian tennis star Ilie Nastase was once asked why he waited over a year to report the theft of his wife’s credit card. “Whoever had it,” he explained, “was spending less than she was”. L Boone, Quotable Business (Random House, 1992).
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The law, both common law and statutory, has today moved far from the classical contract law of the nineteenth century when principles of freedom and sanctity of contract dominated and the Latin maxim caveat emptor –let the buyer beware –reflected the approach of the law to contracts. Goldwater and Ciro (in “Standard of Behaviour in Commercial Contracting” (2003) 30 Australian Business Law Review 369 at 394) suggest that: The principles of fairness, fair dealing and flexibility –hallmarks of relational contracting and commercial best practice –are being embedded on general commercial transactions by the High Court and by Parliament. The law has increasingly responded to concerns arising out of the disparate bargaining positions of the parties, information asymmetries, the
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Chapter 7 Contracts in Business circumstances surrounding the signing of the contract and other issues involving an inquiry into the realities of the transaction and the transacting process. In particular the norms of truthful conduct imposed by [the legislative prohibition of misleading conduct], the standards of conduct imposed by legislative and judicial attempts to proscribe unconscionability, and emerging notions of good faith increasingly mirror the common honesty and decency which form part of the “occupational morality” of businessmen. Viewed from this perspective, the various standards of business behaviour that typify relational dealings have been given very broad doctrinal expression that extends beyond relational boundaries. (References omitted)
Business parties must understand and accommodate the changing legal and regulatory environments in which business operates. The changing environment is of course most obvious in B2C contracts where a comprehensive regulatory regime, in particular the Australian Consumer Law (ACL), has categorically changed the goalposts. But B2B contracts are not immune to the sentiments expressed by Allsop CJ prefacing this section. The two most powerful provisions of the ACL –the prohibitions of misleading and unconscionable conduct –apply to B2B conduct in trade or commerce as well as to B2C conduct, and indeed dominate the case law on these provisions. The “best practice” obligation of business in relations to B2B contracting obviously goes beyond these broad ethical statutory obligations but they are a significant starting point.
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Misleading and unconscionable conduct [7.530] Little more needs to be said in relation to the massive influence these legislative prohibitions (under the ACL) have had on B2B conduct. A former Chairman of the Australian Competition and Consumer Commission (ACCC) Graeme Samuel has commented that “At its very heart, the [Australian Consumer Law] can still be encapsulated in two basic commandments for business –thou shalt not engage in anticompetitive, harsh, oppressive or unconscionable conduct; and thou shalt be honest”: [2004] TPLB 93 at 94). The prohibitions on misleading and unconscionable conduct are central to these commandments and establish an ethical framework for the conduct of Australian business. They are discussed in Chapters 19 and 20.
If your lawyers tell you that you have a very good case, you should settle immediately. Richard Ingrams.
An implied obligation of good faith in commercial contracts [7.540] In Overlook v Foxtel [2002] NSWSC 17, Barrett J in the Supreme Court of New South Wales stated that, “a term requiring the exercise of good faith in the performance” of a commercial contract “is now in [NSW] a legal incident of every such contract”. Judicial support in other jurisdictions is not as effusive and the Victorian Court of Appeal has expressed reservations (Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL Australia [2005] VSCA 228). The High Court has not yet addressed this issue. Most of the good faith cases have arisen in the context of the franchising relationship and the mandating of an obligation of good faith in such relationships under the 2014 Franchising Code of Conduct (see Chapter 14) has provided a legislative solution to this issue in this context. Business parties must nevertheless appreciate that an obligation to act in good faith in negotiation, performance and ending of contractual relationships is very much on the agenda and that acting dishonestly, unreasonably and without regard to the other party’s interests is potentially vulnerable.
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In Paciocco v Australian and New Zealand Banking Group [2015] FCAFC 50 the implied term of good faith was acknowledged by the Federal Court of Appeal in terms which give comfort to those who support its introduction. Allsop CJ stated at [287] that: It is always the best policy to speak the truth –unless, of course, you are an exceptionally good liar. Jerome K Jerome.
[Good faith] is conception that has been recognised (though not by all courts in Australia) as an implication or feature of Australian contract law attending the performance of the bargain and its construction and implied content … The usual content of the obligation of good faith that can be extracted from [the cases] is an obligation to act honestly and with a fidelity to the bargain; an obligation not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; and an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained. None of these obligations requires the interests of a contracting party to be subordinated to those of the other. It is good faith or fair dealing between the parties by reference to the bargain and its terms that is called for, be they both commercial parties or business dealing with consumers … The standard of fair dealing or reasonableness that is to be expected in any given case must recognise the nature of the contract or relationship, the different interests of the parties and the lack of necessity for parties to subordinate their own interests to those of the counterparty. That a normative standard is introduced by good faith is clear. It will, however, not call for the same acts from all contracting parties in all cases. The legal norm should not be confused with the factual question of its satisfaction. The contractual and factual context (including the nature of the contract or contextual relationship) is vital to understand what, in any case, is required to be done or not done to satisfy the normative standard.
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Fiduciary duties in commercial relationships [7.550] In Shelanu Inc v Print Three Franchising Corporation (2003) 64 OR (3d) 533, the Court of Appeal for Ontario quoted Paul Finn (now Finn J of the Federal Court of Australia) at 555-556: “Unconscionability” accepts that one party is entitled as of course to act self-interestedly in his actions towards the other. Yet in deference to that other’s interests, it then proscribes excessively self-interested or exploitative conduct. “Good faith”, while permitting a party to act self-interestedly, nonetheless qualifies this by positively requiring that party, in his decision and action, to have regard to the legitimate interests herein of the other. The “fiduciary” standard for its part enjoins one party to act in the interests of the other –to act selflessly and with undivided loyalty. There is, in other words, a progression from the first to the third: from selfish behaviour to selfless behaviour.
The duties imposed under the first two doctrines apply generally to all business conduct. Fiduciary duties are more rigorous and operate in more limited contexts. The duties of a fiduciary include the duty to act honestly, to disclose all material facts of which he or she is aware whether asked about them or not, to avoid any conflict of interest and to not make any unauthorised profit. The law recognises a number of established categories of fiduciary relationships – between partners, trustees and beneficiaries, principals and agents, solicitors and clients, employers and employees, company directors and the company, joint venturers 336
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Chapter 7 Contracts in Business
in some situations. Fiduciary relationships can nevertheless be found outside the established categories where the critical features is: “that the fiduciary undertakes or agrees to act for or on behalf of or in the interest of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense”: Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64 at [68]. From this power or discretion comes the duty to exercise it in the interest of the person to whom it is owed. Commercial transactions which fall outside of the accepted traditional categories of fiduciary relationship generally do not give rise to fiduciary duties is as they are commercial in nature, and do not meet the criteria for characterisation as fiduciary in nature. In the Hospital Products case Deane J stated (at [8]) that: The express term of the contract … requiring the distributor to use its “best efforts” to build up the market for, and distribute, the products in Australia “to the common benefit” of both manufacturer and distributor [does] not, of itself, impose a general fiduciary duty on the distributor to seek no profit or benefit for itself or to disregard its own interests where they conflicted with the manufacturer’s.
The law never moves more slowly than when it is involved in putting its own house in order. Editorial, Sydney Morning Herald (4 February 1967).
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Mason J commented in relation to cases where the contract provides the foundation for a fiduciary relation that (at [70]): In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.
A useful summary of the relevant principles is provided by Olssen AJ in Territory Sheet Metal Pty Ltd & Ors v ANZ Group Ltd [2009] NTSC 31 (references omitted): (a)
the categories of fiduciary relationships are not closed;
(b)
a fiduciary relationship exists where the facts of the case in hand establish that, in a particular matter, a person has undertaken to act in the interests of another and not his own;
(c)
where a fiduciary relationship is found to exist then, as to matters to which that duty attaches, it is said that the fiduciary must not place himself in a situation in which his duty and his interest conflict;
(d)
the notion underlying all the cases of fiduciary obligation is that, inherent in the nature of the relationship itself, is a position of either disadvantage or vulnerability on the part of one of the parties that causes that party to place reliance upon the other and requires the protection of equity acting on the conscience of that other;
(e)
the critical feature of fiduciary relationships is that the fiduciary undertakes or agrees to act for or on behalf of, or in the interests of, another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense;
(f)
the relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that
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other person, who is, accordingly, vulnerable to abuse by the fiduciary of the latter’s position; and (g)
wherever two persons stand in a relationship that, while it continues, confidence is necessarily reposed by one, and the influence which naturally grows out of that confidence is possessed by the other, and this confidence is abused or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of his position will not be permitted to retain the advantage, although the transaction could not have been impeached if no such confidential relationship existed.
Although arms-length commercial transactions in business are unlikely to attract fiduciary duties, it may be different if one party is acting for or on behalf of the other party.
PART 2 PARTICULAR BUSINESS CONTRACTS
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7.8 SALE OF GOODS Silicon Valley is like an individual running around in front of a steamroller. You can outrun the steamroller on any given day. But if you ever sit down you get squashed. G Boschert, president of Boschert Electronics.
[7.560] The contract for the sale of goods is Australia’s, and the world’s, most common contract. Each time goods are sold –whether a retailer selling a newspaper to a consumer or a manufacturer selling an air conditioning plant to a developer –there is a contract for the sale of goods. Fortunately, very few of these contracts give rise to disputation. The Sale of Goods Acts (SOGAs) of the states and territories (eg Sale of Goods Act 1923 (NSW)) were based on the Sale of Goods Act 1893 (UK) –the world’s first consumer protection law as, inter alia, it implied terms of merchantable quality and fitness for purpose to protect the weaker party. Perhaps not unrealistically the protection given by the SOGAs proved largely illusory as they allowed the implied terms to be overridden by express terms of the contract and it was virtually standard in consumer contracts, where the seller had the bargaining power, to exclude them. This issue was addressed towards the end of last century when the SOGAs were amended to prevent the implied terms being excluded in consumer contracts. Today the implied terms in consumer contracts –which were reproduced nationally in the TPA –have been replaced by equivalent consumer guarantees under the ACL (see Chapter 22) which extends protection to supplies (not simply sales) of services (not simply goods). This development does not render the SOGAs irrelevant –the rules relating to passing of property (ownership) and risk set out in the SOGAs remain authoritative and are discussed in Chapter 9.
7.9 E-COMMERCE [7.570] The Chinese Government’s Department of Communications reports that on China’s annual Singles Day (11 November (11/11)) –in 2017 Chinese consumers spent more than A$33 billion –a figure far eclipsing Australia’s annual online spend of A$23 billion (of an estimated total retail spend of A$267 billion).
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Chapter 7 Contracts in Business
IN CONTEXT
How not to agree to clean public toilets when you accept any online terms and conditions [7.580] How often do you see this when you’re online, whether downloading a new app or software or signing up for some new service? Click Agree to accept our Terms and Conditions. You click on it, but then discover you’ve just agreed to give up your future first-born child or clean public toilets for 1,000 hours. This is what happened recently to more than 20,000 people in the UK when they accepted the terms and conditions for free Wi-Fi that included a commitment to clean public toilets, hug stray dogs and paint snails’ shells to brighten up their existence. Thankfully the Wi-Fi provider, Purple, says it is not going to enforce its “Community Service Clause”. But it makes a good point. Purple says it added the spoof clause to its terms and conditions for a two-week period to see if anyone would notice. It said in a statement:
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The real reason behind our experiment is to highlight the lack of consumer awareness when signing up to use free Wi-Fi. All users were given the chance to flag up the questionable clause in return for a prize, but remarkably only one individual, which is 0.000045% of all Wi-Fi users throughout the whole two weeks, managed to spot it. Read on, if you dare We want free online service and free software, and we want it now. So we readily agree to the terms and conditions despite having little idea what we are agreeing to, and the service provider is in no hurry to tell us. That’s a concern for everyone who readily accepts free Wi-Fi conections in places such as shopping centres, cafes, restaurants, hotels, bars or any other public Wi-Fi hotspots. The Australian Communications and Media Authority said that as of June 30, 2015, an average of 4.23 million people in Australia had used a public Wi-Fi hotspot, either free or paid. The same concerns apply when it comes to downloading free software and apps which can sometimes come bundled with other software or extensions, often referred to as Potentially Unwanted Programs. If people don’t read the terms and conditions then they won’t know what else they are agreeing to install. We have been warned about these problems for years and yet the recent Purple example shows that people still haven’t learned. Earlier this year the consumer group Choice raised the issue of licence agreements, terms- of-use agreements and terms and conditions that people never read.
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It gave the example Amazon’s Kindle Voyage e-reader, which it said had a minimum of eight documents that needed to be read and agreed to when buying the device, as well as documents to be read to use any subscription service. The total word count is more than 73,000, which Choice said would take about nine hours to read. It even tasked someone to read the lot, but here’s the abridged version. A shorter version … thankfully. Properly informed consent While the great majority of tech companies operate lawfully, if not ethically, the process of getting actual informed consent remains problematic. At present, just clicking Agree will do, regardless of what lies buried deep in the many words of those terms and conditions. One survey in Britain found that only 7% of people read the terms and conditions carefully when signing up for an online service or product. These documents are typically written in legalese, meaning that only a trained lawyer would be able to understand them properly. Yet the simple act of clicking on a check-box constitutes informed consent in the legal sense. That same survey found that one in five people said they had suffered as a result of agreeing to terms and conditions without having read them carefully. One in ten had been locked into a contract for longer than expected because they didn’t read the small print.
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Choice says “lengthy and overly complex contracts” should be considered unfair and has called for reform of the Australian Consumer Law (ACL) to protect people from such agreements. A readable solution With billions of dollars at stake, IT companies need to make it clearer just what the consequences of using that product or service will be, including any potential dangers. If users can give genuinely informed consent, it’s a win-win situation. For example, if we know we’re agreeing that an online product can use some of our personal information –and we know what that information is –we could receive targeted advertising that might be useful to us, and even be a good fit for our lifestyle. So how can we do to make sure people are properly informed in plain language about the consequences of using a product or service? One solution that already works well is the way Creative Commons includes a human readable summary of its licensing conditions. It breaks it down to the basics then highlights anything out of the ordinary. It’s not difficult to do this, and if you have nothing to hide, the user is unlikely to be scared off by it. David Tuffley, The Conversation (24 July 2017)
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Chapter 7 Contracts in Business
There can be little argument with the proposition that “the internet is a new and ubiquitous tool for conducting business” (E Ball, “Section 92 and the Regulation of E-Commerce” [2008] 36(2) Federal Law Review 265 at [265]). By 2020 it has been estimated that $50 billion will be spent annually by Australian consumers on online e-commerce. New modes of transacting business such as e-commerce nevertheless raise new legal issues. Common problems that have had to be faced by parties involved in e-commerce have been issues of confidence, protection of consumer rights, formation of contracts and privacy. Many of these issues have already had to be faced by businesses in non-electronic transactions. There are nevertheless some particularly relevant laws that bear in a more direct manner on e-commerce activities.
In the new digital economy, things are changing hourly and you have to be very adaptable, very flexible. K Kelly, Big Think Guy at Wired magazine.
IN CONTEXT
ePayments Code [7.585] The ePayments Code is a voluntary Code of Practice (effective 26 March 2016),
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the objectives of which are to provide: (a)
a quality consumer protection regime for payment facilities,
(b)
a framework to promote consumer confidence in electronic banking and payment systems,
(c)
effective disclosure of information, to enable consumers to make informed decisions about facilities,
(d)
clear and fair rules for allocating liability for unauthorized transactions,
(e)
effective procedures for resolving complaints, and
(f)
a regime that is flexible and accommodates providers of new payment facilities.
It is subscribed to by banks, credit unions, building societies of electronic payment facilities to consumers and is administered by ASIC. The Code: • requires subscribers to give consumers terms and conditions, information about changes to terms and conditions (such as fee increases), receipts and statements, • sets out the rules for determining who pays for unauthorised transactions, and • establishes a regime for recovering mistaken internet payments.
Regulating the methods of e-commerce [7.590] The most significant piece of legislation in the Australian context with regard to e-business was enacted to ensure that parties dealing electronically should have confidence in the legal enforceability of their transactions. This piece of legislation is the Electronic Transactions Act 1999 (Cth) (ETA).
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Electronic Transactions Act [7.600] The ETA was introduced to promote and legitimise electronic transactions in both the business world and the community generally. Versions of the Commonwealth Act have been introduced into each State and Territory (eg Electronic Transactions Act 2000 (NSW)). For ease of explanation, only the Commonwealth ETA is discussed here. The ETA is a faithful adaptation of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Commerce. The Model Law was developed in 1996 after lengthy international consultation to provide a template from which individual countries might introduce internationally consistent national legislation. The explanatory memorandum in relation to the ETA reiterated the stated purpose of UNCITRAL’s Model Law: The purpose of the Model Law is to offer national legislators a set of internationally acceptable rules designed to remove a number of legal obstacles to the use of electronic communications for the communication of legally significant information, creating a more secure environment for electronic commerce.
In reflecting the stated purposes of the UNCITRAL Model Law, the ETA states in s 3 its objects as being the provision of a regulatory framework that: • recognises the importance of the “information economy”; • facilitates the use of electronic transactions;
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• promotes business and community confidence in the model; and • enables businesses and communities to engage the government through electronic communications (s 3(a)-(d)). I don’t see it being more than John the Baptist –not the light itself, but the precursor of the light. P Job, chief executive of Reuters, on the internet.
[7.610] The ETA has as another important objective –the achievement of functional equivalency (also known as media neutrality). This means that communications and transactions should not be any less legitimate merely because they are electronic and not, for example, in writing. An important consequence of this is that the use of an electronic communication method should not be the subject of more or less stringent regulations than any other mode of communication. Nevertheless, this objective is not achieved entirely by the ETA. That is because it is impossible to ignore the uniqueness of electronic communications. Therefore the ETA does, in fact, establish certain advantages and/or disadvantages for those who choose to communicate via this method. This is demonstrated, for instance, in relation to the deeming provisions for place of dispatch and receipt of messages discussed below. Nevertheless the ETA is an attempt to embrace technology and provide legislative legitimacy to electronic transactions. The ETA achieves this in a number of ways, for instance: • For the purposes of any Commonwealth law a transaction is not invalid just because it took place by “electronic means” (s 8(1)); • A requirement by law for written documentation is satisfied by providing the information “by means of an electronic communication” (s 9(1)); • A requirement that information be retained for a period of time is “taken to have been met if the person records the information in electronic form” (s 12(1)); and,
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Chapter 7 Contracts in Business
• Any Commonwealth law requiring the signature of a person can be satisfied electronically so long as, inter alia, the method used to identify the person is as reliable as is appropriate for the purposes and the person to whom the signature is required to be given consents to that requirement being met by way of the use of the method (s 10).
La Forrest v Ford [2001] QCA 455
Case Study
Facts
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[7.620] Ms La Forrest had brought an action against a number of parties for injuries she had suffered at Jupiter’s Casino in Queensland in 1992. At the first instance she was unsuccessful, but then appealed to the Supreme Court. In the course of negotiations in relation to the appeal certain correspondence was sent between La Forrest and solicitors for two of the defendants. The solicitors sent a letter to La Forrest stating that their client was willing to make a commercial offer of settlement without any admission of liability. Without reference to that letter La Forrest faxed the solicitors that she would be prepared to accept a sum of $50,000, in full and final settlement of this matter, with each party to bear its own costs. This offer was rejected by the solicitors. On 1 March 2001, by direct email apparently sent at 5:42 pm, La Forrest wrote to the solicitors referring to the offer of settlement dated 22 February 2001 (the letter from them) and advising that she was prepared to accept this offer. At 6:08 pm, on the same day the solicitors confirmed the acceptance of the offer. The offer made by the solicitors on 22 February 2001 stipulated that the offer was open for acceptance for a period of seven days only. If the offers had been accepted then La Forrest would be prevented from appealing against the relevant defendants. Issue The issue that the court had to decide was whether the correspondence between the parties constituted a contract. One of the arguments raised by La Forrest was that an acceptance by email was not capable of creating contractual relations as it could not be verified. Held The court agreed with the decision that had been made by Atkinson J who had heard the first appeal. Atkinson J had held simply that an acceptance by email is capable of creating legal relations and cited ss 4 and 8(1) of the ETA as authority. Implications This decision demonstrates that the ETA has achieved its primary purpose of recognising that electronic communications are as valid as other communication media in forming contracts.
The ETA also attempts to bring certainty to existing legal principles when applied to electronic communications. In recognition of the importance of identifying the time and place of dispatch and receipt of information in the context of pre-existing legal principles, the ETA specifically addresses the issues of when and where an electronic communication is deemed to be sent and received. These sections of the ETA have special significance in relation to the formation of electronic contracts and are discussed below.
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Regulating the practices of e-business in Australia [7.630] There are laws in Australia that regulate the practice of business transactions. In keeping with the theme already mentioned, just because a business transaction takes place electronically in Australia does not mean the normal rules of business practice do not apply. For instance, consumers will have the same legal rights whether an item is bought over the counter or over the internet. Rather than focusing on the mode by which the transaction occurs, it is more useful to focus on the issues that arise from the underlying transaction itself. For example, is the transaction one of supplying goods? Is it the provision of information? Does it involve matters of copyright, dubious credit practices or deceptive conduct? All of these issues may arise in any business transaction, be it e-business or otherwise.
The uniqueness of e-business
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[7.640] There are some features of a business transaction that are unique to e-business. This uniqueness has arisen because of the speed, ease and volume with which e-business transactions can take place and because the transaction is one that is conducted at a distance. Some examples of its uniqueness are that the transacting parties do not have to meet, the buyer will not necessarily see physically the product that is being bought and many e-businesses do not have an accompanying shop front. This does not make e-businesses any less reputable (take Amazon.com as just one example of a reliable e- business); it just makes e-businesses harder for transacting parties to evaluate. An e-business can appear more convincing or more dubious, sometimes inappropriately so. For example, a perfectly legitimate business may give the appearance of being shifty simply because they have not invested a great deal of money in their website design. Conversely, a fly-by-night operation may give the appearance of respectability and assurance for no other reason than it has a convincing domain name, flashy graphics, reputable links to other sites, great web design, a user-friendly layout and the inclusion of glowing written assurances from previous “satisfied customers”. In the e-world, there can be no way of knowing exactly with whom you are dealing. There are some activities relevant to e-business that deserve special attention. The following issues will be discussed in an Australian context: • Domain names –how these are registered and the problem of a party being misled by a domain name (see [23.200]); • Consumer protection –how existing consumer protection legislation like the ACL operates in relation to e-business; • Contracts –how, where and when contracts are formed over the internet and by email; and • Privacy –what protection individuals have in e-business transactions.
Consumer protection and the ACL The future ain’t what it used to be. Yogi Berra, baseball manager.
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[7.650] An issue in relation to an e-business transaction is whether or not consumer protection legislation applies to the transaction. The ACCC takes it as given that existing consumer protection laws also apply to e-business activities. This has been confirmed by
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Chapter 7 Contracts in Business
the Federal Court in the following case where it applied s 52 of the TPA (now s 18 of the ACL) to advertising material posted on websites.
ACCC v Abel Rent-a-Car Pty Ltd [1999] FCA 314 [7.660] Abel Rent-a-Car Pty Ltd advertised on its website that cars and trucks could be rented from $29 per day. In fact the offer was restricted to certain days of the week, and only available in relation to particular vehicles. There were further misleading claims made on the site in relation to “free insurance” and “free delivery” of vehicles. Drummond J of the Federal Court found that Abel Rent-a-Car had engaged in misleading and deceptive conduct, and as a consequence breached [s 18 of the ACL]. Orders were granted to have the webpages modified by either removing or qualifying the misleading statements.
ACCC v Phoneflasher.com Pty Ltd (ACCC media release, 23 August 2004)
Case Study
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Facts
[7.670] Phoneflasher.com supplied Phoneflashers to various retailers throughout Australia with claims that they reduced radiation and therefore had associated health benefits. The claims were on the packaging and displays, in promotional material and on the Phoneflasher.com website. Issue The issue was whether Phoneflasher.com had breached [now s 29 of the ACL], among other sections, because the product did not work as claimed. Held The Federal Court declared that Phoneflasher.com had made false or misleading representations that the Phoneflasher had performance characteristics that it did not have, contrary to [now s 29(1)(g) of the ACL] the Act. It granted a three-year injunction restraining Phoneflasher.com and Mr Alan Jorgensen and Ms Jimeale Jorgensen from making representations that the Phoneflasher reduces radiation, provides health benefits for the user of the telephone, or prevents short-term memory deterioration by absorbing electromagnetic radiation. It ordered that Phoneflasher.com write to each retail outlet it supplied with the Phoneflashers to advise them of the Federal Court’s orders and requesting that they display a consumer notice in a prominent location near where the Phoneflasher is displayed for sale. Further, it ordered Phoneflasher.com place a similar notice on the website, http://www.phoneflasher. com, and any other website being used by Phoneflasher.com to promote the Phoneflasher, in the form of an automatically generated active pop-up window or message box for a period of six months. Finally Phoneflasher.com had to pay the ACCC’s costs of $20 000. Implication Information displayed on websites will be treated in the same manner as other written material in respect to the TPA (now ACL) enforcement.
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ACCC v Worldplay Services Pty Ltd [2004] FCA 1138
Case Study
Facts
[7.680] Worldplay Services Pty Ltd (WPS), a Gold Coast company, provided administrative, IT support and member support services, among other services, to a pyramid scheme which operated internationally using a website. A company in the British Virgin Islands had overall control, and service companies contributed to the scheme operating from Britain, Gibraltar, the Netherlands Antilles and Australia. Consumers recruited into the scheme came from a number of countries, including Canada, the United Kingdom and Norway. Issue The issue was whether WPS was in breach of the pyramid selling provisions of Division 1AAA of the Trade Practices Act 1974 (Cth) (now s 44 of the Australian Consumer Law).
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Held The Court held that WPS had contravened s 65AAC(1) of the TPA and that Australia could not be used wholly or partially as a haven for operators of internet-based pyramid selling schemes in circumstances in which members of the Australian public are unable to gain internet access to such schemes through Australian internet service providers. The court ordered WPS be restrained from participating in the World Games Inc Scheme or in a scheme similar to the World Games Inc Scheme in which: (a) to take part in the scheme, some or all new participants must make a payment (a “participation payment”) to another participant or participants in the scheme; and (b) the participation payments are entirely or substantially induced by the prospect held out to new participants that they will be entitled to a payment in relation to the introduction to the scheme of further new participants. Implications The decision confirms that the ACL will apply to schemes that can be shown to have a connection with Australia even if Australian residents cannot access the scheme through Australian-based ISPs.
Contract issues Accountants are the witch-doctors of the modern world and willing to turn their hands to any kind of magic. Lord Justice Harman.
[7.690] The contract issue in relation to e-business transactions is no longer whether or not current Australian law can be applied to contracts formed using a computer, rather it involves the precise timing of the creation of a contract using electronic communications. The former issue was resolved by Rares J in eBay International AG v Creative Festival Entertainment Pty Ltd [2006] FCA 1768 (see [7.770]). The law in relation to contract formation is centuries old. It is a common law doctrine built up over hundreds of years of judicial decisions and commercial protocol. Applying these ancient principles to the new manifestation of e-business cannot always be done neatly or with certainty. It is one thing to say a contract is formed in a traditional shop- front scenario when the cashier accepts the purchaser’s money, but how do we apply this to contracts formed over the internet or by email? At law a contract is formed when acceptance to an offer is communicated to the offeror. Establishing the moment of formation is crucial for two reasons. First, the moment of formation is the moment when parties are contractually liable to one another. Second, the
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Chapter 7 Contracts in Business
moment of formation is considered at law to be the place of formation. This is of importance in establishing the law that will apply to a particular contract and a court’s jurisdiction to deal with a contractual dispute. When is the moment of formation of contract in the e-world? In place of direct laws, the formation of e-contracts is governed by applying common law principles and some indirect legislation, like the ETA. Further, it seems application of traditional contract law to contracts formed by email produces different outcomes when those same principles are applied to online contracts (eg website auctions). First, the impact of provisions of the ETA will be discussed.
Dispatch and receipt of messages under the ETA [7.700] The UNCITRAL Model Law recognises the importance of ascertaining the place of receipt of information and the precise moment of time of formation of contract for the operation of many existing rules of contract law. There is need for certainty in order to apply these rules.
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In relation to dispatch and receipt provisions, the ETA is practically identical to the UNCITRAL Model Law. Section 14(1) of the ETA deems a message to be dispatched that is sent at: a)
the time when the electronic communication leaves an information system under the control of the originator or of the party who sent it on behalf of the originator; or
b)
if the electronic communication has not left an information system under the control of the originator or of the party who sent it on behalf of the originator –the time when the electronic communication is received by the addressee.
Section 14A of the ETA deems a message to be received: a)
when it becomes capable of being retrieved by the addressee at an electronic address designated by the addressee; or
b)
if sent to another address of the addressee it is when it can be retrieved from that address and the addressee becomes aware that the communication was sent to that other address.
[7.710] There is no requirement that the message be actually intelligible or readable. This reflects the “functional equivalency” objectives of the ETA. The UNCITRAL Model Law on Electronic Commerce with Guide to Enactment (1996) emphasises this functional equivalency objective by stating (at p 32): The Model Law should not create a more stringent requirement than currently exists in a paper-based environment, where a message can be considered to be received even if it is not intelligible for the addressee.
[7.720] However, the ETA and the Model Law do not specify that the mere receipt of information is acceptance for the purpose of contract formation. It remains to be seen if this is how these provisions will be judicially interpreted.
In the age of e-commerce, distance and physical borders mean very little. E Ball, “Section 92 and the Regulation of e-Commerce: A Casenote on Betfair Pty Ltd v Western Australia” (2008) 36(2) Federal Law Review 265 at 265.
[7.730] The ETA also specifies where an electronic message is sent and received (s 14B). Unless otherwise agreed the electronic communication is taken to have been dispatched at the place where the originator has its place of business and the electronic communication is taken to have been received at the place where the addressee has its place of business. In addressing this issue the ETA gives legislative recognition to the uniqueness
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of computerised transmissions as a mode of communication. For instance, an electronic message may be received anywhere in the world, regardless of the location of the server to which it was sent. Contrast this with “snail mail” which can only be received in one place. Accordingly, the ETA deems the “place” of dispatch and receipt to be the place where the dispatcher/recipient “has its place of business” (see s 14B(2)-14B(4)). This deeming of “place” of dispatch/receipt achieves a number of objectives: • It provides for a more meaningful connection between the transaction, place and the dispatcher/recipient than merely the location of the information system used to relay the message. • It enables communicators to use publicly available information (eg general business guides, address services) to determine the location of the dispatcher/recipient where locating an information system may be impossible. • It ensures certainty on the question of “where” a communication was sent/received. • It recognises the legal and practical uniqueness of transacting via computerised transmissions by addressing technology-specific issues.
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Email [7.740] A contract may arise by email just as it might if parties are conducting negotiations by any other form of communication; for example, a job offer may be made by email and accepted in the same way. Or, as another example, a company might accept orders for the purchase of goods via an email address. There are many other scenarios in which a contract may be formed by email. But at issue is: Exactly where and when is that contract formed? If the provisions of the ETA are taken to mean that receipt of acceptance equates to acceptance in a contractual sense (and the case study of La Forrest v Ford (see [7.600]) indicates that they will be), formation of the contract will occur when the offeror receives the acceptance of the offeree, or in the words of the ETA, “when the electronic message enters [the designated] information system” (s 14(3)). This would be the case when the offeror has designated her or his email address for the purposes of receiving communication. If the recipient/addressee (for contractual purposes the offeror) has not designated an information system (eg an email address) for receipt of electronic messages, the ETA will not consider acceptance received until such time as it actually “comes to the attention of the addressee” (s 14(4)). In other words, in contractual negotiations where an offeror had not specified their email address, acceptance would not occur until that offeror/recipient had actually read the email. Email –a form of communication oppressively compelling a speedy response. Dyson Heydon.
[7.750] But what if the offeror/addressee did not read their email? Or they deliberately avoided logging on to check their correspondence? In common law a person who does not receive an acceptance in a timely fashion because of poor business practices or deliberate evasion cannot rely on their tardiness to delay the time of the notice. In Tenax Steamship Co Ltd v Owners of the Motor Vessel “Brimnes” [1974] 3 All ER 88 at 113, Megaw LJ stated: if a notice arrives at the address of the person to be notified, at such a time and by such a means of communication that it would in the normal course of business come to the attention of that person on its arrival, that person cannot rely on some failure of himself or his servants to act in a normal businesslike manner in respect of taking cognisance of the communication,
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Chapter 7 Contracts in Business so as to postpone the effective time of the notice until some later time when in fact it came to his attention.
Because of the deeming provisions and the ETA’s functional equivalency objective, there is no reason why these established principles would not apply to this contemporary form of communication. The ETA’s drafters specified that a message need not be read to be considered “received” (Electronic Transactions Bill 1999 (Cth), Explanatory Memorandum): An addressee who actually knows, or should reasonably know in the circumstances, of the existence of the communication should be considered to have received the communication. For example, an addressee who is aware that the communication is in their electronic mail “box”, but who refuses to read it should be considered to have received the communication.
Online contracts Formation [7.760] Unless a contrary intention is shown, or the electronic communication is addressed to one or more specific parties, a proposal to form a contract will be treated only as an invitation to treat (s 15B). An online seller will not be contractually bound until the price offered by the online customer is accepted. There is a right to withdraw a portion of an electronic message for an input error provided that the other party is notified as soon as possible and there has been no use of or benefit from the goods or services (s 15D).
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Content [7.770] Although there are still unresolved issues in relation to contract formation and exactly how a court will interpret the provisions of the ETA, contract law does provide the ability to overcome most, if not all, problems related to online contract formation. This is accomplished by creating a contract with terms and conditions that resolve the problematic issues of: • the time and place an offer is said to be made; • the time and place and mode by which the offer is accepted; • the exact time when a contract between the online seller and the purchaser comes into existence;
The successful executive of the next Millennium will have to realize that money and information are not national and are totally out of control of any political system we have, but –above all –he will have to realize that what happens in the most remote corner of the world may tomorrow have an impact on his own local market; he should realise that already there is no economic centre. Peter Drucker.
• the place where the contract is agreed to be made and the law (jurisdiction) by which the contract is to be governed; and • the terms and conditions representing the entire agreement between the parties other than non-excludable statutory implied terms. The issue becomes: how does an e-business ensure that the terms and conditions (containing the resolutions to the above problematic issues) upon which it desires to conduct its e-business are binding between the parties? The answer is by obtaining the unambiguous consent of the buyer to the seller’s terms and conditions contained on the seller’s website. The case law which explains how this occurs centres around enforceability of exclusion and limitation of liability clauses. In essence that body of precedent states that a term will be included in a contract if the term was made known and agreed to by the parties at the time or before the contract was made, or sufficient notice of the term was given to the party at the time or before the contract was made. In the electronic environment, this unambiguous
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consent to contract terms and conditions may be obtained by using what is known as “click- wrap” terms, which require the user (the buyer from an e-business website) to view and scroll through the terms and conditions and click on a button that says “I accept” or “I agree” before they are allowed to place an order. To ensure unambiguous consent, rather than accidental consent, there should be two buttons, one that says “I do not accept” or “I do not agree” which is the default setting (ie is clicked when the terms and conditions appear) together with the “I accept” or “I agree” button. By requiring the customer to change the default setting, unambiguous consent is recorded. If a user does not agree to accept the terms and conditions, the user is not allowed to place an order. Because the e-business is dictating the terms and conditions upon which it is prepared to do business, care should be taken in drafting the terms so that they are not overly onerous or one sided in favour of the e-business as what is created is a contract of adherence which lacks any true negotiations between the parties. Onerous terms in contracts of adherence may not be looked upon favourably by courts and may be struck down by consumer protection legislation.
IN CONTEXT
Click-wrap and browse-wrap contracts
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Click-wrap contracts There are three kinds of lies: lies, damned lies and statistics. Benjamin Disraeli.
[7.780]“Click-wrap” contracts are contracts where, before the transaction is concluded, consumers are required to click on a box or icon confirming their agreement to the supplier’s terms. The terms are typically made available through some form of drop down box or hypertext link accompanying the “I accept” icon. Typically, click-wrap contracts may be treated as signed contracts. The consumer’s act of clicking “I accept” will usually constitute a clear and unequivocal signal of consent to the standardised terms proposed by the supplier. In such cases the supplier’s terms will be incorporated into the contract regardless of whether the consumer has read or understood those terms. However, it is the nature of the notice, in the form of a statement of acceptance, not the mere act of clicking, that ensures this consequence. It is possible to envisage a click-wrap contract where the consumer’s act of clicking cannot be treated as akin to signature for the purposes of incorporating standardised terms. In some cases, clicking an “I accept” icon might reasonably be understood by consumers as performing a more limited function. For example, the click might reasonably be seen as a way as signalling agreement only to the specified purchase price, quantity or delivery details or as authorising the downloading of software. For a click-wrap contract to be treated as a signed contract, it must always be shown that consumers were provided with a clear statement of the consequences of the act of clicking (ie “By clicking I consent to the attached terms and conditions”). In this sense, click-wrap contracts have similarities with those contracts for which notice must be provided to incorporate terms. Browse-wrap contracts “Browse-wrap” contracts are contracts where consent to the supplier’s standardised terms is inferred from the conduct of consumers in proceeding through a webpage or completing an online transaction. Browse-wrap contracts have been treated as unsigned contracts
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Chapter 7 Contracts in Business
incorporating terms through notice. In some circumstances, browse-wrap contracts might also be treated as signed contracts. Once again, the issue comes down to the notice given to consumers about the significance of their conduct in concluding a contract. A supplier’s standardised terms available on a website may be incorporated into the contract with consumers through clear notice on the website that the transaction will be governed by those terms. This notice may or may not be accompanied by a requirement for consumers to enter their name or to verify their identity. In some transactions, consumers may reasonably view this information as relevant merely to delivery or billing issues. However, a consumer’s conduct in entering their name on a website in concluding an online contract might amount to the equivalent of a formal signature in a paper transaction where performed in response to a clear statement by the supplier about the consequences of that conduct, for example, “by entering your name you consent to the supplier’s contract terms”.
Live within your income, even if you have to borrow to do so. Josh Billings (1818-1885).
J M Paterson, “Consumer Contracting in the Age of the Digital Natives” (2011) Journal of Contract Law 152 at 167 (references omitted)
eBay International AG v Creative Festival Entertainment Pty Ltd [2006] FCA 1768
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Facts
[7.790]Creative Festival Entertainment Pty Ltd (“Creative”) was the organiser of the Big Day Out concerts, events held in late January or early February each year at venues at the Gold Coast, Sydney, Melbourne, Adelaide and Perth. The particular events in question were to be held in 2007 and tickets for the events could be purchased on the Big Day Out and Ticketmaster websites as well as over the counter at Ticketmaster stores and other retail outlets. eBay is the world’s largest online auction site where people may sell and buy almost any item that is capable of being bought and sold, including tickets to an event such as Big Day Out. Tickets to the Big Day Out were limited and the demand was very large, especially for the Sydney venue which sold out in less than 2.5 hours after going on sale. In an effort to make tickets available to the largest number of people, Creative limited the number of tickets any person could buy online or over the counter. Creative also included a term on the back of each ticket (new condition 6): “Should this ticket be re-sold for profit it will be cancelled and the holder will be refused entry. This condition specifically prohibits ticket re-sale through online market or auction sites”. Unfortunately, neither the Big Day Out nor the Ticketmaster websites contained this new condition 6; rather they displayed, using a click-wrap method of obtaining consent to the terms and conditions displayed on the website, a clause from previous year’s tickets which stated: “Should the ticket be re-sold or transferred for profit or commercial gain it will become voidable and the holder may be refused entry to, or ejected from the venue”. eBay sued Creative alleging that the new condition 6 was misleading and deceptive in that it indicated that Creative had the means to discover and cancel each ticket sold online on its website and the legal ability to do so. Issue The issues were whether the new condition 6 was a term of the contract where tickets were purchased online, and whether the new condition 6 was misleading or deceptive in breach of the then s 52 of the TPA (now s 18 of the ACL).
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The Court held that the new condition 6 was not a term of the contract for online ticket sales that occurred before the proceedings were started and the websites changed to include the new condition 6. The new condition was misleading in that it purported to indicate that Creative had the means and would detect every instance of resale for profit. Rares J held (at [49]-[52]) that: The Ticketmaster online purchase was a contract in writing signed by the parties. By clicking on the relevant buttons and, by the computer bringing up all terms needed to purchase a ticket, on behalf of Ticketmaster as agent for Creative, the whole transaction was in writing, signed and agreed by the parties. A reasonable person in the position of the parties would have regarded the transaction completed on Ticketmasters’ webpage as the contract: Toll (FCGT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165. When the purchaser received the ticket, the terms themselves precluded any opportunity to seek a refund (see condition of sale 3) because he or she was informed that tickets would not be exchanged or replaced, nor money refunded “after purchase”. That is, the very transaction which had been confirmed by the series of webpages and the confirmation email generated by a Ticketmaster online transaction, could not be undone if the conditions of sale were part of the transaction … Because these conditions were not brought to the attention of the purchaser and were not available to the purchaser, perhaps for more than six weeks after the transaction was effected and the purchaser paid the price, I am of opinion that it is quite unrealistic to regard this ordinary consumer transaction as one in which the purchaser would have been free to return the ticket thereafter and receive a refund. The ordinary reasonable member of the public would be confronted with a representation on the reverse side of the ticket that the contract denied him or her the ability to return the ticket or get a refund on ascertaining that the conditions were unsatisfactory. I am of opinion that condition of sale is calculated to convey to a person who bought online from Ticketmaster that the transaction was completed online at the time of the webpage transactions. It follows that it did not contain any terms on the ticket. The vague and general reference in Ticketmaster’s purchaser policy to terms being on tickets, cannot substitute for the necessity to draw specifically to someone’s attention unusual or significant terms affecting the proposed relationship, if it is sought to claim that the contract contains those terms. This is the more so when a term like new condition 6 is not otherwise available to a purchaser and their attention is not directed to it clearly or, as in this case, at all.
Implications The biggest lesson to be learned … is a legal one … Most contracts were developed before social media was even thought of. Now they will be a lot more specific, in terms of what is acceptable. Contracts for every opera house in the world will be different now. L Terracini, Sydney Morning Herald (12 August 2014).
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[7.800] The decision accepted that contracts could be made online through the use of a series of webpages displaying content and using a click-wrap agreement to obtain the consent of the purchaser to the displayed terms. Terms that were later argued to be incorporated into the contract were not included because of the lack of notice of those terms at or prior to the time the contract was made. Digital signatures [7.810] Some contracts require actual written signatures of the contracting parties to be enforceable. This is impossible to achieve when a contract is made electronically. So, how can a party sign a contract created electronically? The ETA allows contracts that would previously have had to be signed with a person’s actual signature to be signed electronically using an “electronic signature”. For this purpose the ETA provides that where a signature is required for the purposes of a law, this requirement is met where a “method is used to identify the person and to indicate the person’s approval of the information communicated” (ETA, s 10(1)(a)). The method used
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Chapter 7 Contracts in Business Information isn’t powerful. Powerful people are seldom informed. Who’s powerful? Look at some of the powerful politicians. Presidents, prime ministers, generals of armies. They don’t sit behind a computer reading stuff off the internet. Hey, who’s got the most information? Librarians do! It’s hard to imagine a group of people with less power than librarians. Cliff Stoll, Astrophysicist.
must be “as reliable as was appropriate for the purposes for which the information was communicated” (ETA, s 10(1)(b)). The ETA goes on to allow for government entities to specify a method for verification of identity (ETA, s 10(1)(c)). The ETA is intentionally technologically neutral, and does not specify exactly what is meant by “as reliable as appropriate”. There is currently no other legislative or judicial guidance on what is a valid electronic signature. However, at the international level, the UNCITRAL Model Law on Electronic Signatures (2001) sets out guidelines for the use and recognition of electronic signatures in the context of international commercial activities. Under Art 6(3) an electronic signature will be reliable for the purpose of an actual signature if: (a) The signature creation data are, within the context in which they are used, linked to the signatory and to no other person; (b) The signature creation data were, at the time of signing under the control of the signatory and of no other person; (c) Any alteration to the electronic signature, made after the time of signing, is detectable; and (d) Where a purpose of the legal requirement for a signature is to provide assurance as to the integrity of the information to which it relates, any alteration made to that information after the time of signing is detectable.
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Article 6(3) may provide some guidance as to what might constitute an electronic signature under Australian law. The Australian government has responded to concerns about electronic signature standards with the introduction of the Australian Business Number Digital Signature Certificate (ABN-DSC). An ABN-DSC is a digital certificate linked to an entity’s ABN. It is intended to facilitate online service delivery and foster the use of digital certificates and e-commerce among Australian businesses. An ABN-DSC may only be issued by an accredited Certification Authority, known as a “Gatekeeper”. The ABN-DSC is primarily issued for use with the Commonwealth government and can be used to deal online with Commonwealth agencies. There have been further developments in relation to ABN- DSCs, like the Angus Project. The Angus Project is a scheme introduced by the four major Australian banks to facilitate electronic transactions with business customers. It involves the issuing of DSCs to banking business customers. From the latter half of 2002, digital certificates issued under the Angus Project have been cross-recognised for the purposes of dealing with such government agencies as the Australian Taxation Office, alleviating the need for businesses to have more than one digital signature.
Privacy [7.820] Electronic commerce opens up a new world of opportunities for the creation, collection and dissemination of information. Information can be stored and generated in a number of ways. These include the use of cookies, the distribution of mailing lists and the collection of personal data for online business purposes. Each of these methods of data collection brings with it privacy concerns for individuals involved in e-business transactions. How might a party’s privacy be protected when information is created, collected and disseminated electronically in e-business transactions?
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Cookies That man is a success who has lived well, laughed often and loved much; who has gained the respect of intelligent men and the love of children; who has filled his niche and accomplished his task; who leaves the world better than he found it, whether by a perfect poem or a rescued soul; who never lacked appreciation of earth’s beauty or failed to express it; who looked for the best in others and gave the best he had. Robert Louis Stevenson.
[7.830] When you log on to your favourite online shopping site, you might be greeted personally as follows, “Good morning Jane Smith; you last visited our store on 3rd January 2015. We have some recommendations that might be of interest to you. Click here to view.” How is it that simply viewing a site gives rise to this amount of personal information popping up on your screen? This is done with the use of cookies, which are pieces of information generated by a web server and stored in the user’s computer. The information consists of any user-specific data entered by the user during a previous visit to that site (or a cooperative site). The rationale offered for the existence of cookies is that it allows a personalisation of the e- shopping experience. A customer profile can be built up over many visits to the e-store, with a gradual accumulation of the user’s likes, dislikes and shopping history. A user’s contact details can be stored, alleviating the need for a user to retype this information when next they order from the site. In most cases, not only does the storage of personal information occur without the user’s knowledge or consent but subsequent access to the cookie by the web server occurs automatically and without consent when the website is revisited. The information stored in a cookie is not restricted to the entity that was responsible for the creation of the cookie. The web server that created your cookies may well have an arrangement with an advertising placement business, allowing your information to be passed on for the purposes of direct marketing.
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Collection of data via cookie technology will usually not fit within the definition of “personal information” as defined in the Privacy Act 1998 (Cth). As such, it is not regulated in this way. Recommendations have been made from time to time that sites collecting and creating cookies advise users that the practice is occurring. At this time, there is no legislation requiring this from service providers or site operators.
Mailing lists and spamming [7.840] Spam is e-junk email. The word is generally credited to have arisen in reference to the infamous Monty Python “Viking Spam Sketch”. Just as traditional junk mail is the delivery of mail to persons who would not otherwise choose to receive it, so too is “spamming”, but in electronic form. Most spam is commercial advertising but can also relate to scams or political lobbying material. Spamming is sent to target lists made up of email addresses gathered from various public and private postings and collections of email addresses. This may involve the stealing of a corporation’s internet mailing list, the acquisition of email lists by purchasing another company’s email lists, or simply by searching the web for an institution’s posted mailing list for staff. Construction of such lists is not usually time-consuming as the entire procedure can be performed through specific computer programs designed for spamming purposes. Spamming is an extremely low-cost activity, as the cost for internet communication is calculated on a time basis and not on the amount of individual emails sent. To send an email to one address or one thousand addresses takes the same amount of “internet time” and hence costs the sender the same amount. Contrast this with traditional junk mail, which involves 354
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Chapter 7 Contracts in Business
more paper and postage for each item sent. In comparing the two it becomes obvious why spamming has become such a popular method for distribution of junk mail.
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Spamming involves the issue of privacy in two ways. The first is how is it possible to restrict access to an email address so that spam cannot be delivered; and the second is how the receipt of unwelcome and unsolicited email can be prevented. [7.850] Legislation has been enacted by the Commonwealth Government to address the problem of spam. The Spam Act 2003 (Cth) came into effect on 10 April 2004. The Act prohibits the sending of unsolicited commercial electronic messages and provides that messages should only be sent to an address when it is known that the person responsible for that address has consented to receive it. The Act also prohibits the use of electronic address harvesting software, or lists which have been generated using such software for the purpose of sending unsolicited commercial electronic messages. Commercial electronic messages must contain accurate information about the sender of the message and a functional way for the message’s recipients to indicate that they do not wish to receive such messages in the future that is that they wish to unsubscribe. The Act covers commercial electronic messages that are sent using applications such as: email; short message service (SMS); multimedia message service (MMS); and instant messaging (IM) but not non-electronic messages (such as ordinary mail, paper flyers, etc); voice-to-voice telemarketing; the majority of “pop up” windows that appear on the internet (they are usually an intrinsic part of a webpage that has been accessed, rather than a message sent to the recipient address); and messages without any commercial content that do not contain links or directions to a commercial website or location. Commercial electronic messages that are covered are those that have originated in Australia that are sent to any destination and those that have originated overseas that are sent to an address accessed in Australia. If the Act is breached a business may be subject to a $220,000 penalty for a single day’s contraventions or if, after that finding the business contravenes the same provision, a penalty of up to $1.1 million. The Spam Act specifies a number of options to enforce the legislation, such as warnings, infringement notices and court actions, depending on which is the most appropriate response to the contravention that has occurred. The biggest problem with spam is, of course, that most spam does not originate in Australia and preventing spam originating from overseas is problematic.
You really have to wonder why we even bother to get up in the morning. I mean, really: Why work? Simply to buy more stuff? Douglas Coupland.
Collection of data for use by online business [7.860] Of necessity many e-businesses need to collect customer-specific data, for example, to assist in the delivery of goods or to confirm the identity of a customer. Another way in which businesses may collect information about customers is through conducting various customer surveys. This information collected and stored electronically by e-businesses is easily sorted and managed. Is the privacy of this information protected? The Privacy Amendment (Private Sector) Act 2000 (Cth) incorporated into the (PA) has been in force since December 2001. The Act regulates the use and storage of personal information by non-government organisations. Personal information is defined within the PA as information or an opinion that can identify a person. An e-business that collects information which may identify a person, and is not exempt under the various exemption provisions (which exempts most businesses with an annual turnover of less than $3 million), will be subject to the PA. For example, an e-business may keep an information file on
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its customers that includes their address, contact numbers, email, full name and age. This information would be subject to the PA. Personal information must only be collected if it is necessary for one of the organisation’s functions or activities, and the organisation must take reasonable steps to inform the individual that the data is being collected and the purpose of such collection. With limited exceptions, disclosure or use of personal information for any purpose other than the primary purpose of collection is prohibited under the PA. There are special provisions specifically aimed at storing data electronically. In many of the e-business practices described above (eg sending of cookies, collection of data), it is possible that personal information is being collected, if so, the PA would apply to the collection of that data and the manner in which it is used and stored thereafter.
Regulating international e-business
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If all else fails, immortality can always be assured by spectacular error. Professor John Kenneth Galbraith.
[7.870] A frequently cited problem with regard to conducting an e-business transaction is the lack of confidence in the process. This is a problem for domestic e-business transactions but is magnified in relation to international e-business transactions. If the e-business transaction occurs wholly within Australia it may be possible to ascertain the physical location of an e-business and the parties are safe to assume that Australian law will apply to the transaction as discussed above. However, if the e-business transaction is international neither the physical location of the business nor the law that will apply to the transaction can be safely assumed –this is apart from actually enforcing any legal remedies that might be won. The practical reality is that it can be very difficult to enforce a judgment made in a particular country if the liable party is not physically present in the country or has no assets in the country. ACCC v Chen [2003] FCA 897 referred to above is a good illustration of this. This is because a unique feature of the internet and conducting business via email or the internet is that the business is conducted in a borderless world. For instance, it may involve the situation of a Mexican online auction house operating via a server based in Brazil with customers anywhere in the world.
Establishing jurisdiction [7.880] The traditional way for an Australian court to deal with an international dispute is that the Australian court must first establish that it has jurisdiction to hear the matter. To establish jurisdiction an Australian court would decide whether the Australian court system has the inherent power to hear and determine the particular matter before it. Once the court has decided that it has jurisdiction to hear that matter it will then decide, on the basis of private international law (conflict of laws) which country’s laws will be used to adjudicate the matter at hand. This question will be decided on the basis of the subject matter of the dispute: that is, should it be for example a contract matter or a tort matter or some other legal matter. In relation to e-business transactions and private international law, unless the parties have agreed otherwise as explained above, the relevant issue in determining jurisdiction is when and where was the contract formed. Take the example of an Australian purchasing from an American company online advertising over the internet. At common law the seller (the American company) would be said to be making an “invitation to treat”. It is the purchaser (the Australian) who makes the offer to buy, which may then be accepted or 356
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Chapter 7 Contracts in Business
rejected by the seller. Given that it is the communication of the acceptance which results in the moment of formation (as discussed at [7.680] ff), formation occurs when the seller’s acceptance of the buyer’s offer is received by the buyer. This means the acceptance is communicated to the buyer and received in Australia: the contract is formed in Australia and Australian law will apply. Therefore, if the seller wishes to have the jurisdiction over the contract, the seller’s country’s courts and/or law, the seller should introduce contract terms that provide for this result. The matter of jurisdiction in ecommerce is far more broad-reaching than contract matters alone. For example, if defamatory information is published on a Japanese website, but viewed in Australia, do Australian courts have jurisdiction to hear the matter? Does that breach occur where material is put on the web or where it is viewed? The leading case in which the Australian High Court has had to determine this question of whether an Australian court had the jurisdiction to hear a particular matter and what laws ought to be applied to regulate the particular matter is Gutnick v Dow Jones & Co Inc (2002) 194 ALR 433. In this case the court had to decide what country’s laws would apply to a potential defamation that had occurred over the internet (note, this was not a contract matter and therefore not an e-business matter).
Lawyers are like rhinoceroses: thick- skinned, short- sighted, and always ready to charge. David Mellor.
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Because of the difficult process that has to be undertaken to establish jurisdiction with regard to an international transaction many online companies will include a jurisdiction clause in their terms and conditions specifying which country will have jurisdiction over any dispute arising from the contract.
Gutnick v Dow Jones & Co Inc (2002) 194 ALR 433
Case Study
Facts
[7.890] Mr Joseph Gutnick is a prominent, entrepreneurial Melbourne businessman, widely known in sporting, philanthropic and religious circles. Dow Jones published an article entitled “Unholy Gains”, both in its printed magazine Barrons and via its online news service Barrons Online, alleging Gutnick was the biggest customer of jailed money-launderer and tax evader Nachum Goldberg. The article included pictures of both Mr Gutnick and Mr Goldberg, and was subtitled “When stock promoters cross paths with religious charities, investors had better be on guard”. Barrons Online was available to some 1700 subscribers to the service in Australia, several hundred of whom were located in Victoria. Barrons Online was uploaded onto the Dow Jones website through a server located in New Jersey, US. Gutnick proceeded in a defamation claim against Dow Jones, claiming Victoria had jurisdiction to hear the matter as Dow Jones had caused the article to be published in Victoria via the internet. Issue The issue was whether Victoria was the correct place in which to hear this alleged matter of defamation. Held The High Court decided that the location of the tort of defamation is where the damage to reputation occurs. This is normally the place where the material is made available. Where the material is published on the internet, material is not available in a comprehensible form until it is downloaded onto a computer at the request of a user. In the Gutnick Case, this was Victoria. Consequently the court found
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-20 04:20:29.
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that the potential tort of defamation in this case occurred in Victoria and that the courts of Victoria had jurisdiction. Implications This decision has a serious impact on publishers of online materials who must consider not only the defamation laws (and defences) of the place where the material is created and/or uploaded, but also the defamation laws of the place where their subscribers download the material. It should be noted that Gutnick limited his claim for damages to those damages that occurred in Victoria.
Harmonisation of legal rules
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A lawyer without history or literature is a mechanic, a mere working mason; if he possesses some knowledge of these, he may venture to call himself an architect. Sir Walter Scott, Guy Mannering (1815)
[7.900] This method of international regulation relies on the development of uniform laws by way of international treaties, conventions or protocol via international bodies such as the United Nations, European Union or the World Trade Organization. An example of attempting uniformity by this method is given by the UNCITRAL Model Law on Electronic Commerce and the subsequent enactment by the Commonwealth and State governments of Australia of the various Electronic Transactions Acts. The attempt at harmonisation of the nation’s laws is an ongoing task that requires constant work. One forum for harmonisation of legal rules relating to e-commerce was the Conference on Private International Law Issues raised by Electronic Commerce at The Hague held on 26-27 October 2004 and organised by the Hague Conference on Private International Law, which looked at the legal aspects of an ecommerce transaction. On 30 June 2005, the members of the Hague Conference on Private International Law signed the Hague Convention on Choice of Court Agreements (HCCA). The main purpose of the HCCA is to provide certainty and enforceability of exclusive choice of court agreements in international civil and commercial matters. The agreements must be international in the sense that the parties must not reside in the same member state and all the elements of the dispute may not be connected to only one member state (Art 1(2)). An “Exclusive choice of court agreement” is defined as an agreement which is written or is in some other form which is accessible for reference subsequently and which designates the courts of a member state or states to the Hague Convention for the purposes of deciding disputes arising in connection with a specified legal relationship to the exclusion of any other courts (Art 3(a) and 3(c)). The major exception to the HCCA is that it does not apply when a consumer is a party or to contracts of employment (Art 2(1)). Article 8 of the HCCA provides that judgments given by courts of member states pursuant to the HCCA must be recognised and enforced in other member states, with only limited exceptions. Although signed by the members of the Conference on Private International Law, the treaty does not come into effect until ratified by the member states. As at September 2008, only one member state, Mexico, has ratified the HCCA, and so the treaty is unlikely to come into force any time in the near future. As can be seen with the HCCA, the problem with this method of regulation is that obtaining true harmonisation of the laws of all the world’s nations is an almost impossible task. Harmonisation has to take into account the world’s different cultures and it must be remembered that legal rules are simply a reflection of a people’s culture. Even within Australia all of the ETAs that have been enacted are not identical.
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Chapter 7 Contracts in Business
What is more likely to happen with regard to different legal rules that exist throughout the world with regard to e-business transactions is that there will be convergence. Convergence is where there is recognition that there are powerful nations or groups of nations in the world economy and that if a party desires to undertake a business transaction with a party within such a nation or group of nations then one simply has no choice but to comply with the laws of that nation or group of nations. As a result there will be de facto harmonisation as parties outside of the nation or group of nations must comply or not be able to undertake a transaction.
7.10 GUARANTEES Nature and function of a guarantee [7.910] A guarantee is a contract in which a guarantor promises to answer to the person in whose favour the guarantee is given (“the creditor”) for a debt or obligation of a principal debtor if the debtor defaults. The New South Wales Law Reform Commission noted in Guaranteeing Someone Else’s Debts (2006), that guarantees are used in a broad range of situations to support a variety of obligations other than the payment of a debt (at [1.9]): • The borrower has no substantial credit record, such as where the borrower is a young person or a recently formed company.
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• The borrower, although credit-worthy, does not have sufficient assets to use as security for the loan. • The borrower is a company and the lender needs security to meet the potential risks not only in the company’s business but also those associated with the use of a corporate structure to operate the business. For example, to avoid its financial obligations to lenders, a company may divert funds and assets to its shareholders, related companies or beneficiaries. In the case of a company with a small paid-up capital, the lender may require its directors to give a personal guarantee as a security in case the limited liability of the company has the effect of it not meeting its financial obligations.
The Report notes (at [1.10]) that: Lenders use guarantees as a risk-minimisation device. They protect the lender’s money in cases where the borrower does not have good credit or enough assets to use as security. Guarantees are also useful in loans made to businesses that are considered risky. By reducing lenders’ exposure to risk, as well as the lenders’ costs associated with risk assessments, they assist in making credit reasonably accessible and less costly. Without guarantees, many businesses may not be able to obtain credit. Additionally, credit would be more expensive since lenders impose higher interest rates and charges as the price for insufficient security for credit risks.
The contract of guarantee [7.920] A contract of guarantee or suretyship is one in which the guarantor, or surety, agrees to perform the obligation or discharge the liability of a third party if the latter fails to do so. There are, accordingly, three parties to the contract of guarantee: 1.
The principal debtor, being the person primarily liable for the obligation or liability whether existing or contemplated.
2.
The creditor, being the person entitled to the benefit of the obligation or liability.
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A fool with a fountain pen. That is what a guarantor is sometimes called. C Boxer, “Professional Liability Today”, The Economist (29 April 1989).
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3.
The guarantor (sometimes also called the surety) who, in consideration of the creditor extending credit or otherwise dealing with the principal debtor, promises the creditor to discharge the liability of the principal debtor if the debtor should fail to do so. In this respect therefore it may be observed that the guarantor is only secondarily liable. The liability only arises on default by the debtor.
The NSWLRC Report explains that the essential distinguishing feature of a contract of guarantee is the secondary, or ancillary, nature of the obligation that the guarantor assumes in the sense that it depends upon the principal debtor’s continuing liability and, ultimately, the debtor’s default. The guarantor is not liable unless and until the principal debtor has failed to perform her or his obligations (at [1.7]). At common law, the secondary liability of the guarantor does not prevent the creditor from enforcing the guarantee before instituting proceedings against the principal debtor. In other words, subject to legislative or contractual provision to the contrary, once the principal debtor is in default, the creditor may sue the guarantor instead of the debtor for the amount owed (at [1.8]).
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Guarantee v indemnity [7.930] An indemnity is a contract to keep another safe from loss. It is distinguished from a guarantee in that it is an independent obligation, and not simply an obligation arising consequent upon the default of a principal debtor. It involves an undertaking to keep the party to whom it is given free from loss and the person giving the indemnity can be called on to perform whether or not the principal debtor has failed in its obligation (it may not even have been asked to perform). This contrast between guarantee and indemnity was described by Holroyd Pearce LJ in Yeoman Credit Ltd v Latter [1961] 1 WLR 828 at 831 in these terms: An indemnity is a contract by one party to keep the other harmless against loss, but a contract of guarantee is a contract to answer for the debt, default or miscarriage of another who is to be primarily liable to the promisee.
This undertaking may arise by the terms of a contract of indemnity; or it may arise by legal implication. An example of the latter is the indemnity implied by law in favour of employees in respect of liabilities incurred by them in the course of employment. Not being a guarantee, there is no requirement that it be written, and obstacles that arise in the enforcement of a guarantee, for example establishing the default of the principal debtor and the validity of the principal contract, do not arise. In many instances, the distinction between a guarantee and an indemnity is not clear and to avoid problems lenders frequently require both a guarantee and an indemnity in support of a proposed loan.
Creation of guarantee In God we trust. All others pay cash. Anon.
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[7.940] It has already been observed that general principles of contract law apply to guarantees, along with legal rules specific to guarantees. A contract of guarantee therefore requires that, first of all, a valid contract be established. In addition, contracts of guarantee must be in writing, signed by or on behalf of the guarantor, except in New South Wales and South Australia where such formal requirements have been dispensed with.
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Chapter 7 Contracts in Business
However, where the guarantee falls within the provisions of the consumer credit legislation, then a written contract is necessary and other formalities must also be complied with; such legislation now applies throughout Australia. Where a guarantee provides for more than one guarantor and, in particular, provides that the liability of all guarantors shall be joint and several, then the document will not be binding on any guarantor until all have signed it, unless there is a provision in it making those who signed bound whether the others sign or not. Joint and several liability means that the guarantors are jointly liable as a group as well as being individually liable for the amount guaranteed. In a particular case a contract for a loan provided that: The personal guarantee of each director is required in the case of a registered company, the paid up capital of which is a nominal amount only. Two guarantees are printed on the back of this form. Additional copies may be obtained from our credit department if required.
The New South Wales Court of Appeal held that the liability of any director signing the guarantee was conditional on all directors of the borrowing company doing likewise: Bleyer v Neville Jeffries Advertising Pty Ltd (unreported, Court of Appeal, New South Wales, 15 December 1987). Another factor relevant to establishing an enforceable guarantee is the existence of a valid contract between the principal debtor and the creditor. In McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 471, Starke J stated:
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[the guarantor], however, is not liable on his guarantee where the principal debt cannot be enforced, because the essence of the obligation is that there is an enforceable obligation of a principal debtor.
Liability of the guarantor [7.950] As stated above, the liability of the guarantor arises upon default by the principal debtor. The scope of that liability is a matter for the terms of the guarantee. Some guarantees are limited to a certain amount so that the whole indebtedness is not guaranteed. Unlimited guarantees, sometimes known as “all moneys guarantees”, create a broad liability not only for the borrowings of the principal debtor but also for example to that debtor’s liability as guarantor for the debts of others. The dangers inherent in such guarantees caused the House of Representatives Standing Committee on Finance and Public Administration in “A pocket full of change” (1991) (the Martin Report), to recommend that unlimited guarantees should not be permitted. That recommendation has not been adopted. The contract will also disclose whether the guarantee is continuing or specific. If specific, it is released upon the repayment of the particular debt by the debtor. If continuing, it is not so released but remains in place to guarantee any future indebtedness incurred prior to the discharge of the guarantee and within its terms. Subject to the terms of the contract, it is not usually necessary for the creditor to sue the principal debtor before demanding payment from the guarantor. The fact of default is sufficient. The determination of the scope of the guarantor’s liability is ultimately a question of the meaning of the contract of guarantee. In this regard it should be noted that courts interpret guarantees strictly, and where the meaning of the contract is unclear it will usually be interpreted in favour of the guarantor, restricting its liability.
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Acquaintance. A person whom we know well enough to borrow from, but not well enough to lend to. Ambrose Bierce.
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Rights of the guarantor My policies are not based on some economic theory but on things I and millions like me were brought up with: an honest day’s work for an honest day’s pay; live within your means; put a nest egg by for a rainy day; pay your bills on time; support the police. M Thatcher, The Economist (29 April 1989).
[7.960] Once liability has arisen the guarantor is entitled, before payment, to set off any proper counter claim against the creditor together with any set-off the principal debtor may have against the creditor. Although the position is not free from doubt it is likely that this last right of set-off does not extend to a cross action for unliquidated damages which the debtor may have against the creditor arising out of the transaction (see Cellulose Products Pty Ltd v Truda (1970) 92 WN (NSW) 561). Having paid the creditor, the guarantor may sue the debtor for that amount. The guarantor is subrogated to (becomes entitled to) the creditor’s rights in relation to the original debt including a right to the benefit of any securities of the debtor held by the creditor. The fact that the contract of guarantee makes no provision for the subrogation of all securities held by a creditor does not disentitle the guarantor to them. The authority for this proposition is the 1803 decision of Lord Eldon in Aldrich v Cooper (1803) 32 ER 402 at 405, that equity regards it as “against conscience that [the creditor] should use securities to the prejudice of the [guarantor]”. Once the guarantor has discharged the guarantee obligation, and the creditor has fully recovered its debt (whether entirely from the guarantor or otherwise) then for the creditor to make further use of the securities would amount to double payment. It follows from the guarantor’s right to subrogation that the creditor must not impair or diminish any security held by it. It was said by Dixon J in Williams v Frayne (1937) 58 CLR 710 at 738 that:
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if the creditor sacrifices or impairs a security, or by his neglect or default allows it to be lost or diminished –in that case the [guarantor] is entitled in equity to be credited with the deficiency in reduction of his liability.
Where there is more than one guarantor, in the absence of agreement to the contrary, each must contribute equally to the amount to be paid. While the creditor may only need to have recourse to any one of them for payment, where they are both jointly and severally liable, that guarantor, upon meeting the creditor’s claim, is entitled to demand contribution from the co-guarantors. This entitlement arises where the co-guarantors have a common liability, described in AE Goodwin Ltd v AG Healing Ltd (1979) 7 ACLR 481 as having coordinate liabilities to make good the one loss. Provided the aspect of sharing a common liability is present, it does not matter that the liability of each guarantor flows from a separate document, nor even that the guarantor claiming contribution signed the guarantee in ignorance of the existence of the other(s).
Discharge of the guarantor [7.970] The guarantor is discharged from liability first where the principal debtor has made payment or been released by the creditor. The guarantee is also terminated where the position of the guarantor has been changed without consent. That happens where the form of the guarantee is changed, where the terms of the transaction between creditor and debtor, which have been guaranteed, are changed or where the debtor’s time for payment is extended. Discharge also results from the loss of or diminution in any securities held by the creditor: for example, by the creditor releasing any security or discharging any one or more of the joint guarantors. 362
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Chapter 7 Contracts in Business
Factors that may operate to vitiate (invalidate) a contract of guarantee include fraud and unconscionability. If the guarantee has been obtained by fraud (eg by the non-disclosure of material facts known to the creditor), it will be set aside. Such vitiating factors, however, extend well beyond fraud. They include undue influence, inequality of bargaining power, duress, and harsh and unconscionable conduct.
IN CONTEXT
What makes contracts of guarantee so problematic? [7.980] Some guarantors, for example, sign a guarantee in the belief that that they are acting simply as a referee for the borrower. Even when they know of their potential liability, many guarantors think they will never be called on to repay the loan. Many believe guarantees pose little or no financial risk.
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A recurring and highly significant theme in guarantee transactions is the personal relationship between the borrower and guarantor. Many guarantors are spouses (usually wives), parents, other relatives or close friends of the borrower. If the borrower is in default, the creditor will usually attempt to recover the money from the guarantor. Hence, this phenomenon has been called “sexually transmitted debt”, “emotionally transmitted debt” or “relationship debt”. On the one hand, the emotional relationship between the borrower and guarantor means the guarantor is vulnerable to unfair conduct on the part of the borrower and/or lender. A significant number of guarantors have reported that they did not understand what they were doing at the time of the transaction. Many do not engage in the usual inquiries that a person entering a business arrangement would undertake. Quite often, they do not receive information needed to understand the nature of the transaction and the risks involved. On the other hand, many guarantors in a close relationship to the borrower agree to guarantee the borrower’s indebtedness even where they fully comprehend the nature of the risks associated with the transaction into which they are entering. They do so simply because they do not want to damage their relationship with the borrower by refusing to act as a guarantor, viewing themselves as having no real choice about providing security for the underlying loan. Speaking of the vulnerability of parents as guarantors for the debts of their children, Chief Justice Higgins and Justice Crispin recently said [in Watt v State Bank of New South Wales [2003] ACTCA 7 at [22]]: [T]he real vulnerability of parents usually stems not from a failure to comprehend the nature of the transactions in which they have been asked to participate or from insufficient information concerning their implications. It stems from the love of their children. Their desire to help and protect them, to advance their interests, to maintain a close relationship, to avoid causing disappointment, hurt or distress, to maintain the relationship may all make it difficult to say “no”. Regardless of the guarantor’s motives for entering into the contract, it is important to remember that guarantees are contracts with significant legal and financial implications. The financial risks can be great because a guarantee is usually accompanied by a mortgage over
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Business and the Law property, commonly the guarantor’s family home. Guarantors therefore undertake huge risks, including the possibility of losing their family home, without necessarily obtaining any financial benefit from the loan taken out by the borrower. It is apparent, therefore, that the legal system needs to protect guarantors as far as it reasonably can, especially from unfair conduct by lenders and borrowers. New South Wales Law Reform Commission, Guaranteeing Someone Else’s Debts (2006)
“Unfair” guarantee contracts [7.990] An enduring issue is that of “fairness”. Guarantees are susceptible to unfair dealings for reasons set out in the NSWLRC Report. Reference is made in Chapter 20 to the range of common law and legislative initiatives which have developed to address contracts –including contracts of guarantee –which, depending on the particular regime, may be “unfair”, “unjust”, “unconscionable” or “harsh or oppressive”.
IN CONTEXT
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Sexually transmitted debt [7.1000] A particular issue that arises in the context of guarantees is that of a wife guar-
Some men are heterosexual, and some men are homosexual, and some men don’t think about sex at all. They become lawyers. Woody Allen.
anteeing the debt of her husband.
There is long-standing authority that a guarantee given by a wife for her husband’s debts will be unenforceable either: i.
where the husband has undue influence over his wife; or
ii.
where, although there may be no undue influence, the transaction is not fully explained to the wife prior to her entering into it.
The principle derives from the case Yerkey v Jones [1939] HCA 3 and has been discussed subsequently in several cases. Despite some doubts as to its continuing relevance it was upheld by the High Court in Garcia v National Australia Bank Ltd [1998] HCA 48. In August 1979, the appellant (Mrs Garcia) and her then husband, Mr Garcia, executed a mortgage over their home in favour of the Commercial Banking Company of Sydney Ltd and during the following years she entered into further guarantees for moneys owing by her husband’s business. At these times she had a brief explanation by the husband as to the legal ramifications of what she was doing but there was no independent advice, especially by the bank. In later litigation Mrs Garcia argued that she had no real idea of what she was signing and thought that all what she was doing was “risk-proof”. The question for the High Court was whether the High Court decision in Yerkey v Jones [1939] HCA 3 placed a married woman in a special position. Despite some doubts as to its continuing relevance the High Court upheld this principle that when there were commercial dealings involving a husband and wife, the wife was in an inferior position because of a disparity of economic and other power within the relationship, and this meant she was not liable under the guarantees.
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Chapter 7 Contracts in Business The court of first instance had said that the rule in that case applied, but on appeal the New South Wales Court of Appeal held that the principle no longer existed for a special “wives” category, but had become a part of the general equitable doctrine of unconscionability set out in Amadio. However, in their joint judgment in the High Court, Gaudron, McHugh, Gummow and Hayne JJ said that (at [31]):
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The principles applied in Yerkey v Jones do not depend upon the creditor having, at the time the guarantee is taken, notice of some unconscionable dealing between the husband as borrower and the wife as surety. Yerkey v Jones begins with the recognition that the surety is a volunteer: a person who obtained no financial benefit from the transaction, performance of the obligations of which she agreed to guarantee. It holds, in what we have called the first kind of case, that to enforce that voluntary transaction against her when in fact she did not bring a free will to its execution would be unconscionable. It holds further, in the second kind of case, that to enforce it against her if it later emerges that she did not understand the purport and effect of the transaction of suretyship would be unconscionable (even though she is a willing party to it) if the lender took no steps itself to explain its purport and effect to her or did not reasonably believe that its purport and effect had been explained to her by a competent, independent and disinterested stranger. And what makes it unconscionable to enforce it in the second kind of case is the combination of circumstances that: (a)
in fact the surety did not understand the purport and effect of the transaction;
(b)
the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed);
(c)
the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet
(d)
the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.
To hold, as Yerkey v Jones did, that in those circumstances the enforcement of the guarantee would be unconscionable represents no departure from accepted principle. Rather, it “conforms to the fundamental principle according to which equity acts, namely that a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable conduct”. It will be seen that the analysis of the second kind of case identified in Yerkey v Jones is not one which depends upon any presumption of undue influence by the husband over the wife. As we have said, undue influence is dealt with separately and differently. Nor does the analysis depend upon identifying the husband as acting as agent for the creditor in procuring the wife’s agreement to the transaction. Rather, it depends upon the surety being a volunteer and mistaken because of the trust and confidence between surety and debtor the surety may well receive from the debtor no sufficient explanation of the transaction’s meaning. To enforce the transaction against a mistaken volunteer when the creditor, the party that seeks to take the benefit of the transaction, has not itself explained the transaction, and does not know that a third party has done so, would be unconscionable.
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Business and the Law Kirby J, while agreeing that the appeal should be upheld, said (at [83]) that: The result to which I have come flows not from the fact that Mrs Garcia was a married woman in need of special protection, as such, from the law of equity. It flows from a broader doctrine by which equity protects the vulnerable parties in a relationship and ensures that in proper cases they have full information and, where necessary, independent advice before they volunteer to put at risk the major asset of their relationship for the primary advantage of those to whose pressure they may be specially vulnerable.
Letters of credit [7.1010] A letter of credit is an arrangement by which a bank (the “issuing bank”) acting on the instructions of its customer (the “applicant”), or on its own behalf, authorises another bank to make a payment to a third party (the “beneficiary”) provided stated conditions are complied with. A typical example of the use of a letter of credit is in the financing of international trade. An importer of goods (the “applicant”) may request its bank (the “issuing bank”) to supply a letter of credit addressed to a bank located in the country of export authorising that bank to pay a certain amount to an exporter (the “beneficiary”) when relevant documents as to the shipping of the goods are supplied. Such an arrangement constitutes a guarantee of payment but is not strictly regarded in law as a contract of guarantee, and the particular rules of law applicable to guarantees do not apply to the interpretation and enforcement of letters of credit.
Shopping is a feeling. David Byrne.
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Letters of comfort [7.1020] A letter of comfort is a statement furnished by a holding company to a lender to a subsidiary under which the holding company undertakes to ensure that the subsidiary is able to repay the loan. There is conflicting case law on the effect of letters of comfort. Ultimately the issue is one of contractual intent –was there an intention to create a legal obligation? (See [7.150].)
7.11 COMMON LAW RESTRAINTS OF TRADE [7.1030] A restraint of trade is, generally, any contractual provision restricting one party’s freedom to engage in trade. Today the Competition and Consumer Act 2010 (Cth) regulates a range of restraints of trade affecting competition whether agreed to or imposed but over a century before competition law imposed its regulation on contracts restraining trade and competition, the common law had developed a jurisdiction under which contracts in restraint of trade were rendered void as contrary to public policy. This area of law survives the introduction of the Act but is less significant today. Even if such contracts survive the common law tests, they will invariably be tested under the much more rigorous provisions of Pt IV of the CCA. However, the Act exempts several categories of contracts in restraint of trade from the Act and subjects them to the traditional common law rules. The particular restraints of trade exempted from the Act are:
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Chapter 7 Contracts in Business
• restrictive provisions in contracts of service (employment contracts) restricting non- corporate employees in relation to the work which the employees may engage in either during or after the termination of the employment contract (s 51(2)(b)); • restrictive provisions in contracts for the provision of services (independent contractor contracts); • restricting the contracts of non-corporate independent contractors in relation to the work which they may engage in either during or after the termination of the contract (s 51(2)(b)); • provisions in contracts arrangements or understandings between non-corporate partners in relation to the terms of the partnership, the conduct of the partnership business, or competition between the partnership and a partner while she or he is or after she or he ceases to be a partner (s 51(2)(d)); • provisions in a contract for the sale of a business which are solely for the protection of the purchaser in respect of the goodwill of the business (s 51(2)(e)). These restraints are outside the scope of the CCA. Their validity is assessed under traditional common law rules that have developed in relation to restraints of trade the operation of which is not affected by the CCA. (CCA, s 4M).
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The common law test [7.1040] The test that governs the enforceability of such restraints was laid down a century ago by the House of Lords in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535 at 565 by Lord Macnaghten: All interferences with individual liberty of action in trading, and all restraints of trade of themselves, if there is nothing more, are contrary to public policy and therefore void. That is the general rule. But there are exceptions: restraints of trade … may be justified by the special circumstances of a particular case. It is a sufficient justification, and indeed it is the only justification, if the restriction is reasonable –reasonable, that is, in reference to the interests of the parties concerned and reasonable in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public.
I know a little boy who told me the other day that he could easily have won a race at his school except that there was another boy who could run faster. S Leacock, Who Canonises the Classics?
In that case it was held that the restraint imposed on the vendor of a business that he would not compete with the purchaser of that business anywhere in the world for 25 years was reasonably necessary to enable the purchaser to enjoy what it had bought. The facts were unusual. In this case the vendor had a worldwide reputation and client base in his business of designing and manufacturing quick-firing guns. Although the Nordenfelt test requires both the public and the private interest to be considered, in Esso Petroleum Co Ltd v Harpers Garage (Stourport) Ltd [1968] AC 269 at 324, Lord Pearce suggested that: There is not … a separation between what is reasonable on grounds of public policy and what is reasonable between the parties. There is one broad question –is it in the interests of the community that this restraint should, as between the parties, be held to be reasonable and enforceable?
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Covenants cannot protect against mere competition [7.1050] The test for the enforceability of a restraint is that it be no wider than is reasonably necessary to protect the party imposing the restraint. This requires both that an interest justifying protection exists and that the restraint is not excessive in the area, time or activities covered. The law as it has developed over the years –within the parameters laid down in Nordenfelt –has tended to treat restraints on the sale of a business more generously than restraints in employment contracts. The tendency in employment cases is for the employer to seek protection against competition and, although restraints can be imposed to prevent the exploitation of trade secrets or trade connections, the restraint must be no wider than necessary. A bare covenant against competition (sometimes known as a covenant in gross) will not be enforceable and the covenantee (the person seeking to enforce the covenant) must establish that it is reasonable in relation to the legitimate interests the covenant seeks to protect. In Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 at 301, Lord Reid expressed the law in these terms:
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The man who is denied the opportunity of taking decisions of importance begins to regard as important the decisions he is allowed to take. C Northcote Parkinson.
whether or not a restraint is in the personal interests of the parties, it is I think well established that the court will not enforce a restraint which goes further than affording adequate protection to the legitimate interests of the party in whose favour it is granted. This must I think be because too wide a restraint is against the public interest. It has often been said that a person is not entitled to be protected against mere competition. I do not find that very helpful in a case like the present. I think it better to ascertain what were the legitimate interests of the appellants which they were entitled to protect and then to see whether these restraints were more than adequate for that purpose.
Stokely-Van Camp Inc v New Generation Beverages Pty Ltd (1998) 44 NSWLR 607 [7.1060] Stokely, the US manufacturer of the sports drink “Gatorade”, successfully restrained its Australian
licensee (PCBA) from using confidential information that PCBA had acquired during the term of the licence. The licence agreement provided that PCBA (on termination) would not, for a full selling season, manufacture or distribute a directly competitive product in the relevant territory. PCBA intended to market a competing sports drink called “All Sport” and argued that the restraint was against public policy as an impermissible restraint of trade. Young J found for Stokely. He observed (at 41,293) that: [i]n a multi-million dollar national enterprise, the courts tend to be a little more tolerant of longer restraints than they are in connection with a worker who is deprived of the ability to earn his or her living during the time of the restraint.
Offending covenant can be severed [7.1070] Contracts in restraint of trade provide an exception to the general rule that contracts contrary to public policy are void. If the offending restraint of trade clause can be severed the courts will enforce the remaining inoffensive clause. The Restraints of Trade Act 1976 (NSW) provides a different solution. Section 4(1) provides that a “restraint of trade is valid to the extent to which it is not against public policy whether it is severable in terms or not”. The courts in New South Wales when faced with an unreasonable restraint of trade can enforce it up to the point that it becomes unreasonable. At common law an 368
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Chapter 7 Contracts in Business
unreasonable clause, perhaps a 10-year restraint applying across the Sydney metropolitan area, would be severed leaving no restraint of trade at all. Under the New South Wales legislation the unreasonable restraint may be rewritten as a reasonable restraint –perhaps a one-year restraint operating within one postcode area. In Orton v Melman [1981] ATPR 40-250, McLelland J in the Supreme Court of New South Wales explained at 43,257-43,258 the operation of the Act in these terms: [The] … mischief or defect [at which the legislation is aimed] was that in determining the validity of a restraint, the courts were bound to consider all possible breaches within its terms (after any permissible severance) and determine whether public policy was infringed by the restraint of all such breaches, rather than by the actual or threatened breaches proved in the particular case; or as stated succinctly in the Report [of the Law Reform Commission on Covenants in Restraint of Trade (LRC 9), at [12]]: “the court does not consider the actual breach, it considers imaginary breaches” … In my opinion where the court is to determine in relation to a restraint to which s 4(1) applies whether (having regard to public policy) the restraint is enforceable in respect of an alleged breach (or threatened breach), it is proper first to determine whether the alleged breach (independently of public policy considerations) does or will infringe the terms of the restraint properly construed, and if so, then to determine whether the restraint, so far as it applies to that breach, is contrary to public policy. If the restraint, so far as it applies to that breach, is not contrary to public policy then by force of s 4(1) the restraint is to that extent valid.
In looking at the same set of business facts or at the some actions of business firms, one judge will often reach conclusions about the effect on competition directly or opposite to the conclusion reached by another judge. Agreement amongst economists on such matters is not much greater. R C Bernhard, “Divergent Concepts of Competition in Antitrust Cases” (1970) The Antitrust Bulletin 43 at 45.
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Agreements between employers and employees [7.1080] An example of an unenforceable restraint of trade in the employment context is provided by Adamson v New South Wales Rugby League Ltd [1991] FCA 550, in which the Full Federal Court held that the NSWRL’s “internal draft” procedures, under which clubs would be entitled to draft players in reverse order to their finishing position in the previous year’s competition, were invalid at common law as an unreasonable restraint of trade. The NSWRL argued that it was a legitimate object of the NSWRL, and in the interests of the players and the public, to ensure competition between evenly matched teams and that the draft was introduced for this purpose. Wilcox J concluded (at [117]) that: I do not doubt that those who framed the internal draft rules did so carefully and from the best of motives. Nor do I doubt that those people would feel themselves to be genuinely concerned with the welfare of the players –But this case cannot be decided by reference to sincerity and motive. As is conceded, the internal draft rules impose a significant restraint upon the employment opportunities of those players who are affected by them. If that restraint is enforceable, it can only be because it does no more than reasonably protect the interests of the respondents having regard to its effect upon the players. If it does not, it would be impermissible to decide the matter by reference to the motives, sincerity or integrity of those who imposed the restraint … On the view I take, the internal draft rules do very little to protect the interests of the respondents. They do much to infringe the freedom and the interests, economic and non-economic, of the players.
As sport becomes increasingly professional, similar issues will arise more often. Another example from a different field is provided by Rentokil Pty Ltd v Lee [1996] ATPR 41-451. Lee had been employed by Rentokil as a sanitary hygiene sales consultant in South Australia. She was required, inter alia, to secure contracts with potential customers and to renew contracts with existing customers, in each instance for periods of about two
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years. Her designated territories covered a large proportion of South Australia. In the course of her employment, Lee dealt with thousands of Rentokil’s existing and potential customers and had access to commercially sensitive and confidential company information such as client files, price lists and computer lists of customers. Lee had signed a written “non-competition” deed which contained non-disclosure provisions and restrained her from working “in any capacity” in certain streams of business for one year within South Australia after her employment terminated. The Full Court of the Supreme Court of South Australia held that the restraint was reasonable and that the deed was enforceable. Doyle CJ held, at 41,522, that: The truth is rarely pure, and never simple. Oscar Wilde.
It is well established by the cases that an employer who has a protectable interest is not limited to a restraint which prevents the specific conduct which would infringe that protectable interest. In other words, the employer is not restricted to a restraint which prohibits solicitation of former customers or making use of confidential information. It is well established that an employer may restrain a former employee from engaging in a business when to do so is likely to present an opportunity to behave in a manner which would infringe upon or damage the employer’s protectable interest. That is what the employer has done here, and in principle that is permissible.
Agreements between independent contractors
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[7.1090] In its 1 November 1993 issue, Time Magazine reported that George Michael, the “stubble-faced rock star”, had taken his legal battle against Sony Corp into London’s High Court, seeking to be freed from a 1988 contract that did not expire until 2003 which prevented him from working with any other recording company and gave him only about 14% of the millions that have been made from his work. The action is an example of a restraint involving a contract for the provision of services. It was held in this case (Panayiotou v Sony Music Entertainment (UK) Ltd [1994] EMLR 229) that the contract was enforceable. Sony had argued that it had a number of “legitimate interests” that it was entitled to protect, including: (i)
the desire to sell as many records as possible;
(ii)
the desire to ensure an even and adequate flow of product;
(iii)
the desire to be able to plan ahead;
(iv)
the desire to have available proven successful product for as long as possible;
(v)
the desire and need to be able to compete on equal terms in an international environment against other record companies which have long-term signings;
(vi)
the desire to be known for continued high-calibre releases by long-term successful artists in order to maintain a reputation with consumers, dealers and new unsigned artists;
(vii)
the desire to maintain morale and enthusiasm among employees;
(viii) the desire and need to recover the investment made in a particular artist;
370
(ix)
the desire to make a profit on that investment;
(x)
the need to have available sufficient product to finance (a) losses on unsuccessful product, and (b) the fixed costs of the infrastructure (including overheads);
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Chapter 7 Contracts in Business
(xi)
the desire to accumulate property rights as an asset;
(xii)
the desire to have a supply of successful product in the future at reasonable and predictable prices.
Without commenting on each of these individually, Parker J held that Sony had legitimate commercial interests to protect which justified a period of exclusivity. This decision has been criticised by Alan Coulthard (“George Michael v Sony Music. A Challenge to Artistic Freedom” (1995) 58 Modern Law Review 731) who argues that: Perhaps the most fundamental objection is that the decision on restraint of trade ignores moral arguments such as artistic integrity and sterility in favour of purely economic considerations. Bearing in mind that UK law is slowly moving towards recognition of the natural right theory as a basis for some forms of intellectual property protection, the decision seems oddly out of step with these developments. The fact that the artist will be well paid for his services is no comfort where the recording relationship has broken down and the effect will be that the artists output is sterilised for an extended period.
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[7.1100] A number of the leading cases in this area involve the music industry. Schroeder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616 and Clifford Davis Management Ltd v WEA Records [1975] 1 All ER 237 are of particular interest because the English courts grafted an inquiry into the fairness of the transactions onto the assessment of restraint of trade fairness. Both cases involved composers who had entered into standard form contracts with publishers giving them all the fruits of their songwriting talents during the period of the agreement. It was the courts’ concern that the freedom that each party theoretically has to contract on their own is not abused by a party with superior bargaining power. Lord Diplock in Macaulay concluded that: In order to determine whether this case is one in which [the court can relieve the promissor of his contractual promises] what your Lordships have in fact been doing has been to assess the relative bargaining power of the [parties] and to decide whether the publisher had used his superior bargaining power to extract from the songwriter promises that were unfairly onerous to him.
Lord Reid held that the agreement was not “made freely by parties bargaining on equal terms” or “moulded under the pressures of negotiation, competition and public opinion” (at 623). In Clifford Davis, Lord Denning (at 240) was concerned that: the parties had not met on equal terms. The one was so strong in bargaining power, and the other so weak that, as a matter of common fairness it was not right that the strong be allowed to push the weak to the wall.
Manifestly unfair terms, grossly inadequate consideration, absence of independent advice and a “gravely impaired bargaining position” all combined to render the agreement unenforceable. These cases were influential in developing a more general equitable doctrine of unconscionability, discussed in Chapter 22.
Sale of business agreements [7.1110] While the general rule is that interferences with freedom to trade are unreasonable, the common law acknowledges the entitlement of a purchase of a business to protect the goodwill acquired as well as the greater public benefit in encouraging the sale and
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There is no place for dogma in economics. There are too many technical complexities and the behavioural reaction of human beings is too unpredictable for that. Those who pretend that the policy solutions are simple and straightforward are indulging in a huge confidence trick. F Argy, Business Review Weekly (19 November 1993).
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Business and the Law Someone has suggested that America’s greatest gifts to civilisation are three: cornflakes, Kleenex and credit. Louis Benezet.
purchase of business. In Bacchus Marsh Concentrated Milk Co Ltd (in Liquidation) v Joseph Nathan and Co Ltd [1919] HCA 18, the High Court accepted that: When a man sells anything he may preclude himself from lessening by competition the value of what he sells, provided the restriction is not unreasonable having regard to the subject matter of the contract … Therefore, when the goodwill of a business is sold, a reasonable covenant on the part of the vendor against competition is valid in order to protect what is bought and sold …
The Nordenfelt case is, of course, an example, but there are many others all of which turn on their own special circumstances. In Fleming Bros (Monaro Agencies) Pty Ltd v Smith [1983] ATPR 40-389, for example, a five-year/100-mile (161-kilometre) restraint that was imposed on the vendor of a stock and station agency in a New South Wales country town was upheld as reasonable to protect the purchaser’s goodwill. In the case of a sale of a business by a company, the purchaser will attempt to impose “non-compete” covenants not only on the vendor company but also on its principals. In Barlow v Neville Jeffress Advertising Pty Ltd [1995] ATPR 41-376, the managing director of an advertising agency sold to another advertising agency was employed by the purchaser on terms which prevented him from engaging in certain conduct with specified clients. The Tasmanian Court of Appeal held that this restraint was enforceable. Slicer J (at 40,177 and 40,179) explained that:
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Given the nature of the advertising industry and the relationship of agent and client which in part depended on ephemeral qualities of creativity and trust, the arrangement was to the advantage of both parties. The appellant sold a capital asset which included the property of a client list and ensured continuation of an income for the exercise of his skills, whilst the respondent gained access to a market and obtained the benefit of the experience and contacts of the respondent … Given the nature of the advertising industry with its dependence on individual creativity, established clients and personal contacts, it is difficult to see how a clause preventing the immediate re-establishment of client contact by the vendor of such an asset could be regarded as unreasonable.
Agreements between partners [7.1120] Covenants in restraint of trade are also common in partnership agreements and are governed by the principles discussed above. However, in such cases, obligations may also arise under the general law. In Re A Firm of Solicitors [1995] TLR 263, the plaintiff sought an injunction in order to restrain a former partner who had joined a new firm from acting as a solicitor for a client with whom the plaintiffs were opposing in legal action. Lightman J held (at 264) that: Having regard to the fiduciary relationship between a client and a firm of solicitors, and each partner, the burden was upon any person who was a partner in the firm which was retained while he was a partner in that firm and, which in the course of such retainer became possessed of confidential information to establish that there was no risk of his misusing confidential information before he could thereafter act against that client The solicitor had to show that there was no reasonable prospect of any conflict between his duty to his new client, and accordingly, not merely that he was not in possession of any relevant confidential information, but that there was no real risk that he had such information.
In the circumstances of this case, the injunction was not granted. 372
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Chapter 7 Contracts in Business
Trading agreements between manufacturers and retailers [7.1130] The decision of the High Court in Peters (WA) Ltd v Petersville Ltd [2001] HCA 45 examined the common law doctrine of restraint of trade. The facts were that in 1980 a partnership known as Australian United Foods (AUF) was established. It manufactured and sold ice cream under the “Pauls” brand nationally and under the “Peters” brand nationally except for Western Australia. In that State, Peters (WA) manufactured and sold “Peters” ice cream. In 1983, AUF sold its Western Australia ice-cream business to Peters (WA) and, under the terms of the sale, AUF consented not to supply any ice-cream in Western Australia for a period of nearly 15 years (the period during which AUF licensed to Peters (WA) the “Pauls” brand, know-how and marketing information). The High Court identified the questions to be decided as: • whether the case fell within any of the well-established categories of restraint of trade that did not attract the operation of the common law doctrine; or
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• whether the case was the first of an example, of a new kind of category to which the doctrine should not apply and, if so, what were the criteria to identify that category. Peters (WA) relied in support of its argument on statements made by Lord Pearce in Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 that the doctrine would not apply to “ordinary commercial contracts for the regulation and promotion of trade during the existence of the contract, provided that any prevention of work outside the contract … is directed towards the absorption of the parties’ services and not their sterilisation”. Peters claimed that a covenant which only had effect during the period of the licensing arrangements and which otherwise came within the statement of Lord Pearce would be excluded from the common law doctrine. The High Court, dismissing the appeal, doubted whether Lord Pearce’s exception to the doctrine of restraint of trade should be adopted in Australia. In any event it considered that Peters (WA) had not established that the covenant was necessary and incidental to the licensing arrangements. The restraint, in fact, was wider than the licensing arrangements and extended to other activities. As such it was unlawful. The Court left open the question whether a species of restraint which has become generally accepted as part of the structure of a trading society should be excluded from the doctrine. That issue remains to be decided.
7.12 INSURANCE CONTRACTS [7.1140] Insurance is a system of spreading risk, usually among a large group of people (policy holders). Insurance is based on a contract (the policy) in which one party, the insured, agrees to pay an amount of money (consideration), the premium, to another, the insurer or the underwriter. The insurer agrees to pay the insured money on the happening of the insured event. The event may be certain (eg death) or contingent (eg damage caused by fire). In both cases, the timing of the event that triggers payment is uncertain. In the case of a contingent event, it may never happen (and hopefully for all concerned, it will never happen). Certain insurance cover is mandatory. Workers’ compensation and motor vehicle third- party insurance are the obvious examples. The relevant legislative schemes require employees and motor vehicle owners to take out these forms of insurance and specify the
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Insurance, n. An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table. Ambrose Bierce, The Devil’s Dictionary (1911).
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premiums and amounts that can be recovered. Many other forms of insurance covering virtually all business risks are optional for business, including business interruption; business protection; cash in transit; computer failure/lightning strike; directors’ and officers’ liability; employer’s liability; fleet insurance; income protection; key person insurance; litigation risk; loss from burglary of plant, equipment, stock, merchandise; loss of profits; motor vehicle insurance; personal injury; plate glass, glass, windows and showcases; public risk; succession; and water leakage.
The insurance contract [7.1150] The parties to an insurance policy are in a contractual relationship with each other. Insurance is thus governed, principally, by the law of contract. A contract of insurance comes into being when the party to whom the offer is made accepts it unconditionally (Fitzgerald v Masters [1956] HCA 53. Once formed, the insurance policy is subject to the same general rules of construction as any other written contract (Australian Casualty Co Limited v Frederico [1986] HCA 32). Because the terms of the policy are ordinarily standard, any ambiguity in language of the policy will be construed against the drafter, which is usually the insurance company (Western Australian Bank v Royal Insurance Co [1908] HCA 11).
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Insurance legislation [7.1160] The Constitution in s 51(xiv) provides the Federal Parliament with power to make laws with respect to “insurance, other than State insurance”. Under this power, the Federal Parliament has enacted the Marine Insurance Act 1909 (Cth) to codify maritime insurance law; the Insurance Act 1973 (Cth) to provide for authorisation and prudential supervision of general insurers; the Life Insurance Act 1995 (Cth) to regulate the life insurance industry; and the Insurance Contracts Act 1984 (Cth) (ICA), which implies specific rights and duties into insurance contracts and supplements the express terms agreed by the parties. Sections 52 and 53 of the ICA prohibit the insurer from contracting out of the Act or varying the policy to the detriment of the insured. Uniform licensing, disclosure and conduct requirements applicable to the insurance industry were introduced into the Corporations Act 2001 (Cth) by the Financial Services Reforms in 2001. These reforms also repealed the Insurance (Agents and Brokers) Act 1984 (Cth) and made insurance intermediaries subject to the general scheme for regulation of financial service providers under the Corporations Act. The Australian Securities and Investments Act 2001 (Cth) gives the Australian Securities and Investments Commission the responsibility for enforcing the consumer protection provisions of that Act in relation to general insurance and life insurance. These provisions mirror the consumer provisions of the ACL.
Types of insurance There are worse things in life than death. Have you ever spent an evening with an insurance salesman? Woody Allen.
[7.1170] Insurance can be categorised by reference to the type of loss, or the type of benefits. The principal kinds of general insurance classified by reference to the type of loss are: • fire insurance, a category which covers property damage by fire which generally extends to other forms of damage and to theft; 374
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Chapter 7 Contracts in Business
• motor vehicle insurance, which includes not only insurance for damage to the vehicles of the insured and of third parties but also, most significantly, compulsory third- party insurance against injury or death in road accidents (and which is not subject to the ICA); • public liability insurance, which includes both commercial and domestic liability for injury caused to members of the public for example through a faulty seat in a concert hall or a slippery floor at home; • accident insurance generally, which includes policies against injury to employees and others as well as to the insured, and which may arise out of virtually any accident (workers’ compensation insurance has its own statutory regime and is not subject to the ICA); • marine insurance, which embraces both ships and their cargo against loss or damage at sea; and which is regulated by the Marine Insurance Act 1909 (Cth); • reinsurance refers to insurance that the insurer takes out to spread the risk and to protect itself against catastrophic claims that might otherwise break the insurance company. Insurance contracts can also be classified according to the type of benefit provided. This method categorises policies as either indemnity insurance or contingency insurance.
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Indemnity insurance [7.1180] Under indemnity insurance the insurer agrees to pay an amount that represents the actual loss that the insured suffered (eg fire insurance, reinsurance). The indemnity contract is the usual form of insurance in property matters. The amount to be paid on the occurrence of a relevant event is determined by reference to the actual loss the insured suffered, but there is no certainty that the defined event will ever happen.
Contingency insurance [7.1190] Under contingency insurance the insurer agrees that, when an event happens, it will pay an agreed amount of money. For instance, on the assured’s death, it will pay an agreed sum of money to the beneficiaries listed in the insurance contract. It includes a contract to pay such an amount to the assured upon the death of a third person, provided that the assured has a relevant insurable interest in the life of that person. The insurer becomes liable when the event happens and the insured does not usually need to prove financial loss. Life insurance is the most common form of contingency insurance covered by the ICA and has the meaning given in s 9 of the Life Insurance Act 1995 (Cth): (a)
a contract that provides for payment of money on the death of a person (not being death by accident or sickness only) or on the happening of a contingency dependent on the termination or continuance of human life;
(b)
a continuous disability insurance contract; or
(c)
a contract that provides for payment of an annuity for a term dependent on the continuation of human life.
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Special features of the insurance relationship Parties to the policy It’s all covered by insurance anyway. Kerry Packer, (on his loss of 10,000 ounces of gold bullion from on office safe). Business Review Weekly (8 May 1995).
[7.1200] In some insurance policies the “insured” may be defined to include a range of persons whose losses are intended to be covered but not all of those persons may be a party to the agreement. If such a person wished to enforce payment under the agreement, they may have been prevented by the common law doctrine of privity of contract (see Tweddle v Atkinson [1861] 121 ER 762). The High Court considered this dilemma in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1985) 165 CLR 107 and took the view that the strict application of this rule would produce an injustice in such a case. Accordingly they held that a contractor described in the insurance contract could enforce the policy even though it was not a party to the agreement (see further at Chapter 13). This issue has now been resolved for insurance purposes by the introduction of s 48(1) of the ICA, which states: A third party beneficiary under a contract of general insurance has a right to recover from the insurer, in accordance with the contract, the amount of any loss suffered by the third party beneficiary even though the third party beneficiary is not a party to the contract.
Section 20 of the ICA further provides that persons benefited by an insurance policy need not be named:
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An insurer under a contract of insurance is not relieved of liability under the contract by reason only that the names of the persons who may benefit under the contract are not specified in the policy document.
Insurable interest [7.1210] The common law generally required an insured party to have some form of proprietary interest in the subject matter of the policy (known as an “insurable interest”), to satisfy the requirement that the insured event should have an adverse effect upon the insured. This applied to both life insurance and general insurance. The reasons for restricting the ability of someone to insure the property or life of another are to avoid both speculation or gambling, and the temptation to deliberately cause loss. The common law in this area has been modified by ss 16-18 and 20 of the ICA. Section 16 provides that an insurable interest is not required in a contract of general insurance: A contract of general insurance is not void by reason only that the insured did not have, at the time when the contract was entered into, an interest in the subject-matter of the contract.
Section 17 provides that a legal and equitable interest is not required at the time of loss: Where the insured under a contract of general insurance has suffered a pecuniary or economic loss by reason that property the subject-matter of the contract has been damaged or destroyed, the insurer is not relieved of liability under the contract by reason only that, at the time of the loss, the insured did not have an interest at law or in equity in the property.
Section 17 requires that the insured should suffer a pecuniary or economic loss, although its interest falls short of legal or equitable ownership of any property lost or damaged. The previous requirement of the common law was that there should exists an interest in the property insured, which was recognised and enforceable at law. That had the result 376
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Chapter 7 Contracts in Business
that for example a major shareholder in a company had no insurable interest in the assets of the company, it being a separate legal entity, and hence recovery was denied despite the fact that the shares were of substantially less value after a fire destroyed company property (Macaura v Northern Insurance Co Ltd [1925] AC 619). Section 18 deals expressly with life insurance and sickness/accident policies providing for the payment of money on death. Such contracts are not void by reason only that the insured did not have, at the time when the contract was entered into, an interest in the subject matter of the contract.
The indemnity principle
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[7.1220] As mentioned above, the general principle is that the amount to be paid on the occurrence of a relevant event is determined by reference to the actual loss suffered by the insured and, thus, an insured is not entitled to make a profit. Certain subsidiary rules flow from this principle. Where an insured recovers damages from a person causing a loss, the right to recover insurance for the same loss lapses and, if insurance monies have already been paid, they must be reimbursed. Similarly, where an insured holds two or more policies for the same risk, recovery can only be made once. However, if one insurer fails to pay the total amount of the loss, then the balance may be sought from another. The parties may agree to vary the indemnity principle by entering an agreed sum policy, which specifies an amount to be payable upon occurrence of an event irrespective of the actual loss. A common example of the latter contract is a household contents policy under which the insurer agrees to pay “replacement value” for items lost or damaged. Insurance policies frequently contain a “new for old” clause, providing that the insurer will replace lost or damaged goods with new goods rather than simply pay the value of the goods at the time of loss. Such provisions are regarded as falling within the indemnity category, despite the fact that the amount recovered may be greater than the loss suffered. A policy may also stipulate a maximum “sum insured” which sets an upper limit upon recovery.
The duty of utmost good faith [7.1230] It is a cardinal principle of insurance law that both insurer and insured must observe a duty of the utmost good faith towards each other. This obligation arises from the special relationship of trust that arises between the parties. This duty is present at all stages of the insurance contract and it is a duty that is owed by both the insurer and the insured. For the insured, good faith encompasses a range of obligations including honesty and disclosure of all facts relevant to the risk undertaken, and reasonable assistance to the insurer during assessment of claims. It is essential not only that the proposal document be honestly completed but also that any other material fact of which the insured is aware or should be aware is disclosed, whether called for by the insurance proposal or not. The duty of disclosure is explained in more detail below. For insurers, good faith requires policies to be drafted in clear and unambiguous terms, and disclosure of all facts that a prudent insured would need to take into account when arranging insurance. Insurers must also particularly exercise good faith when assessing and settling claims, including prompt admission of liability to meet a sound claim. In CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36, Gleeson CJ and
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“In an attempt to kill a fly, I drove into a telephone pole.” “The indirect cause of the accident was a little guy in a small car with a big mouth.” And, “I was thrown from my car as it left the road. I was later found in a ditch by some stray cows.” From the NRMA’s accident insurance claim files, Sydney Morning Herald (7 August 1992).
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Business and the Law The Act of God designation on all insurance policies; which means roughly that you cannot be insured for the accidents that are most likely to happen to you. If your ox kicks a hole in your neighbour’s Maserati, however, indemnity is instantaneous. A Coren, The Lady from Stalingrad Mansions (St Martin’s Press, 1977).
Crennan J of the High Court accepted that acting with the utmost good faith requires an insurer to do more than act honestly, and may require it to have regard not only to its own interests, but also to the legitimate interests of its insured. The s 13 of the ICA has provided specifically for the duty of utmost good faith in the following terms: A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.
Section 14 further provides that neither party to an insurance contract may rely on any of its provisions if to do so would be to fail to act with the utmost good faith. Section 14(3) adds, “In deciding whether reliance by an insurer on a provision of the contract of insurance would be to fail to act with the utmost good faith, the court shall have regard to any notification of the provision that was given to the insured, whether a notification of a kind mentioned in s 37 or otherwise”.
IN CONTEXT
The Insurance Code of Practice [7.1240] Industry standards can provide a useful benchmark for testing whether an insurer
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has acted with utmost good faith. The insurance industry is subject to a range of strict regulatory controls, and is often keen to avoid instances of poor performance which might lead to tighter legislation in future. One strategy to avoid public criticism is the establishment of a voluntary code of conduct to be followed by members of the industry. The General Insurance Code of Practice came into force as a preliminary set of standards for insurers on 1 July 1995. After a period of consultation a revised version of the Code was introduced on 18 July 2006. The current code was introduced in 2014. Participation in the Code by insurance companies is voluntary. While the Code is self- regulatory and does not provide for redress for specific matters, it does require participating insurers to establish both internal and external dispute resolution procedures and imposes sanctions for failure to do so. Some of the Code’s aims are to: • describe standards of good practice and service to be met by participating insurers; • promote disclosure of information relevant and useful to consumers so as to allow them to make an informed choice and compare one product with another; • facilitate the education of consumers about their rights and obligations under insurance contracts; • promote informed and effective relationships between consumers, insurers and agents; • require insurers to have fair procedures for resolution of disputes between consumers and insurers or consumers and agents; and • provide representation for consumer views in the administration and development of the Code.
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Chapter 7 Contracts in Business In the words of the Insurance Council of Australia: Many key elements of the existing Code worked so well they have been taken up in new legislation introduced by Government, so the industry now wants to go further. The new Draft Code’s proposed focus on claims management avoids overlap with legislation and provides a framework which encourages individual companies to go even further for customers. The Australian Financial Complaints Authority has jurisdiction in relation to insurance matters.
The duty of disclosure [7.1250] The basis for the duty of disclosure was set out in a famous passage by Lord Mansfield in Carter v Boehm (1766) 97 ER 1162 at 1164:
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Insurance is a contract upon speculation. The special facts upon which the contingent chance is to be computed lie most commonly within the knowledge of the insured only; the under- writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risqué as if it did not exist … Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact, and his believing the contrary.
At common law it is necessary that disclosure of facts that a “prudent insurer” would regard as material should be made (Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228). While the cases confirm that the obligation placed on an insured by this requirement is both strict and onerous, it is at times difficult to apply the test with precision. Matters that have been held to be material include refusal by another insurer to cover the risk, previous losses or claims, and the existence of any unusual dangers to the goods insured. The common law has also developed certain exceptions so that for example an insured is not required to disclose material facts that are not within her or his knowledge, or circumstances that should be known to the insurer.
The truth is really an ambition which is beyond us. Peter Ustinov.
[7.1260] The ICA has restated the duty of disclosure in s 21: 1)
Subject to this Act, an insured has a duty to disclose to the insurer before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:
a. the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or b. a reasonable person in the circumstances could be expected to know to be a matter so relevant.
This section replaces the common law prudent insurer test. The ICA test is for an insured to assess whether particular information is “a matter relevant to the decision of the insurer whether to accept the risk”. Section 21(1)(b) requires disclosure of matters that a reasonable person in the circumstances could be expected to know to be relevant. In Commercial Union v Beard [1999] NSWCA 422, the respondent Beard ran a backpackers’ hostel in Kings Cross, which is an area associated with high “moral risk”. Beard had a public liability policy with insurer
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Commercial Union (CU). The building burnt down causing loss to four individuals which became the subject of a claim under the policy. CU denied liability based upon non-disclosure by Beard of the identity of one of the shareholders of the company which owned the building (who was a person of high moral risk.) The court had to consider the application of s 21(1)(b) and concluded that a reasonable person would have been likely to consider that the ownership of the premises was a matter outside the ambit of the matters that CU took into account, and thus there was no breach of s 21.
Modifications to the duty of disclosure by the ICA [7.1270] The operation of the common law in relation to insurance contracts produced some harsh results for the insured. The ICA contains a number of provisions relating to disclosure and misrepresentations aimed at avoiding such harsh results (see particularly Div 2 of Pt IV). These provisions are mandatory in all contracts that are subject to the ICA. Sections 52 and 53 of the ICA prohibit the insurer from contracting out of the Act or varying the policy to the detriment of the insured.
Matters that need not be disclosed: ICA, s 21(2)
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[7.1280] The ICA excludes from the duty of disclosure certain matters that the insurer ought to have known, or would not need to know. Section 21(2) provides that the insured need not disclose a matter: (a)
that diminishes the risk;
(b)
that is of common knowledge;
(c)
that the insurer knows or in the ordinary course of his business as insurer ought to know; or
(d)
as to which compliance with the duty of disclosure is waived by the insurer.
In Commercial Union v Beard (see [7.1240]) the respondent Beard sought to apply s 21(2)(c) by arguing that the insurer Commercial Union ought to have been aware of the identity and character of the relevant person through certain newspaper articles. However the Court rejected this argument, taking the view that knowledge for the purpose of s 21(2) (c) had to be actual knowledge in the possession of the insurer or an appropriate officer or agent. Merely having access to a source from which that knowledge could be obtained was not sufficient (see Bates v Hewitt (1867) LR 2 QB 595).
Incomplete or obviously irrelevant answers in proposal forms: ICA, s 21(3) The underwriter knows nothing and the man who comes to him to ask him to insure knows everything. Rozanes v Bowen (1928) 32 U L Rep 98 at 102 per Scrutton LJ.
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[7.1290] The ICA places a clear onus upon insurers to ensure that proposal forms are completed correctly. Section 21(3) provides: Where a person: a)
failed to answer; or
b)
gave an obviously incomplete or irrelevant answer to;
a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.
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Chapter 7 Contracts in Business
The reason for the waiver provided in s 21(3) is that the Act regards it as a matter for the insurer to seek further particulars of the answer in question. Where it fails to do so, it is deemed to have regarded that item as irrelevant.
Insurers obligation to notify nature and effect of the duty: ICA, s 22 [7.1300] The ICA places a range of obligations upon insurers to notify an insured of certain aspects of the law. For instance, s 22(1) places the onus on insurance companies to let the insured person know “in writing of the general nature and effect of the duty of disclosure”. By way of consequence, s 22(3) provides that:
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An insurer who has not complied with subsection (1) may not exercise a right in respect of a failure to comply with the duty of disclosure unless that failure was fraudulent.
In RACV Insurance Pty Ltd v Alam [2001] VSC 503, the Victorian Supreme Court had to consider whether RACV did not inform Ms Alam clearly in writing of her duty to disclose. RACV argued Ms Alam had failed to disclose relevant recent criminal activities of her brother. Ms Alam successfully argued that RACV Insurance had not fulfilled the duty to clearly inform her of the nature and effect of the duty of disclosure. When she had telephoned the RACV when she was taking out the policy initially, she was told that it was not necessary to notify them that her brother was a regular driver of the vehicle. Why then would she think it would be necessary to tell the insurance company details about her brother at renewal time? This case is a reminder to insurance companies to be very clear and thorough about their notification obligations under s 22. Failure to meet the standard required by s 22 will mean the insurer cannot rely on s 21(3) in refusing to pay a claim.
Ambiguous questions in proposal: ICA, s 23 [7.1310] The common law doctrine of contra proferentem has been taken up in s 23. It provides that where the question in the proposal was ambiguous and a person answered in a reasonable way, the question will be taken to have that meaning: Where: (a) a statement is made in answer to a question asked in relation to a proposed contract of insurance; and (b) a reasonable person in the circumstances would have understood the question to have the meaning that the person answering the question apparently understood it to have;
that meaning shall, in relation to the person who made the statement, be deemed to be the meaning of the question.
The law isn’t justice. It’s a very imperfect mechanism. If you press exactly the right buttons and are also lucky, justice may show up in the answer. A mechanism is all the law was ever intended to be. Raymond Chandler.
In Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Insurance Cases 60-813, a question in the proposal stated “Have you ever had a loss or made a claim under a contents, valued items or personal liability policy over $1,000?” Despite an earlier claim for items with a replacement value of $1,000, the insured had responded “no” because the purchase price of the items stolen had been only $840. The court conceded the ambiguity and found that the insured, on the basis of their interpretation, could have truthfully answered the question in this manner. Young J then turned to s 23 of the ICA for
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assistance in interpreting the situation. He concluded that although a reasonable person could have interpreted the question in the same way as the insured, he was not satisfied that this, in accordance with s 23, would have been the case. In construing the question thus, Young J deemed the insured to have responded falsely since the actual loss claimed was in excess of $1,000. Accordingly, under ICA, s 23, a court will not only ascertain the true construction of the words to determine whether ambiguity exists but will then identify what the insured apparently understood the words to mean overlaid by the determination of whether, under the circumstances, the reasonable person would have understood the question in the same manner.
Basis clauses: ICA, s 24
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[7.1320] A basis clause is a clause in a policy that states that any information provided by the insured in the proposal becomes the foundation of the insurance contract. The result at common law was that any trivial error could result in the insurance company avoiding liability. The effect of the basis clause could also extend to a warranty as to future events. In Mammone v RACV Insurance Pty Ltd [1976] VR 617, it was held that a breach of a warranty in a proposal by the insured (that “the motor vehicle has not been and will not be specifically modified from the maker’s original specifications”), could result in the policy being avoided despite the fact that the loss sustained may have not had any connection with the breach. Section 24 provides that statements constituting basis clauses are now treated as pre-contractual representations: A statement made in or in connection with a contract of insurance, being a statement made by or attributable to the insured, with respect to the existence of a state of affairs does not have effect as a warranty but has effect as though it were a statement made to the insurer by the insured during the negotiations for the contract but before it was entered into.
Innocent misrepresentation: ICA, s 26 As to the certainty of law … it would be very hard upon the profession if the law was so certain that everyone knew it. The misfortune is that it is so uncertain that it costs much more money to know what it is, even to the last resort. Jones v Randall (1774) 98 ER 954 per Lord Mansfield.
[7.1330] Unintentional misrepresentations based upon a reasonable belief may be protected by s 26, which states: (1) Where a statement that was made by a person in connection with a proposed contract of insurance was in fact untrue but was made on the basis of a belief that he held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation. (2) A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.
Blank or incomplete answers in a proposal: ICA, s 27 [7.1340] Section 27 states: A person shall not be taken to have made a misrepresentation by reason only that the person failed to answer a question included in a proposal form or gave an obviously incomplete or irrelevant answer to such a question.
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Chapter 7 Contracts in Business
This means that where a person returns a blank or incomplete answer the insurance company cannot refuse payment on the basis that the insured has failed to provide adequate disclosure.
Remedies of the insurer Remedies for non-disclosure and misrepresentation upon entry into contract: ICA, ss 28-33 [7.1350] Prior to the introduction of the ICA one of the most controversial areas of the common law was the ability of insurers to deny insurance cover completely where an insured made a non-disclosure or misrepresentation, even where the false representation had not influenced the insurer in accepting the risk. The ICA now provides a complete range of remedies for non-disclosure and misrepresentation, which override any contractual terms to the contrary (ICA, s 33). These statutory remedies limit the insurer’s rights by reference to relevance and proportionality. There are three basic scenarios covered by ICA, s 28 which cover the conduct of an insured upon entering the contract: • If the non-disclosure or misrepresentation was fraudulent the insurer may avoid the contract (s 28(2));
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• If the non-disclosure or misrepresentation was not fraudulent the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made (s 28(3)); and • In any case, the insurer has no remedy if the insured would have entered into the contract, for the same premium and on the same terms and conditions, even if the non-disclosure or misrepresentation had not occurred (s 28(1)). Even in cases where the contract may be avoided for fraud, the ICA provides a further measure of protection to the insured under s 31, which provides that a court may disregard the avoidance, if it would be harsh and unfair not to do so, and the court is of the opinion that the insurer has not been prejudiced, or the prejudice is minimal or insignificant.
Remedies for fraudulent claims: ICA, s 56 [7.1360] At common law any fraud on behalf of the insured in making a claim would generally amount to a breach of contract that would entitle the insurer to avoid liability under the contract completely. This rule sometimes produced very harsh results, and thus the ICA introduced limitations to the insurer’s remedies for fraudulent claims. Section 56 provides that: (1) the insurer may not avoid the contract but may refuse payment of the claim; (2) a court may order the insurer to pay an amount that is just and equitable in the circumstances, if only a minimal or insignificant part of the claim is made fraudulently and non-payment of the remainder of the claim would be harsh and unfair.
Since the contract is not avoided, the parties continue to be subject to the duty of utmost good faith and other ICA requirements.
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Whatever the real fact may be, I think a Court of Law is bound to proceed upon the assumption that the legislature is an ideal person that does not make mistakes. Commissioners for Special Purposes ofthe Income Tax v Pemsel [1891] AC 531 at 549 per Lord Halsbury LC.
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Insurer’s right to recover from other parties Subrogation: ICA, ss 65-66 [7.1370] The doctrine of subrogation provides that if an insurer has indemnified a loss suffered by an insured, the insurer is entitled to recover the loss from any third party that the insured could have brought proceedings against in respect of the loss. This doctrine is limited to insurance contracts of indemnity and it only operates after the insurer has properly satisfied the claim of the insured under the policy. The ICA also limits the scope of the doctrine with respect to actions against members of the insured’s family or employees of the insured. Section 65 restricts the right of subrogation where the insured might reasonably be expected not to exercise rights of action against another by reason of family or other personal relationship or if the third party was using, by consent, the insured’s motor vehicle at the time of loss or damage. With respect to employees, s 66 provides that an insurer does not have the right to be subrogated to the rights of an insured against her or his employee, provided that the loss occurred in the course of employment and the conduct of the employee did not amount to serious or wilful misconduct.
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Contribution: ICA, s 76 [7.1380] It is quite common for an insured loss to be covered by more than one insurance policy. The indemnity principle prevents an insured from recovering from both insurers. However, the common law has recognised that the insurer which pays a claim in such cases is entitled to contribution from other insurer(s) who may have provided the same cover, in proportion to their respective liabilities (see Albion Insurance Co Ltd v GIG of NSW (1969) 121 CLR 342). Section 76 of the ICA has adopted and clarified this principle for the purposes of that Act. Section 45 precludes contractual restrictions of this right.
7.13 NEGOTIABLE INSTRUMENTS AND FINANCIAL TRANSACTIONS [7.1400] Negotiable instruments are used in commercial situations where one party wishes to transfer funds to another. They are used in commercial contexts countless times every day. Negotiable instruments such as cheques are used in any form of commercial activity where money (particularly large sums of money) needs to be transferred from one party to another. The other main types of negotiable instrument are bills of exchange, which are mainly used in international trading transactions such as international shipping, and promissory notes (also known as commercial paper), which are used to provide finance for a range of large businesses.
An insurance policy is like old underwear. The gaps in its cover are only shown by accident. D Yates, Sunday Times (United Kingdom) (21 October 1984).
From an early time in the history of commerce, people have sought and created various means of exchange to facilitate trade. Some have been physical for example gold and silver. Others are documentary and establish a series of obligations intended to ensure that particular debts are satisfied. In particular, bills of exchange are a feature of contemporary international trade while cheques are regularly used in both commercial and domestic situations. The categories of negotiable instruments developed out of mercantile custom and are evolving over time with the common law. The courts are, subject to 384
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statutory provisions, generally able to follow mercantile custom to recognise negotiable instruments that have become accepted in mercantile usage. Negotiable instruments are commercially useful because they offer a quick and direct method of transferring money from one party to another without requiring the parties to physically transfer the funds each time the instrument is transferred (negotiated). An example is given below. If A buys goods from B, A can pay B by giving B a negotiable instrument that will be payable on a certain date. B may then transfer the instrument to one of B’s creditors, C, in satisfaction of a debt owed by B to C. C may then transfer the instrument to one of their creditors. The utility of negotiable instruments lies in the fact that each transaction does not require a physical transfer of funds from one party to another; negotiation (transfer) of the instrument is sufficient to transfer the funds by transferring the obligation to pay those funds from one person to the next. Each negotiation of the instrument involves another party agreeing to assume responsibility for the debt represented in the instrument.
The nature of negotiable instruments
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[7.1410] The most commonly used negotiable instruments are bills of exchange and cheques, although there are many other forms such as bonds, promissory notes, warrants and certain debentures. The Commonwealth Parliament has the power under s 51(xvi) of the Constitution to make laws dealing with bills of exchange and promissory notes which it has used to enact the Bills of Exchange Act 1909 (Cth) and the Cheques Act 1986 (Cth).
Wealth, in a commercial age, is made up largely of promises. An important part of everyone’s substance consists of advantages which others have promised to provide for or to tender to him; of demands to have the advantages promised which he may assert not against the world at large but against particular individuals. R Pound, An Introduction to the Philosophy of Law (Yale University Press, 1922).
Transferability and negotiability [7.1420] Negotiable instruments constitute a class of written instruments which all share the characteristic that they are undertakings by one person to pay a certain sum of money to another. The essence of negotiable instruments involves transferring the obligation to satisfy the debt contained in the instrument from one party to another by “negotiating” the instrument. This is different to the common law rule that a debt (as a chose in action) could not be assigned, which has since been altered by statute. All negotiable instruments are, in the absence of special provision, readily transferable from the party that has control over the instrument (referred to as the “holder”) to another. A key feature of negotiable instruments is that the party receiving the instrument (referred to as the “transferee”) in good faith, for value and without notice of any fault in the title of the transferor, obtains good title even if there is a defect in the title of the holder. This is something that distinguishes negotiable instruments from other property transfers. In ordinary property transfers, any title defect (such as fraud) will be passed on from the seller to the buyer (referred to as the nemo dat rule –see Chapter 9). This means that if a person obtains property by fraud they generally cannot transfer complete title to the property, which can cause considerable uncertainty in commercial transactions. Therefore, the great advantage of negotiable instruments is their ability to transfer complete title in certain circumstances. This involves more than merely transferring the debt stated in the instrument; it results in the transferor receiving better title than the holder
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had. Early recognition by the High Court of this understanding of negotiability was provided in the judgment of Isaacs J in Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd [1914] HCA 83, where he said that: Negotiability in its truest sense means capability of being transferred by delivery or endorsement so as to give a good title to the instrument to the transferee, taking bona fide and for value, thereby constituting him the true owner, notwithstanding any defect in title in the transferor.
Bills of exchange I don’t know how much money I’ve got. I did ask the accountant how much it come to. I wrote it down on a bit of paper but I’ve lost the bit of paper. John Lennon.
[7.1430] Bills of exchange provide a mechanism whereby if X owes money to Y, but is owed money by Z, X may require Z to pay Y direct. To effect this, X draws a bill on Z payable to Y. The advantage of bills of exchange is that business may transfer sums of money without having to physically transfer the money with each transaction. A bill of exchange is therefore a written direction from one person to another, that the second person pays the party who has possession of, or is named on, the instrument. Section 8 of the Bills of Exchange Act 1909 (Cth) defines a bill of exchange in the following terms: A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer.
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Types of bills of exchange [7.1440] Section 13(2) of the Bills of Exchange Act 1909 (Cth) provides for two kinds of bills: bills payable to order and bills payable to bearer. A bearer bill is defined in the Act as one which is expressed to be payable to bearer, or on which the only or last indorsement is an indorsement in blank. An order bill is a bill that is expressed to be payable to order or is expressed to be payable to a particular person, and does not contain words prohibiting transfer or indicating an intention that it should not be transferable.
Parties to a bill of exchange [7.1450] There may be numerous parties to a bill of exchange. It is important to identify who are the relevant parties to a bill of exchange because each party to a bill will have different rights and obligations on the bill. The parties to a bill of exchange may include the: • bearer –the person in possession of a bill or note which is payable to bearer. • payee –the person who is to receive the payment of the amount covered by the bill. • drawer –the person who creates (or draws) a negotiable instrument. • drawee –the person to whom the bill is addressed by the drawer. • acceptor –a drawee of a bill of exchange who signs the bill when presented by the holder, intending to become bound on the bill. • indorser –this is the person who transfers (or negotiates) a bill by writing on it and delivering it to another person. 386
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• holder –this person is in possession of the bill and may be either the payee or the indorsee of the bill or the bearer of the bill. • holder in due course –this person is a holder who has taken a bill in good faith and for value without notice of any previous defect or dishonour of the bill. The bill must have been negotiated before it became overdue and must have appeared complete and regular on its face.
Rights and liabilities of parties [7.1460] The nature of the rights contained in a bill of exchange is essentially based on a contract for the transfer of a debt owed by the drawer to the drawee. By drawing a negotiable instrument, the drawer warrants (ie promises) that when the bill is presented it will be accepted or paid according to its terms. The drawer also warrants that if the bill is dishonoured, they will compensate the holder or any indorser who is compelled to pay on the bill. The drawer is prevented from denying her or his capacity to draw the bill to a holder in due course.
“When I use a word”, Humpty Dumpty said in a rather scornful tone, “it means just what I choose it to mean –neither more nor less”. Lewis Carroll, Alice in Wonderland.
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The drawee is only liable on a bill of exchange where he or she signs the bill intending to become bound, which turns the drawee into an acceptor. In other words, in signing the bill the drawee must have the contractual intention to be bound as an acceptor. In Smith v Commercial Banking Co of Sydney Ltd [1910] HCA 72 the High Court held that a single signature by a bank official, without the official stamp of the bank, was insufficient to demonstrate an intention by the bank to be bound as an acceptor. Once the bill is accepted, the acceptor warrants that he or she will pay the bill according to its terms when the bill is presented for payment. The acceptor is prevented from denying to a holder in due course the validity of the drawer’s signature or capacity to draw the bill. The indorser, by signing the bill, warrants that he or she will pay the bill according to its terms when the bill is presented for payment. The indorser, by signing the bill, warrants that he or she will compensate a holder or subsequent indorser if the bill is dishonoured when it is presented for payment. The indorser is also prevented from denying her or his title in the bill to a subsequent indorser or a holder in due course. [7.1510] In general, the holder of a bill of exchange has the right to enforce the bill in her or his own name. The holder of a bill of exchange that is payable to bearer may transfer (negotiate) the bill by delivery without actually signing the bill. Where this is done, the holder is not liable to pay on the bill. Where a bill is lost or destroyed the holder may request a replacement from the drawer. The advantage of being a holder in due course is that a person can obtain good title to a bill of exchange even if there were prior existing defects in the title or quality of the bill. A stranger who signs a bill of exchange will generally be liable on the bill as an indorser to a holder in due course. [7.1530] If a bill of exchange is dishonoured then the amount of compensation that is payable by a party liable on the bill will include the amount of money covered by the bill, as well as interest from the time when the bill is due to be paid, and any expenses related to notifying the parties liable of the bill’s dishonour. The drawer or an indorser
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may limit their liability on a bill of exchange by writing “without recourse” or “sans recourse” across the bill. If a bill of exchange is dishonoured when presented for payment, the holder of the bill must give written notice to the drawer and any indorser of the bill. You know it is not in my interest to pay the principal; nor it is my principle to pay the interest. Richard Brinsley Sheridan, Reply to a creditor.
[7.1540] Liability on a bill of exchange is extinguished when the bill is discharged. A bill of exchange may be discharged when it is paid in good faith, and without notice of any defect in its title by or on behalf of the drawee or an acceptor. The holder of a bill of exchange that has matured may discharge the bill by giving notice in writing to the acceptor that he or she renounces their rights on the bill against the acceptor. Any party that is liable on a bill of exchange may also renounce their rights against any previous party to the bill by notifying that party in writing. A holder of a bill of exchange may discharge all liabilities on the bill by intentionally cancelling the bill. There is no required method of cancelling the bill, but the cancellation must be obvious on the face of the bill to be effective. An unintentional cancellation does not operate to discharge the liabilities on a bill of exchange. [7.1550] A material alteration of a bill of exchange (which may include an alteration of the amount liable on the bill, the date for payment or the place of payment) without the consent of all parties liable on a bill will void the operation of the bill except against the party who made the material alteration and any subsequent indorsers. A material unauthorised alteration that is not apparent from the face of the bill will not affect a holder in due course of the bill.
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[7.1560] The distinguishing characteristic of a bill of exchange is its negotiability. Negotiating a bill of exchange simply means that title to a debt is transferred from one party to another without the need to physically transfer the money. There are different requirements for a successful negotiation of a bill that will depend upon the type of bill that is sought to be negotiated. If the bill is a bill payable to bearer it is negotiated simply by being delivered to another person. In this way a bill of exchange may be used in the same way as money and passed from one person to another. Where a person issues an order bill, rather than a bearer bill, they are imposing restrictions on how the bill may be negotiated. A bill payable to order must be paid to the payee or in accordance with the payee’s directions. If the payee wishes to transfer the bill to another person it is necessary that the bill be indorsed. This is done by the payee signing the bill and transferring it by delivery to another person. The indorsement must relate to the entire bill, as a partial indorsement will not negotiate the bill to another party. The original payee then becomes the indorser and the new payee becomes the indorsee. Having drawn a bill of exchange it is usual for it to be signed by the drawee, indicating acceptance of it. It is that acceptance which brings about the drawee’s liability to honour its payment. If the bill is subsequently dishonoured its then holder may seek compensation from the drawer, the drawee and any indorser. The act of indorsement includes an undertaking that, if the bill is dishonoured, the indorser will compensate the last holder or a subsequent indorser. Thus a chain of liability on the debt is established.
Promissory notes [7.1570] A promissory note is a type of commercial finance used by major (investment- grade rated) companies, and is also commonly called “commercial paper”. Promissory 388
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notes are typically bought by investors at a discount of the face value of the note, and are then redeemed at maturity for the face value which provides the interest for the investor. The notes are typically issued for terms of less than a year (with 30, 60 and 180 days being the most common time frames used in the money market for commercial paper). It is common for commercial paper issues to be either fully or partly underwritten by a financial intermediary such as a merchant bank, who may underwrite the issue at a discount and then on-sell the commercial paper to the market.
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The essence of a promissory note is a written promise by a large and reputable company to pay a specific amount of money to the holder of (or person named on) the note. Negotiable instruments may be used to transfer funds from one person to another. Similarly, a promissory note may be used to transfer funds from the lender to another person. For example, assume Acme Ltd is a large and reputable Australian company and it wants to raise $100 million in new finance. Acme could use a range of methods to raise these funds, including standard bank loans or new share issues. One method of raising the funds would be to issue $100 million worth of promissory notes. The takers of these notes, which are basically written promises to pay the amount stated on the notes, could then negotiate the notes so as to transfer those funds (or more correctly, the right to receive those funds from Acme at the date of maturity) to another person to whom the takers owe money. The regulation of promissory notes is similar to that imposed on bills of exchange. Indeed, both instruments come within the, and s 95 of that provides that the provisions of the Act regulating bills also apply to promissory notes. There are some minor exceptions to this: the provisions dealing with acceptance of bills of exchange (see [7.1430] ff) do not apply to promissory notes. This is because there is no acceptor for promissory notes, as the note is signed by the company issuing the note (and therefore promising to repay the money borrowed by the note).
A financier is a pawnbroker with imagination. Arthur Wing Pinero.
Definition [7.1580] Section 89 of the Act defines a promissory note in the following terms: A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of a specified person, or to bearer.
The elements of this definition bear numerous similarities to the definition of a bill of exchange discussed above. There is an unconditional promise, whereas with a bill of exchange there is an “unconditional order”. Promissory notes are usually made out to be payable to the bearer rather than to order, which allows for a more liquid secondary market in which to trade them.
Liability [7.1590] One of the features that distinguishes promissory notes from bills of exchange is the fact that notes do not require a drawee (often a bank with bills of exchange) to sign on the instrument as an acceptor. This is because it is the maker of the promissory note (ie the company seeking finance) who is liable to pay the face value of the note, whereas a bill of exchange involves a direction to another person (normally a bank) to pay someone else. This is the reason that promissory notes are often called “one-name paper”.
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The maker of the promissory note is liable on the note once they have signed the note and delivered it to the bearer: s 90. A promissory note must be presented for payment within a reasonable time: s 92. This is different from a bill of exchange where the acceptor may be liable even without presentation: s 57. The lack of a bank indorsement has meant that companies seeking to issue commercial paper will sometimes have to obtain collateral bank guarantees (in the form of letters of credit) to generate confidence in the ability of the issuer to pay the face value of the note. Section 94 of the provides that the maker of a promissory note is liable to pay the note according to its terms and is precluded from denying to a holder in due course their right to claim payment on the note. A promissory note is not payable until it is presented for payment: s 93.
Cheques [7.1600] A “cheque” is defined in s 10 of the Cheques Act 1986: (1)
A cheque is an unconditional order in writing that: (a) is addressed by a person to another person, being a financial institution; and (b) is signed by the person giving it; and (c) requires the financial institution to pay on demand a sum certain in money.
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(2)
An instrument that does not comply with subsection (1), or that orders any act to be done in addition to the payment of money, is not a cheque.
Previously, this definition referred to a bank rather than a financial institution. The extension of the definition of a cheque to financial institutions rather than simply banks means that cheques may now be issued by credit unions, building societies, banks and other financial institutions. That is hardly a practical suggestion. A banker so very careful to avoid risk would soon have no risk to avoid. Bank of England v Vagliano Bros [1891] AC 107 at 117 per Lord MacNaghten (following a suggestion by one of the judges that a bank should not pay cheques until satisfied by inquiry and investigation that all endorsements were genuine).
Cheques have been a popular form of debt payment because they do not require the physical transfer of money from one party to another. However, their use is dropping significantly since the 1980s when convenient electronic payment systems, credit cards and debit cards grew in popularly. The Reserve Bank of Australia data suggests that if current trends continue the cheque book will entirely disappear by the end of 2019. A cheque is simply a special form of a bill of exchange. Its distinguishing features are that it is always payable on demand and it is always drawn on a bank. Previously regulated by the Bills of Exchange Act, cheques are now the subject of separate legislation, the Cheques Act 1986 (Cth). [7.1610] In addition to their different functions, cheques can be distinguished from general bills of exchange in that: • a cheque is drawn only on a financial institution; • cheques are usually used for local transactions; bills of exchange are used for overseas trading; promissory notes are used for corporate financing; • cheques are drawn on a bank and payable on demand, the grace periods allowed to a drawee of a bill of exchange are not applicable; • bills of exchange and promissory notes cannot be crossed;
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• a bill of exchange is accepted by the party upon whom it is drawn; • a cheque must be presented for payment within a reasonable time while a bill payable on demand is deemed to be a continuing security.
The parties to a cheque [7.1620] There may be several different parties to any given cheque. It is important to identify the different parties of the cheque because each party to a cheque will have different rights and responsibilities under the cheque. The parties to a cheque include the: • drawer –the person who signs the cheque and on whose account it is drawn. • drawee –the financial institution on which the cheque is drawn and which it is anticipated will make the payment. • payee –the person to whom the funds covered by the cheque are payable. • holder (bearer cheque) the person in possession of the bearer cheque. • holder (order cheque) the person specified on the cheque as the initial payee or a person to whom the cheque has subsequently been indorsed. • collecting financial institution –this is the financial institution to whom the cheque is presented for payment to be arranged, usually by the deposit of the cheque into the account of the holder.
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Rights and liabilities of parties to a cheque [7.1630] Section 71 of the Cheques Act 1986 (Cth) provides that the drawer of a cheque, by writing out and issuing the cheque (drawing the cheque), gives an undertaking that when the cheque is presented for payment, it will be honoured according to its terms. A further obligation of a drawer of a cheque is to pay the funds covered by the cheque to the holder where the cheque is dishonoured. Where an indorser is obliged to pay a dishonoured cheque, s 71 renders the drawer liable to compensate the indorser. Under s 72 the drawer of a cheque, by issuing the cheque, is estopped from denying to a holder in due course that the cheque was, at the time when the cheque was issued, a valid cheque. [7.1640] The indorser may exclude or limit their liability on the cheque by writing “without recourse” or for example “only liable for $500” on the face of the cheque. Section 73 provides that the indorser of a cheque, by indorsing the cheque, gives an undertaking that the cheque will be honoured according to its terms when it is presented for payment. The indorser, like the drawer, must pay the funds covered by the cheque to the holder or any subsequent indorser who is compelled to pay on a dishonoured cheque. The effect of indorsing the cheque is that the indorser is prevented from denying the validity of their title to the cheque or the validity of the cheque, at the time that the cheque was indorsed, to a holder or subsequent indorser. The liability of an indorser may be extinguished by the holder of the cheque absolutely and unconditionally renouncing in writing their rights against the indorser or cancelling the indorser’s signature on the cheque. If the indorser is no longer liable to the holder, then any other parties who have rights against the indorser also have their rights extinguished. From an indorser’s perspective, it is vital that any discharge of their liability be obvious on the face of the cheque, otherwise they may still be liable, under s 86 against a party who takes the cheque without notice of the discharge.
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I love law. I love its logic, as well as its social, political and historic significance. C Sherry, “Is It Worthwhile Studying the Law?”, Sydney Morning Herald (18 September 2015).
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[7.1650] A stranger who signs a cheque otherwise than as the drawer or an indorser is presumed, in respect of a holder in due course, to have intended to become liable on the cheque. The presumption that the stranger signing the cheque intended to become liable is rebuttable where the cheque is negotiated to a holder rather than a holder in due course. The stranger will not be liable on the cheque if the face of the cheque clearly demonstrates that the stranger did not intend to be become liable on the cheque. [7.1660] The authority of the drawee to pay a cheque is removed once the drawee receives notice of the drawer’s death or mental incapacity, or receives a countermand. The drawee is not generally obliged to pay cheques that were drawn longer than 15 months previously (a stale cheque), unless there is an agreement or direction between the bank and the drawer that stale cheques are to be paid. Under the Cheques Act, drawee financial institutions are generally protected against liability for paying irregular cheques providing that they act in good faith and without negligence. The drawee is, however, liable to the drawer where it pays a clearly crossed cheque to a party other than a financial institution.
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[7.1670] The collecting institution does not incur any liability simply by receiving the payment for a cheque and crediting their customer’s account with the amount of the payment. Where the customer of the collecting financial institution is substantially similar to the name of the payee the collecting institution does not act negligently by crediting the amount of the payment to their customer’s account, even where the indorsement is absent or irregular. The law touches every interest of man. Nothing that is human is alien to it. Felix Frankfurter J.
[7.1680] A bearer cheque may be negotiated by delivery without the transferor indorsing the cheque. Where the party receiving the cheque does not give value for the cheque, the transferor is not liable on the cheque. Where the party receiving the cheque gives value for the cheque then the transferor is deemed by s 77 to have given a warranty that: • The cheque is what it appears to be. • The transferor has a right to negotiate the cheque. • The transferor was not aware, at the time of negotiation, of any fact that would render the cheque valueless. [7.1690] Where a cheque is dishonoured the holder may recover the funds covered by the cheque from any person liable on the cheque. An indorser who becomes liable to pay a dishonoured cheque may recover the amount paid from a previous indorser or the drawer. The amount of compensation that is payable on a dishonoured cheque includes interest and any amount required to convert the amount of a foreign cheque into Australian currency. [7.1700] The rights and liabilities arising from a cheque will cease when the cheque is discharged. A cheque may be discharged by: • an absolute and unconditional discharge by the holder of their rights attaching to the cheque; • a fraudulent or material alteration to the cheque; • the drawee institution paying the cheque in due course; or • the cancellation of the cheque.
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Chapter 7 Contracts in Business
Where a cheque discharged by renunciation is subsequently negotiated to a party in due course who takes the cheque without notice of the renunciation, the holder may enforce the cheque as if it had not been discharged. If a cheque is discharged because of a fraudulent or material alteration, a party who takes the cheque may enforce it against the person who altered the cheque or agreed to the alteration of the cheque, or against any indorser of the altered cheque. If the alteration is not apparent on the face of the cheque then any person taking the altered cheque in circumstances where they would otherwise be a holder in due course may enforce the cheque according to its original terms as if the cheque had not been dishonoured.
Classification of cheques [7.1710] There are generally two categories of cheques: crossed cheques and uncrossed cheques. Crossed cheques may be crossed without any added instructions (in which case the cheque must be paid to another financial institution), or crossed with “not negotiable” written, which removes the cheque’s ability to confer title free from previous equities. Uncrossed cheques may come in the form of order cheques or bearer cheques. An order cheque is described in s 21: A cheque is payable to order if the cheque is expressed, whether originally or by endorsement, to require the drawee institution to pay the sum ordered to be paid by the cheque to or to the order of, and only to or to the order of:
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(a) a person specified in the cheque as payee or endorsee; or (b) two or more persons specified in the cheque, jointly or in the alternative, as payee or endorsee.
The usual form of a printed cheque includes the words “or bearer” after the space provided for the name of the payee. Simply crossing out those words and specifying the name of the payee on the line provided is sufficient to create an order cheque. The words “or order” may be added, but are not necessary. The cheque should read “Pay AB or order” or simply “Pay A.B”. In either event, AB is able to negotiate the cheque to another payee by written indorsement (eg “Pay CD (signed) AB”) and then deliver the cheque to the transferee. Section 22 provides that any cheque which is not an order cheque is a bearer cheque. A bearer cheque will read either “Pay AB or bearer” or “Pay cash or bearer”. In the case of a cheque payable to cash, or where the payee is either not named or is given a fictitious name, the cheque is a bearer cheque whether or not the words “or bearer” appear on it. However, where a real person is named as payee, the cheque will be an order cheque in the absence of the “or bearer” instruction. Negotiation of a bearer cheque to a transferee simply requires delivery of it –writing is unnecessary. The bearer may, however, alter the cheque so that it becomes an order cheque. That may be achieved either by the appropriate indorsement, or by deleting the words “or bearer” on the front, if the payee is named.
There have been three great inventions since the beginning of time: fire, the wheel and central banking. Will Rogers.
Crossings [7.1720] A cheque has been crossed –by drawing across its face two parallel transverse lines –has the effect that the drawee financial institution must not pay the cheque direct to the payee or bearer –it must pay the amount into the account of another financial
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institution. The cheque is still negotiable in the sense that the person who last takes it will obtain a good title to it despite the fact that the transferor had a defective title. As with other bills of exchange, this added quality of negotiability over ordinary transferability depends upon the transferee having received the cheque in good faith, without notice of the defect in title and for value. Where a cheque has been crossed with the addition of the words “not negotiable” between the lines, again the crossing acts as an instruction to the drawee institution that it must be paid into the account of another financial institution. The addition of the words “not negotiable” has the further effect that the cheque loses its quality of negotiability. It is still transferable from one payee to another, but the transferee does not obtain a better title than the transferor had to give, so the rule nemo dat quod non habet still applies. Where a financial institution, in disregard of the instruction to pay a cheque into an account which is conveyed by the crossing, pays it otherwise, usually by the delivery of cash to the person presenting it for payment, the bank becomes liable to the person properly entitled to the cheque for any loss suffered.
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Consumer credit [7.1725] The National Consumer Credit Protection Act 2009 (Cth) prescribes the National Credit Code, which governs all credit transactions taking place in Australia from pre- contractual disclosure to provision of relief for debtors undergoing genuine hardship and reopening of unjust transactions. Credit means an advance of money or money’s worth with the expectation of repayment. Under s 3 of the Code, credit is provided under a contract where either payment of a debt owed by one person (the debtor) to another (the credit provider) is deferred; or one person (the debtor) incurs a deferred debt to another (the credit provider). The following criteria must be satisfied before credit is regulated under the Code:
Credit is a system whereby a person who can’t pay gets another person who can’t pay to guarantee that he can pay. Charles Dickens.
• The debtor is a natural person or a residential strata corporation; • The credit is provided wholly or predominantly for personal, domestic or household use; • A charge for the credit is or may be made; • The credit provider provides the credit in their usual course of business; and • The contract is not specifically excluded from regulation by the Code. [7.1730] In essence the Code protects consumers by applying fair trading and consumer protection law principles, as well as the principle of truth in lending, to all credit provided for consumer purposes. Thus, credit providers must tell the consumer what their rights and obligations are in a credit contract before the consumer signs it. They are required to disclose many “key requirements” such as: the amount of credit that is to be provided; the annual percentage rate or rates; how the interest is calculated and when it is charged; the total amount of interest if the contract is to be paid out within seven years; the credit fees and charges to be paid; changes affecting interest and credit fees and charges; any default rate of interest and how this is calculated (eg whether it is a published reference rate); 394
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Chapter 7 Contracts in Business
the frequency of account statements; details of relevant commission charges; information about whether a mortgage or guarantee applies; and details of credit-related insurance financed under the contract. Credit providers who fail to disclose any of the key requirements could suffer a civil fine of up to $500,000 for each non-disclosure. After a credit contract has been signed, the credit providers are also required to give the consumer regular account statements to advise the consumer of the progress of their accounts and any changes in the terms and conditions. [7.1735] The Code also protects lenders by clarifying their rights and responsibilities, and it also covers other matters such as: • Power to negotiate a variation of contracts if the borrower is suffering hardship; • Power for a court or tribunal to reopen a credit contract to determine whether it was unjust; • Protection against unfair contract enforcement and repossession practices.
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The bank-customer relationship [7.1740] Aspects of the contractual relationship between a bank and its customer are particularly relevant to any examination of the law relating to cheques. While that relationship extends well beyond the subject matter of cheques, each party owes duties to the other in the specific context of issuing and paying cheques. The duties owed by bankers and customers to each other are based upon the contract between a bank and its customer. The courts have generally been disinclined to expand the tort of negligence to the banker- customer relationship.
The customer’s duties [7.1750] The relevant customer’s duties are based on two decisions of the House of Lords, London Joint Stock Bank Ltd v Macmillan [1918] AC 777 and Greenwood v St Martins Bank [1933] AC 51. Macmillan duty is that a customer must exercise reasonable care in drawing a cheque to protect against forgery. In that case, an employee had his employer sign a cheque for £2, said to be for petty cash. The amount was written in figures but not in words, and the cheque was subsequently amended to provide for payment of £120. The employer sued the bank for having debited its account for the excess amount of £118. The House of Lords held that the customer had breached its duty to the bank and should bear the loss itself. Lord Shaw, at 825, pointed out that: If a banker were bound to enquire in regard to every cheque with a genuine signature what had been the history of that cheque from the time that the customer lifted his pen from it until the time when it was presented at the bank, banking business would be greatly impeded or impossible and would be subjected to risks for which there is no foundation in legal principle.
In the bank-customer relationship the customer should clearly think of the bank as a commercial vendor rather than a friendly adviser. Graham McDonald (Banking Ombudsman), Business Review Weekly (5 June 1992).
The correctness of this decision was indorsed by the Australian High Court in Commonwealth Trading Bank of Australia v Sydney Wide Stores Pty Ltd [1981] HCA 43, in which the High Court overruled its own previous decision in Marshall v Colonial Bank of Australia [1904] HCA 31 and preferred the Macmillan statement of the law.
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The position of the bank [7.1760] As stated above, the relationship between banker and customer is founded on contract. The bank has a duty under that contract to exercise due care and skill in carrying out activities in relation to the customer’s account. The main requirement of a bank in relation to cheques is that it must pay its customer’s cheques provided sufficient funds are available. Its position is made difficult by the volume of cheques dealt with, the prospect of fraud and the relatively slight duties imposed on its customer. The bank is, however, afforded some relief by the Cheques Act 1986 (Cth), which provides some statutory defences to liability. Where a bank pays a cheque which has been fraudulently altered to increase the amount payable, s 91 provides that the bank, if it acted in good faith and not negligently, may debit its customer’s account, but only to the amount of the cheque as originally drawn. Section 92 provides that where a bank, in good faith and without negligence, pays a crossed cheque drawn on it to a bank, the paying bank is deemed to have paid the cheque in due course. It has already been observed that where a bank pays a crossed cheque not to a bank but for example by cashing it, then it is liable to make good any resulting loss. The bank does, however, have a s 93 defence in these circumstances if the cheque, on presentment, did not appear either to be or to have been crossed, the crossings having been erased in some way. In that event, payment in good faith and without negligence is deemed to be payment in due course.
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Where an indorsement on a cheque has been made without authority, or where it is in irregular form or is missing, the Act provides certain protection for the paying bank. Section 94(1) protects the bank in the case of unauthorised indorsement, whether the cheque is paid out directly or into an account. The basis for this defence is that it would be unreasonable to require the bank to know whether a signature, not necessarily of one of its customers, is an authentic indorsement of a cheque. Section 94(2) protects the bank where the indorsement is either irregular or absent, but in these circumstances the protection extends only to payment into an account. In all cases, the paying bank must act in good faith and without negligence. The effect of the s 94 defences is to require the collecting bank to be responsible for the legitimacy and effectiveness of indorsements.
Disputes with banks [7.1770] Schemes for resolving disputes with banks have been in place since 1990. Today, it is the Australian Financial Complaints Authority –a “mega ombudsman” which replaces the Financial Ombudsman Service, the Credit and Investments Ombudsman and the Superannuation Complaints Tribunal –which is responsible for providing fair, independent and effective solutions for financial disputes by working with consumers, small business and the financial services sector. It is the single point of contact for financial complaints and the scheme is free to consumers. Membership is compulsory for financial firms and advisers. Decisions of the AFCA are binding on financial firms but complainant unhappy with the resolution of the decision retains the legal right to bring legal action in court. 396
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Chapter 7 Contracts in Business
IN CONTEXT
2019 Banking Code of Practice [7.1780] In July 2019 a new Banking Code of Practice comes into effect. The Code sets
out the banking industry’s key commitments and obligations to customers on standards of practice, disclosure and principles of conduct for their banking services. It has been approved by ASIC and applies to personal and small business bank customers. It is a consition of Australian Banking Association membership that member banks with a retial presence in Australia are required to sign up to the Code. ASIC (MR 18-223) sets out increased protection available under the 2019 code:
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Significant new protections for small businesses The new Code provides for improved protections for small business borrowers and expands the reach and impact of legal protections against unfair contract terms. For small businesses who borrow up to $3 million, the Code provides that lending contracts should not contain a range of potentially unfair and one-sided terms. Unfair contract terms protections in the law apply to businesses who borrow up to $1 million. At its current setting of applying to small businesses who borrow up to $3 million, the Code will cover the considerable majority –between 92-97% –of businesses in Australia. To ensure the settings in the Code provide a high level of coverage of the small business sector, ASIC’s approval is conditional on an independent review of the definition of small business within 18 months of the Code’s commencement. This targeted review will test the adequacy and application of the Code’s small business coverage in practice, and will occur well before the Code’s comprehensive review, due three years after its commencement. At the same time, ASIC will collect quarterly data from banks and the Australian Financial Complaints Authority to monitor the extent of the Code’s coverage of small business. ASIC will ensure that this data is made public every six months. This will provide the public with ongoing transparency about the coverage of the Code. Expanded protections for consumers The Code has built on and enhanced the existing protections for consumers in the 2013 Code. The new Code includes: • provisions for inclusive and accessible banking, including for vulnerable customers, customers on low incomes and Indigenous customers; • protections relating to the sale of consumer credit insurance (CCI) including a deferred sales period of four days for CCI for credit cards and personal loans sold in branches and over the phone; • protections for guarantors of loans, for instance, giving prospective guarantors generally three days to consider information about a guarantee and requiring banks to only enforce a guarantee once they have taken action against the borrower; • rules requiring credit card customers to receive reminders about balance transfer promotional periods ending, as well as more consistent treatment about how repayments are applied; and • enhanced processes for assisting customers in financial difficulty and processes for resolving complaints.
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QUESTIONS 1.
“Business people often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business may appear to those unfamiliar with the business far from complete or precise. It is, accordingly, the duty of the court to construe such documents fairly and broadly; without being too astute or subtle in finding defects”: Hillas v Arcos [1932] All ER 494.
To what extent does uncertainty preclude an enforceable contract?
2.
What is the legal effect of an agreement made:
(i) “subject to contract”; and (ii) “subject to finance”? 3.
What is the legal effect of a document headed:
(i)
“heads of agreement” and
(ii) “memorandum of understanding”? 4.
Anita and Brett are both successful businesspersons and members of the “The Entrepreneurs Club” –a group of successful business entrepreneurs who regularly meet for lunch and fellowship. It is not unusual for deals to be done over lunch.
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At a recent lunch meeting Anita, who had made her money in a large chain of fast food restaurants, expressed her frustration at the difficulty she was having finding a suitable facility she urgently needed for food preparation for her restaurant chain. It was very difficult to find suitable premises because of location and accessibility requirements, town planning and food security regulations, fit-out costs and unrealistic rents as well as a real shortage of suitable premises. Brett, a very successful property developer, told Anita that he might have the ideal facility – a large commercial kitchen that seemed to meet all of Anita’s requirements. The facility was currently leased to one of Anita’s competitors but the lease was about to expire. Brett explained that he was not intending to renew the lease –he was frustrated by the tough bargaining stance taken by the current lessee, their insistence on what he regarded as unreasonable due diligence, their delaying tactics, their request that the contract be renegotiated and their refusal to agree to Brett’s rental increase demand. Brett’s premises were ideal for Anita’s purpose and she was happy with the rent that Brett was asking but she wanted the right to renew the lease upon its expiry. She communicated this to Brett who said “let’s do it”. Anita said she would get straight on to her lawyers to draft the necessary documentation. Brett replied “Mate, this is not how I do business. If we’re all agreed on the main game let’s do the deal. The detail is not important. That’s all lawyer stuff we don’t need to bother about”. When Anita, a much more conservative businessperson than Brett, expressed her preference for the deal to be properly negotiated and documented, Brett wrote the address of the premises, the rent, the term, and the renewal term on the back of a menu under the heading “Heads of Agreement” and challenged Anita to “take it or leave it –we’re sensible business people and can work out the rest of it as we go along”. At the suggestion of one of the group he reluctantly agreed to add the words “subject to contract” as he accepted that various regulatory authorities may require something more formal than
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Chapter 7 Contracts in Business a signed menu. Anita expressed her concern at the lack of documentation but, driven by her desire to get the premises, signed. Brett has now reneged on the deal telling Anita that he has received a better offer from Anita’s competitor. He has told Anita that: “Just as you said it seems as if we didn’t have a contract after all as we didn’t cross the t’s and dot the i’s. No hard feelings”. Anita seeks your advice.
WEB REFERENCES Australian Government Business Entry Point http://www.business.gov.au Working with contracts http://www.treasury.gov.au
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399
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8
8
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Torts: Concepts of Liability Andrew Terry Trang Quang THE BUSINESS CONTEXT Human activity involves a multitude of risks to life, person and property. It is therefore a legitimate question to ask: “To what extent should the law compensate individuals who suffer harm or loss?” Similarly, the question should be asked: “To what extent should individuals/businesses/governments be responsible for the consequences of their conduct when engaging in that conduct causes injury damage to another?” The law of torts addresses these questions by maintaining a system of legal principles that imposes a civil liability on persons to pay compensation, in appropriate cases, to those who have suffered as a consequence of their actions, or inactions. It comprises a range of complex civil obligations which, if breached, may lead to awards of damages. Tort law has a major impact on businesses and those people involved in the business. The tort of negligence in particular can affect all business activity and potentially any conduct causing physical injury, and in some cases purely economic losses may give rise to liability. It is important for business people to be aware of what conduct gives rise to liability in tort and thereby attain an appreciation of how they may limit their potential liability. This is part of a process of “risk management” which includes obtaining public liability insurance and professional indemnity insurance. This chapter discusses a variety of torts that affect business activity, although primary attention is given to the law of negligence.
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8.1
THE NATURE AND ROLE OF THE LAW OF TORTS ........................................................................................ 403
[8.10]
Torts law ........................................................................................................................................................ 403
[8.30]
Comparison with criminal law and contract law .................................................................................. 404
[8.70]
Fault v no-fault compensation .................................................................................................................. 405
[8.130]
Employers and liability for employees: Vicarious liability .................................................................. 408
PART 1 –NEGLIGENCE: PERSONAL INJURY AND PROPERTY DAMAGE .......................................................... 410 8.2
NEGLIGENCE, THE TORT LAW CRISIS AND THE CIVIL LIABILITY REFORMS .................................... 410
[8.180]
The elements of the tort of negligence ................................................................................................... 410
[8.190]
The Civil Liability Reforms ...................................................................................................................... 411
8.3
THE DUTY OF CARE ................................................................................................................................................ 413
[8.230]
The duty of care .......................................................................................................................................... 413
[8.250]
The test for establishing a duty of care .................................................................................................. 415
[8.290]
The established categories of duty of care ............................................................................................ 417
[8.350]
Beyond the established categories ........................................................................................................... 420
[8.410]
Special categories and situations ............................................................................................................. 423
[8.550]
Non-delegable duties ................................................................................................................................. 430
8.4
THE STANDARD OF CARE: BREACH OF DUTY ............................................................................................... 431
[8.580]
Who is a reasonable person? .................................................................................................................... 432
[8.590]
What would the reasonable person do? ................................................................................................. 432
8.5 CAUSATION ............................................................................................................................................................... 438 8.6 REMOTENESS ........................................................................................................................................................... 440
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8.7
DEFENCES TO NEGLIGENCE ............................................................................................................................... 441
[8.830]
Contributory negligence ............................................................................................................................ 441
[8.860]
Voluntary assumption of risk .................................................................................................................... 443
[8.870]
Disclaimers which renounce a duty of care ........................................................................................... 443
8.8 DAMAGES ................................................................................................................................................................... 443 [8.900]
Special and general damages ................................................................................................................... 444
[8.910]
Compensation to relatives ......................................................................................................................... 445
PART 2 –NEGLIGENCE AND ECONOMIC LOSS ....................................................................................................... 447 8.9
NEGLIGENT MISSTATEMENTS AND PURE ECONOMIC LOSS ................................................................ 448
8.10 NEGLIGENT ACTIONS AND PURE ECONOMIC LOSS ................................................................................ 454 [8.1100]
Relational interests ..................................................................................................................................... 455
[8.1160]
Solicitor’s duty to third parties ................................................................................................................. 461
[8.1180]
Liability for defective premises ................................................................................................................ 461
PART 3 – OTHER BUSINESS-RELATED TORTS ............................................................................................................ 464 8.11 PASSING OFF ............................................................................................................................................................. 464 8.12 DECEIT ........................................................................................................................................................................ 466 8.13 DEFAMATION ........................................................................................................................................................... 467 [8.1320]
Elements of a defamation action .............................................................................................................. 469
[8.1370]
Defences to a defamation action .............................................................................................................. 472
8.14 INJURIOUS FALSEHOOD ...................................................................................................................................... 475 8.15 INTERFERENCE WITH CONTRACTUAL RELATIONS ................................................................................... 475 8.16 NUISANCE ................................................................................................................................................................. 477 8.17 BREACH OF STATUTORY DUTY .......................................................................................................................... 478
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Chapter 8 Torts: Concepts of Liability
8.1 THE NATURE AND ROLE OF THE LAW OF TORTS Torts law [8.10] The word “tort” (from the Latin “tortus”) means “wrong”. A tort is a civil wrong – an action or omission which infringes another person’s rights that are recognised at law. Contract law deals with obligations which arise from agreement. Torts law deals with obligations which arise irrespective of any agreement or contract. The law of torts imposes standards of conduct upon society as a whole, and in this regard performs a similar function to the criminal law. Where conduct is not in accordance with the standards imposed under law of torts the person breaching the standard, the “tortfeasor” (the defendant), may be sued by the victim of that tort (the plaintiff). The law of torts, therefore, is that law which provides a remedy for someone injured or otherwise harmed by the act or omission of another in circumstances in which the law recognises that a legal duty is owed. The law of torts includes a number of distinct torts with little in common other than the legal recognition of an “obligation” owed by one person to another: • negligence –conduct causing damage to another, in breach of the defendant’s duty of care owed to the other;
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• passing off –misrepresenting business associations and products; • defamation –words, spoken or written, or conduct disparaging the reputation of another;
Torts [law] has the capacity, simultaneously, to captivate and confuse. Clarke et al, Torts: A Practical Learning Approach (3rd ed, LexisNexis, 2013).
• nuisance –interference with another’s use or enjoyment of land; • deceit –fraudulent untruth; • trespass to the person:
– battery –the application of direct force to another; – assault –the threat of direct force to another;
– false imprisonment –deprivation of another’s liberty without lawful cause or excuse; • trespass to land –direct interference with land in possession of another without lawful excuse; • trespass to goods:
– conversion –wrongfully dealing with the property of another;
– detinue –wrongfully detaining the property of another;
– trespass to chattels –direct physical interference with personal property in the possession of another without lawful excuse; • tortious interference with contractual relations –where one person induces another to breach their contract with a third party.
[8.20] The law of torts is primarily judge-made although there is increasing statutory intervention to supplement the common law. Statutes also have the effects of modifying existing common law torts or creating new tort. Examples include the codification
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of defamation law, workers’ compensation and sports injury schemes, victims of crime schemes, motor accident liability schemes, no fault compensation schemes. The civil liability reforms (see [8.200]) are a particularly important development which enshrine certain basic principles of liability for negligence in legislation and introduce legislative changes. The list of torts is not closed and new torts can be created through the common law process of law making. An example discussed in Chapter 15 is the possible development of a statutory tort of privacy. Under the principle of vicarious liability (see [8.130]) employers are liable for torts committed by their employees in the course of their employment.
Comparison with criminal law and contract law
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Criminal v tort law “Torts” more or less means “wrongs” and the subject is the study of the kinds of injuries done by private citizens to one another for which the law offers relief … The cases concern virtually the entire range of misfortune and hurts which human beings can blame on one another … and the narratives of fact in the cases often offer accounts of bizarre calamities. One of my friends said during the year that Torts is the course which proves that your mother was right. S Turow, One L (Penguin, 2010).
[8.30] Both criminal law and tort law impose duties upon members of society and thereby seek to regulate the conduct of society as a whole but whereas the criminal law is primarily public in nature, tort law is primarily private in nature. Breaches of the criminal law are enforced and “prosecuted” by the State, whereas tort law is enforced by an individual victim or a group of people bringing a class action who have suffered some form of loss or damage. A further difference between tort and criminal law relates to the consequences of the act. Criminal law punishes the wrongdoers, generally through a fine or imprisonment, whereas tort law compensates the victim generally by an award of damages.
Contract v tort law [8.40] Both contract law and tort law seek to regulate the private relationship between two or more parties. In the law of contract the parties are largely free to set their own duties, and the obligations each party owes to the other are fixed by their agreement. However, obligations arising under the law of torts are fixed by the law and are not determined by any agreement by the parties. A further distinction lies in the fact that obligations in contract only apply to the parties to the contract, whereas obligations in tort are imposed on society as a whole although they are only enforceable by victims of breaches of tort law.
Concurrent liabilities in contract and tort [8.50] One point of significance for students studying tort law for the first time is to appreciate that the law of torts works in conjunction with other areas of law such as criminal law and contract law. Professional people such as accountants, lawyers and financial advisers generally owe their client both tortious and contractual duties. A duty to exercise reasonable care and skill may arise under the tort of negligence and a similar duty may arise under the law of contract through an implied term.
Astley v Austrust Ltd [1999] HCA 6 [8.60] The High Court held that a firm of lawyers owed duties to its client in both contract and tort. The firm had given the client incorrect advice regarding the potential legal implications of becoming a trustee. The 404
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Chapter 8 Torts: Concepts of Liability client successfully sued the firm for negligence but had its compensation reduced because of contributory negligence. The key issue in the High Court concerned whether the doctrine of contributory negligence was available to reduce the client’s damages against the law firm for breach of contract (ie because the lawyers did not adequately provide the service they had been contracted by the client to provide) because of the client’s conduct in contributing to its own losses. The court held that the legislation allowing for a reduction of damages only applied to tort claims and not to contract claims. Therefore, the client was able to obtain partial compensation in negligence and then top-up damages for breach of contract to compensate for the full amount lost. The result of Astley v Austrust has been subsequently overturned by statutory reform of contributory negligence legislation, which now allows the court to reduce contractual damages because of the plaintiff’s conduct. The civil liability reforms (see [8.200]) have taken this further. They apply to any claim for damages for harm resulting from negligence regardless of whether the claim is brought in tort or in contract or under a statute.
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Fault v no-fault compensation [8.70] Despite the common, sensible and increasingly compulsory practice of taking out insurance cover to protect against negligence-based actions, it is important to appreciate that negligence is a system based on “fault”. Compensation –frequently from insurance cover –is available only to the plaintiff who can establish that the defendant owed a duty of care to the plaintiff and breached that duty by not taking reasonable care. Unlike New Zealand, which has a comprehensive “no-fault” accident compensation scheme covering all personal injury through any accident irrespective of fault, Australia has no comprehensive statutory system of no-fault accident compensation. Changing values in society, combined with compulsory insurance schemes, have nevertheless led to some no-fault schemes in Australia –for example the establishment of statutory workers’ compensation schemes where the cost of injury is shifted from the worker to the employer (in effect the employer’s insurer) regardless of fault.
This argument completely misses the highway of logic and enters on a secondary road of complete irrelevancy. Great Lakes Forwarding Corp v Pennsylvania R Co 100 A 2d 612 (1953) per Musmanno J.
The National Injury Insurance Scheme recommended in 2011 by the Productivity Commission aims to address inequity of fault-based liability by requiring all Australian jurisdictions to provide no-fault cover for catastrophic injuries. Regulatory options in relation to workplace and motor vehicle accidents are currently under consideration.
Workers compensation schemes [8.80] Under workers’ compensation schemes throughout Australia, liability is status based rather than fault based. Section 9 of the Workers Compensation Act 1987 (NSW) for example provides that: (1)
A worker who has received an injury (and, in the case of the death of the worker, his or her dependants) shall receive compensation from the workers’ employer in accordance with this Act.
(2)
Compensation is payable whether the injury was received by the worker at or away from the worker’s place of employment.
If the plaintiff is a worker in terms of the legislation he or she is entitled to compensation under the statutory scheme irrespective of fault (see [13.520]). Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-22 20:22:54.
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Motor vehicle accident schemes
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[8.90] Motor vehicle accidents provide an interesting case study. The specific circumstance which gives rise to most tortious litigation in Australia is the negligence of the drivers of motor vehicles. The system whereby accident victims are compensated only after negligent default raises serious questions. The requirement to establish fault not only results in delays and growth in litigation but will also deny compensation to those injured but unable to establish fault in another. In this way a lottery aspect is introduced into the right to compensation, and in practice a great number of people injured in motor vehicle accidents –especially when they themselves are driving –are unable to recover compensation for their injuries. Compulsory third-party insurance ensures that those injured through another’s negligence will receive compensation but a system based on fault provides little comfort to the motor accident victims who cannot establish that the injury was caused by another’s negligence. The question becomes whether the community is prepared to accept the responsibility for injuries caused by motor vehicles. In one way or another everyone depends upon those vehicles for their lifestyle. Given society’s reliance upon and acceptance of motor vehicles there would seem to be an implied acceptance of the toll they extract in life and limb. It is argued by some that greater and more comprehensive concern should be shown for the victims and that the whole community should bear the cost through compulsory insurance for all those injured. It can of course be argued that a no-fault scheme would encourage carelessness. It is unlikely, however, that a driver will be encouraged to drive negligently and risk serious injury simply because compensation is available. A no-fault motor accident compensation scheme, although it may provide damages to a party whose injuries were caused by her or his own negligence, would also ensure a greater reach of compensation to those injured where perhaps no fault at all can be established. The additional cost involved in the increased claims would to a large extent be offset by savings in the cost of administering the scheme. Removing the burden of proving fault would render litigation almost entirely unnecessary.
IN CONTEXT
Compulsory third-party insurance Negligence law reflects and serves to sustain the life of a community. Richard Mullender.
[8.100] Those involved in a serious motor accident might initially count themselves lucky they managed to avoid death. But depending on where in Australia the accident occurred, this feeling of relief may be short-lived once they realise what sort of an ordeal they have ahead of them.
Compulsory third-party (CTP) insurance is universally required to register a motor vehicle in Australia. However, the breadth of cover provided to the driver of that vehicle varies dramatically between the States and Territories.
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Chapter 8 Torts: Concepts of Liability
In “no-fault” schemes, injuries to the driver are compensated by their vehicle’s CTP insurance policy. In “at-fault” schemes, the driver’s injuries are not covered by their vehicle’s policy. Chris McHugh, “Beyond Fault: Progressing to universal no-fault insurance for catastrophic motor injuries”, Insurance Insights (Suncorp Group, June 2014).
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No-fault schemes have been established in Victoria, Tasmania and the Northern Territory to allow payment of compensation without the need to establish fault. All other States and Territories have at-fault compulsory third-party insurance schemes, meaning injuries to the driver responsible for causing the accident are not covered. Some of the “at-fault” jurisdictions have introduced no-fault cover for catastrophic injuries. New South Wales introduced a limited no-fault scheme in October 2007. The compulsory third-party (CTP) accident scheme provides lifetime medical care and support for everyone catastrophically injured in a motor accident regardless of fault. Those who are paraplegic, quadriplegic and/or have a traumatic brain injury will be covered by the Lifetime Care and Support Scheme, including daily personal and nursing care, wheelchairs, domestic help, respite care, home and transport modifications. Injuries that are not “catastrophic” remain to be compensated, if at all, under the old “fault” system. Queensland and Western Australia currently retain at-fault scheme.
To be alive at all involves some risk. Harold MacMillan.
IN CONTEXT
CTP reforms labelled a disaster [8.110] Further reforms to the NSW CTP scheme introduced in 2017 provide benefits to all injured people, regardless of who is at fault for loss of income and medical expenses for six months. However, a Sydney Morning Herald Investigation in August 2018 has labelled the reforms a “disaster”: Reforms to the compulsory third party insurance system in NSW have been a “complete disaster” in curbing the “aggressive” and “adversarial” approach taken by some insurers to deny payments to motor accident victims, the Australian Lawyers’ Alliance has warned. Finance Minister Victor Dominello said … the focus was on “early intervention”, with fast- tracked payments covering lost income and medical expenses for the injured. “The biggest winners under the new scheme are motorists who have their green slips significantly reduced, with Sydney motorists saving $157 on average this year.” The scheme has introduced automatic benefits for six months – covering medical expenses and lost wages for anyone deemed to have a “minor injury”. Soft tissue and psychological injuries make up the loin’s share of such claims. People are eligible regardless of fault, opening the scheme up to an additional 7000 drivers for the first time.
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But the Law Society warned the new minor injury definition appeared to have given rise to a significant reduction in damages claims, by bundling people out of the system before they were fully recovered. Victims with injuries that were “in no way minor” in terms of impact were facing “significantly harsher” treatment, it said. Carrie Fellner, CTP reforms labelled a “disaster” (Sydney Morning Herald, 21 August 2018)
Of course insurance companies offer “at-fault” driver insurance and most insurance companies now offer limited at-fault driver cover as part of the third-party insurance cover that must be purchased before a motor vehicle can be registered.
IN CONTEXT
Fault v no-fault schemes
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[8.120] “No-fault coverage brings a financial cost to the scheme, but eliminating the tragic circumstances that can befall injured drivers who are without cover provides a profound social benefit”, Suncorp argued. In contrast, “at fault” schemes do not cover the person who caused the accident. In South Australia, the at-fault scheme resulted in around 40 per cent of catastrophically injured motor accident victims left without compensation. The state has since introduced new laws, including a new no-fault life-time support scheme, for people who are catastrophically injured in accidents from 1 July, 2014. R Liew, “Suncorp Calls for ‘No Fault’ Injury Scheme” (7 October 2013) Australian Financial Review
Employers and liability for employees: Vicarious liability One man’s justice is another’s injustice. Ralph Waldo Emerson.
[8.130] Under the principle of vicarious liability an employer is liable for the tortious acts and omissions of employees within the course of their employment. In NSW v Lepore [2003] HCA 4 Gleeson CJ commented in relation to an employer’s vicarious liability that (at [40]-[42]): The limiting or controlling concept, course of employment, is sometimes referred to as scope of employment. Its aspects are functional, as well as geographical and temporal. Not everything that an employee does at work, or during working hours, is sufficiently connected with the duties and responsibilities of the employee to be regarded as within the scope of the employment. And the fact that wrongdoing occurs away from the workplace, or outside normal working hours, is not conclusive against liability. The antithesis of conduct in the course of employment is sometimes expressed by saying that the employee was “on a frolic of his own” … … It is clear that if the wrongful act of an employee has been authorised by the employer, the employer will be liable. The difficulty relates to unauthorised acts. The best known
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Chapter 8 Torts: Concepts of Liability formulation of the test to be applied is that … an employer is liable even for unauthorised acts if they are so connected with authorised acts that they may be regarded as modes –although improper modes –of doing them, but the employer is not responsible if the unauthorised and wrongful act is not so connected with the authorised act as to be a mode of doing it, but is an independent act.
[8.140] The question of whether a wrongful act of an employee that constitutes a minimal offence has been considered in a number of cases, which established that although a criminal office does not preclude the possibility of vicarious liability the fact that employment affords the opportunity for the commission of a wrongful act is not of itself a sufficient reason to attract vicarious liability.
Deatons Pty Ltd v Flew [1949] HCA 60 [8.150] A hotel patron was the victim of an unexplainable unprovoked attack by a barmaid. When he asked
to speak to the licensee she responded by throwing a glass at him leading to his loss of sight of an eye. The Court held that the barmaid could not be said to have acted in the course of her employment in taking that action: Her actions were entirely unconnected with her employment. His Honour described the barmaid’s act as one of personal “passion and resentment” not done in furtherance of the employer’s interests, under his express or implied authority or as an incident to, or in consequence of, anything she was employed to do. She did not throw the beer or glass in the course of maintaining discipline or order, for which she was not in any event authorised.
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The employer was not vicariously liable.
Hollis v Vabu Pty Ltd [2001] HCA 44 [8.160] Mr Hollis suffered injuries when hit by a bicycle courier in Sydney. The courier worked for Vabu
and was wearing its distinctive uniforms. Mr Hollis could not identify the actual courier who ran him over, although he recognised the Vabu uniform (Mr Hollis was himself a courier so he was familiar with the uniforms of courier companies). He sued Vabu as the employer of the courier. The High Court accepted that employers are vicariously liable for the torts committed by their employees during the course of their employment. The key issue was whether the activities of the employee in committing the tort could be said to be within the scope of his employment. In this case, the courier hit Mr Hollis while carrying out his courier duties for Vabu and therefore the tort was committed during the course of employment. The majority held (at [42]) that: The conduct by the defendant of an enterprise in which persons are identified as representing that enterprise should carry an obligation to third persons to bear the cost of injury or damage to them which may fairly be said to be characteristic of the conduct of that enterprise.
Prince Alfred College Incorporated v ADC [2016] HCA 37 [8.170] A 12-year old pupil, a boarder at Prince Alfred College, was sexually abused by a housemaster on a number of occasions. His action against the college was unsuccessful as the offences was committed over 50 years earlier and the Court refused to extend the statutory limitation period because it was no longer possible for there to be a fair trial given the passage of time and the loss of most of the evidence. However the
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Business and the Law High Court took the opportunity to provide some guidance as to when an employee might be vicariously liable for the wrongful and criminal act of its employee. The relevant approach is: … to consider any special role that the employer has assigned to the employee and the position in which the employee is thereby placed vis-à-vis the victim. In determining whether the apparent performance of such a role may be said to give the “occasion” for the wrongful act, particular features may be taken into account. They include authority, power, trust, control and the ability to achieve intimacy with the victim. The latter feature may be especially important. Where, in such circumstances, the employee takes advantage of his or her position with respect to the victim, that may suffice to determine that the wrongful act should be regarded as committed in the course or scope of employment and as such render the employer vicariously liable.
PART 1 NEGLIGENCE: PERSONAL INJURY AND PROPERTY DAMAGE 8.2 NEGLIGENCE, THE TORT LAW CRISIS AND THE CIVIL LIABILITY REFORMS The elements of the tort of negligence
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[8.180] Most personal liability compensation cases in Australia fall into three categories –motor vehicle accidents, work accidents and public liability (accidents to members of the public for which owners/occupiers may be liable) in which the tort of negligence is central.
By all reasonable measures, the American tort system is a disaster. It resembles a wealth- redistribution lottery more than an efficient system designed to compensate those injured by the wrongful actions of others. David E Bernstein.
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The rapid development in tort law, particularly the law of negligence, can be traced back to the decision in Donoghue v Stevenson [1932] AC 562, discussed in detail at [8.230]. Since 1932, the tort of negligence has rapidly evolved to become the most dominant of all civil lawsuits. Several factors are responsible. Because it is an unintentional tort it may be committed without the defendant intending to cause harm to the plaintiff and as society becomes increasingly complex there are increasing opportunities for unintentional harm. Another factor is that the tort is capable of expansion and adoption to new circumstances: the categories of situations that are likely to attract liability in negligence are not closed, which means that potentially any conduct that causes physical injury or, in some limited cases, lost profit, may give rise to liability in negligence. A third factor is the common, sensible and in some cases compulsory practice of insuring against liability (such as in relation to motor vehicles through compulsory third-party insurance) which has also fuelled its growth. There were traditionally four elements of the tort of negligence which the plaintiff had to prove to the court in order to succeed in a claim based in negligence: • the defendant owed the plaintiff a duty of care; • the defendant breached that duty of care by falling below reasonable standards of conduct; • the defendant’s conduct caused the plaintiff to suffer either physical or economic harm –causation; and • the harm suffered by the plaintiff was reasonably foreseeable –remoteness.
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Chapter 8 Torts: Concepts of Liability
The Civil Liability Reforms [8.190] The elements noted above must be established for the plaintiff to succeed in a negligence action but they have been supplemented, and modified to some extent, by the Civil Liability Reforms. In the 1990s State and Territory governments made sweeping changes to motor accident, workers’ compensation and civil liability legislation to reduce the number of minor claims and to impose a cap on the amount of compensation received. These changes were driven by the increasing cost of liability insurance which was becoming prohibitive for both the private and public sectors. Despite these initiatives the cost and availability of public liability insurance was an increasing concern. The media regularly reported for example the closure by local councils of children’s playgrounds and the cancellation of community events because the cost of insurance was too high and the risk of operating without insurance was too great. There was a widely held view in the Australian community that there were problems with the law stemming from perceptions that: • the law of negligence as it is applied in the courts is unclear and unpredictable; • in recent times it has become too easy for plaintiffs in personal injury cases to establish liability for negligence on the part of defendants; and
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• damages awards in personal injuries cases are frequently too high. [8.200] In these circumstances the Federal Government in May 2002 commissioned a panel to examine the scope for possible reforms to the law of negligence. The terms of reference stated that:
There are not many actions for damages for negligence generating personal injury which do not involve one or more of the provisions of the Civil Liability Act. French CJ, “Bending Words: The Fine Art of Interpretation”, lecture (20 March 2014).
[t]he award of damages for personal injury has become unaffordable and unsustainable as the principle source of compensation for those injured through the fault of another. It is desirable to examine a method for the reform of the common law with the objective of limiting liability and quantum of damages arising from personal injury and death.
The Ipp Committee’s: Australia, Treasury, Law of Negligence Review Panel, Review of the Law of Negligence: Final Report (Ipp Report) was released in September 2002 and made 60 recommendations for legislative reform. Unfortunately, the Ipp recommendations for a national approach to tort reform have not been implemented and the States and Territories have legislated individually. Despite the “patchwork” of legislation across Australia there is nevertheless a reasonable degree of consistency in relation to the reforms enacted. The reforms are generally referred to as the “civil liability” reforms. They do not codify the tort of negligence but address particular problems in personal injury cases. The primary legislation giving effect to civil liability reforms are: • Civil Law (Wrongs) Act 2002 (ACT); • Civil Liability Act 2002 (NSW); • Personal Injuries (Liabilities and Damages) Act 2003 (NT); • Civil Liability Act 2003 (Qld); • Civil Liability Act 1936 (SA); • Civil Liability Act 2002 (Tas);
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• Wrongs Act 1958 (Vic); • Civil Liability Act 2002 (WA); and • Competition and Consumer Act 2010 (Cth), s 139A “Terms excluding consumer guarantees from supplies of recreational services”. The civil liability reforms have two major thrusts. They: • narrow the scope of potential liability by removing or limiting liability in certain circumstances; and • reduce the damages which may be awarded in negligence personal injury actions.
IN CONTEXT
Controversy over the civil liability reforms
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[8.210] The Insurance Council of Australia has pointed to the significant reduction of
public liability insurance premiums as evidence that the reforms have been successful. A National Insurance Brokers’ Association survey of its members released in February 2006 found that public liability insurance premiums had experienced reductions of up to 30 per cent. However, while the reforms have made insurance cover more accessible and affordable, some plaintiff lawyers argue that this benefit has come at their clients’ expense. From a plaintiff’s perspective the reforms are seen to have reduced both the circumstances in which they can bring a claim (particularly with regard to personal injury claims) as well as the causes of action upon which such claims may be based. Minter Ellison, Tort Law Reform Throughout Australia (7th ed, October 2007) There is a duty if the court says there is a duty; the law, like the Constitution, is what we make it. Duty is only word with which we state our conclusion that there is or is not to be liability; it necessarily begs the essential question … many factors interplay: the hand of history, our ideas of morals and justice, the convenience of administration of the rule, and our social ideas as to where the loss should fall. W L Prosser, “Palsgraf Revisited” (1953) 52 Michigan Law Review 1.
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IN CONTEXT
Negligence and the civil liability reforms [8.220] The civil liability reforms do not codify the tort of negligence but re-state principles generally consistent with the common law. For example the Civil Liability Act 2002 (NSW) provides that: Duty of care 5B General principles
(1) A person is not negligent in failing to take precautions against a risk of harm unless:
(a) the risk was foreseeable (that is, it is a risk of which the person knew or ought to have known), and
(b) the risk was not insignificant, and
(c) in the circumstances, a reasonable person in the person’s position would have taken these precautions.
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Chapter 8 Torts: Concepts of Liability
(2) In determining whether a reasonable person would have taken precautions against a risk of harm, the court is to consider the following (amongst other relevant things):
(a) the probability that the harm would occur if care were not taken,
(b) the likely seriousness of harm,
(c) the burden of taking precautions to avoid the risk of harm,
(d) the social utility of the activity that creates the risk of harm. 5C Other principles In proceedings relating to liability for negligence:
(a) the burden of taking precautions to avoid a risk of harm includes the burden of taking precautions to avoid similar risks of harm for which the person may be responsible, and
(b) the fact that a risk of harm could have been avoided by doing something in a different way does not of itself give rise to or affect liability for the way in which the thing was done, and
(c) the subsequent taking of action that would (had the action been taken earlier) have avoided a risk of harm does not of itself give rise to or affect liability in respect of the risk and does not of itself constitute an admission of liability in connection with the risk.
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Similar provisions have been enacted in other jurisdictions. The reforms nevertheless address special categories and situations, discussed below, in which liability that might have arisen at common law has been removed or limited.
8.3 THE DUTY OF CARE The duty of care [8.230] The duty of care is the “filter” for the scope of liability for negligent conduct. At law a person is not liable for damage to another through her or his negligence unless a duty of care is owed. This principle was clearly expressed by Lord Esher MR over a century ago in Le Lievre v Gould [1893] 1 QB 491 at 497: The question of liability for negligence cannot arise at all until it is established that the man who has been negligent owed some duty to the person who seeks to make him liable for his negligence. A man is entitled to be as negligent as he pleases towards the whole world if he owes no duty to them.
The question of whether a duty of care exists is therefore central to any negligence action. The High Court has observed that in Australia “there is no settled methodology, a universal test for determining the existence of a duty of care” but noted that “in practice the absence of an agreed legal formula has not caused difficulty for the overwhelming majority of tort actions” (Harriton v Stephens [2006] HCA 17) as in most cases the existence of a duty of care has been established by multiple precedents. Motor vehicle accidents
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It is remarkable how difficult it is to find in the English authorities statements of general application defining the relations between parties that give rise to the duty of care. Donoghue v Stevenson [1932] AC 562 at 570 per Lord Atkin.
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[The] world of commerce would come to a halt and ordinary life would become intolerable if the law imposed a duty on all persons at all times to refrain from any conduct which might foreseeably cause detriment to another. Weller & Co v Foot & Mouth Disease Research Institute [1966] 1 QB 569 at 585 per Widgery J.
and injury to employees through unsafe systems of work are obvious cases. However, this is not always the case and, outside of the established categories, the Court has to determine whether a duty of care exists in a particular case. In Harriton v Stephens, the High Court had to determine whether a medical practitioner owed a duty of care to a child born with profound disability whose mother would have elected to terminate the pregnancy had she been warned of the risk. Callinan J expressed the challenge for the court in these terms: The question that this appeal raises is one that has exercised the minds of philosophers, theologians, scientists, legislators and lawyers throughout the world; may a child born profoundly disabled who probably would have been aborted by her mother had she been informed of the child’s likely condition at birth as she should have been, but negligently was not, by the medical practitioner responsible for her, sue the practitioner for damages?
What does the court do in such case? As Kirby J explained: There is no legislation and no settled judicial authority in Australia to resolve the content of the law. It is therefore the duty of this Court to do so in the usual way. It must proceed by analogous reasoning from past decisions, drawing upon any relevant considerations of legal authority, principle and policy.
In the words of Lord Pearce in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 at 537:
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How wide the sphere of the duty of care in negligence is to be laid depends ultimately on the court’s assessment of the demands of society for protection from the carelessness of others.
The accepted genesis of the modern legal understanding of the duty of care is Lord Atkin’s “neighbour” principle laid down in Donoghue v Stevenson in 1932 which has been developed through the subsequent common law and, more recently, the civil liability reforms.
Donoghue v Stevenson [1932] AC 562
Case Study
Background
[8.240] The law of negligence did not begin in 1932 with Donoghue v Stevenson. However, the law of negligence as we know it today can be traced back to that decision. Prior to Donoghue v Stevenson, the law of negligence was confined to strict categories of situations where a duty of care was imposed by the law – eg occupier and entrant, doctor and patient. The significance of Donoghue v Stevenson lies in its recognition that the law of negligence extended beyond specific categories to any relationship where a duty of care ought to be imposed. Facts The plaintiff Mrs Donoghue consumed ginger beer purchased by her friend at a cafe in Glasgow. The ginger beer bottle was not clear glass and Mrs Donoghue and her friend could not see its contents clearly. The waiter poured some ginger beer into Mrs Donoghue’s glass and she drank it. Then, her companion topped up her glass and a rotten snail fell into the glass. As a result of consuming the ginger beer the plaintiff suffered shock, became ill with gastroenteritis and lost wages through time off work during her recovery.
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Chapter 8 Torts: Concepts of Liability
The plaintiff did not have a remedy in contract against the defendant Stevenson (the bottler of the ginger beer) because the contract was between Mrs Donoghue’s companion and the cafe. The essential question for the House of Lords was whether Stevenson, who had not entered into any contract with the plaintiff and who therefore had no contractual liability to her, owed her a duty of care in negligence. Decision The House of Lords held that liability for causing physical harm was not limited to cases involving direct contractual relationships. The significance of the decision comes from the formulation by Lord Atkin of the “neighbour test” which determined liability in negligence according to the nature of the relationship, direct or indirect, between the parties. Lord Atkin, at 580, stated that: There must be, and is, some general conception of relations giving rise to a duty of care, of which the particular cases found in the books are but instances … That 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, 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.
His Lordship said further at 599 that:
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A manufacturer of products, which he sells in such a form as to show that he intends them to reach the ultimate consumer in the form in which they left him with no reasonable possibility of intermediate examination, and with the knowledge that the absence of reasonable care in the preparation or putting up of the products will result in an injury to the consumer’s life or property, owes a duty to the consumer to take that reasonable care.
Donoghue v Stevenson found that a duty of care can arise when the creation of a risk of harm is reasonably foreseeable.
The test for establishing a duty of care [8.250] As noted above, the existence of a duty of care is not controversial in the categories that have been established through precedents. Outside the established categories the courts have struggled with the appropriate test. Lord Atkin’s ‘reasonable foreseeability’ test was supplemented by the “proximity test” which has in turn been replaced by the “salient features” tests.
Reasonable foreseeability [8.260] Reasonable foreseeability was held in Donoghue v Stevenson to be the basis for finding a duty of care. More recently Australian courts have held that while reasonable foreseeability of harm is a necessary condition for imposing a duty of care, it is not a sufficient condition for imposing a duty of care on its own (Sullivan v Moody [2001] HCA 59; Esanda Finance Corp Ltd v Peat Marwick Hungerfords [1997] HCA 8). One of the perceived problems with common law negligence was the supposed ease with which the requirement of reasonable foreseeability could be met. It has often been said that, particularly in physical injury cases, it is difficult to think of a risk that is not, in hindsight, foreseeable. There has been a widespread belief that trial courts, particularly in New South Wales,
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The search for a unifying principle in the law of negligence has proven to be as futile as the search for a unifying principle in the laws of physics. J Spigelman, “Negligence: The Last Outpost of the Welfare State” (2002) 76 Australian Law Journal 432 (address to Judicial Conference of Australia, edited version published).
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have been too eager to impose a duty of care in situations where the risk was, in hindsight, foreseeable. For example, it is always reasonably foreseeable that someone might be injured at the beach if they swim in large waves. Gleeson CJ in Tame v NSW [2002] HCA 35 noted that: It is important that “reasonable foreseeability” should be understood and applied with due regard to the consideration that, in the context of an issue as to duty of care, it is bound up with the question whether it is reasonable to require a person to have in contemplation the risk of injury that has eventuated.
IN CONTEXT
Reasonable foreseeability
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[8.270] Reasonable foreseeability must be established by the plaintiff within three out of the four common law elements of negligence, although its meaning is different in each element. • Duty of care – at this stage in the test for negligence the plaintiff must prove that a reasonable person, in similar circumstances to the defendant, would be aware that their conduct may create a risk of harming another person. The civil liability reforms now require that this risk be “not insignificant”, which the Ipp Report states is intended to mean that the risk is not so likely that it will definitely occur but more likely to occur than the previously endorsed standard that the risk must not be too far-fetched. In one sense the civil liability reforms explain this by requiring that the risk be of a nature that a reasonable person would have taken precautions to avoid it eventuating. • Breach of duty – at this stage the concept of reasonable foreseeability is concerned with the nature of the risk that has been created by the defendant’s conduct. In other words, how would a reasonable person respond to that exact type of risk? This is concerned with setting standards of acceptable conduct that will be determined with reference to a range of factors including the likely consequences on the plaintiff if the risk eventuates and the burden that would be imposed on the defendant to remove the risk. What we do mean by the word “proximate” is that, because of convenience, of public policy, of a rough sense of justice, the law arbitrarily declines to trace a series of events beyond a certain point. This is not logic. It is practical politics. Palsgraf v Long Island RR 248 NY 339 at 352 per Andrews J.
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• Remoteness of damage – at this stage the question of reasonable foreseeability is concerned with whether a reasonable person would have thought that the defendant’s conduct would result in a person suffering the broad type of damage that occurred (eg serious injury). The concept of reasonable foreseeability is not relevant to a determination of causation.
Proximity [8.280] Since the formulation of the neighbour test by Lord Atkin in 1932, there has been considerable debate across the common law world concerning when a relationship may properly be said to give rise to a duty of care. There have been several tests proposed at various times to attempt to explain or add to what Lord Atkin meant by the neighbour test, including the notion of “proximity”, which was embraced by the High Court in the
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Chapter 8 Torts: Concepts of Liability
1980s and early 1990s. In decisions such as Jaensch v Coffey [1984] HCA 52 and Sutherland Shire Council v Heyman [1985] HCA 41 Deane J, who was a leading proponent of the proximity test, asserted that a duty of care may arise where harm was reasonably foreseeable and the parties were in a relationship of proximity (eg by being physically proximate). Deane J described what he meant by the requirement of proximity in Sutherland Shire Council v Heyman: [It] is directed to the relationship between the parties … It involves the notion of nearness or closeness and embraces physical proximity … circumstantial proximity … and what may … be referred to as causal proximity.
However, the influence of proximity as a test for determining the existence of a duty of care ended with the retirement of Deane J from High Court and was finally discredited by the High Court in Sullivan v Moody [2001] HCA 59 in which the High Court unanimously held that proximity was of limited value and did not represent a test for establishing the existence of a duty of care.
Salient features A test usually referred to, as the “salient features’ test, has evolved to fill the void left by the proximity test being discredited. It is of most relevance in establishing a duty of care beyond the established categories and is discussed below at [8.350].
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The Established categories of duty of care [8.290] Through the doctrine of precedent, Lord Atkin’s neighbour principle as propounded in Donoghue v Stevenson was recognised, applied and developed further in later judicial decisions. In Australian Knitting Mills Ltd v Grant [1933] HCA 35, the High Court cited with approval Lord Atkin’s neighbour principle and gave it a broad interpretation to impose a duty on manufacturers to take reasonable care in manufacturing goods. The case marked the adoption of the neighbour principle in later Australian court decisions, developing further categories of relationship where a duty of care is imposed. The established categories of relationship where a duty of care is imposed include: • Manufacturers and consumers • Motor vehicle users and other road users • Employer and employees • Occupiers and visitors/trespassers • Professional advisors and their clients Reference is made to several of these categories throughout this chapter, and the discussion below focuses on the liability of occupiers and public authorities.
Occupiers [8.300] The duty of care owed by an occupier of land or building to persons lawfully on the land or premises is one of the established duty of care categories. The scope of that duty can nevertheless be contentious in unusual circumstances. Modbury Triangle Shopping Centre Pty Ltd v Anzil [2000] HCA 61 (see [8.320]) is such an example.
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I have come to regard the law courts not as a cathedral but rather as a casino. Richard Ingrams.
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Modbury Triangle Shopping Centre Pty Ltd v Anzil [2000] HCA 61 [8.320] In this case an employee of a tenant in a shopping centre was assaulted in the centre’s car park after the floodlights had been turned off at night. The injured person sued the shopping centre. The question was whether the shopping centre was liable for failing to take reasonable steps to protect the employee of a tenant against the deliberate wrongdoing of a third party. As stated by Gleeson CJ at [17]: The point of debate concerns whether the appellant owed a duty of kind relevant to the harm which befell the first respondent.
The Chief Justice commented at [13] that: Most actions in tort which come before trial courts arise out of relationships in which the existence of a duty of care is well established, and the nature of the duty well understood. Cases arising out of the use of a motor vehicle, or involving employer and employee, or bailor and bailee, turn upon the application to the facts of well settled principles concerning legal responsibility. References to duty of care, breach of duty, and causation provide convenient sub-headings for a judgment, but in many cases the concepts require no further analysis. In other cases, of which the present is an example, there is a real issue as to the scope of legal responsibility. Such an issue cannot then be resolved by a detailed recitation of the facts, the repetition of the standard rubrics under which discussion of the tort of negligence is commonly organised, and an appeal to common sense.
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An occupier owes a duty of care to persons lawfully on the land. The shopping centre owed a duty in relation to physical state and condition of the car park but it was held that no duty was owed to protect the workers in the shopping centre from the unauthorised, unknown and uncontrolled criminal activities of others. The significance of control over third parties was emphasised in the judgments. Gaudron J, for example, states at [43] that: There are situations in which there is a duty of care to warn or take other positive steps to protect another against harm from third parties. Usually, a duty of care of that kind arises because of special vulnerability, on the one hand, and on the other, special knowledge, the assumption of a responsibility or a combination of both. Those situations aside, however, the law is, and in my view should be, slow to impose a duty of care on a person with respect to the actions of third parties over whom he or she has no control.
Public authorities The law is not always about what a normal citizen might regard as simple logic. M Stevens, “ACCC and Union Unite against Boral” Australian Financial Review (17 July 2015).
[8.330] The law of negligence, and the duties imposed under that law, apply equally to a public authority such as a government department or government corporation as they do to private businesses and individuals. A duty of care may be imposed on a public authority if the authority exercises a statutory power –negligent act –or even when it fails to do so –negligent omission. However, the fact that public authorities are owned and managed by the government, and hence are responsible for using public money means that the ordinary application of the law of negligence may operate unfairly on public authorities. For example, local or regional government authorities are ordinarily responsible for the maintenance of roads and highways. Many regional government authorities are, however, responsible for vast areas of land and hence lengthy stretches of road for which the local authority may not have sufficient money to properly maintain. Is it appropriate for the law of negligence to dictate to a State government that it should spend more on roads and therefore less on hospitals, schools and police? Because the tort liability of public authorities raises difficult policy questions regarding government expenditure of public money, the law of negligence tends to treat public
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Chapter 8 Torts: Concepts of Liability
authorities slightly differently from other defendants. The following guidelines are appropriate for determining whether to impose a duty of care on a public authority: • Public authorities generally cannot be liable in negligence for failing to exercise a statutory power unless the exercise of power could be compelled (ie no liability where the authority merely has discretion to do something and decides on policy grounds not to exercise its discretion in a particular case). • The mere fact that a public authority chooses to exercise a statutory power does not of itself justify imposing a duty of care. The exercise of power must occur in a situation where it is reasonable to expect that the authority will take reasonable care not to create a risk of harm to the plaintiff. • In order to determine whether it is appropriate to impose a duty of care on a public authority in carrying out its official functions the court will consider: (a) The legislative framework that determines the authority’s powers, particularly whether the imposition of a duty of care would be consistent with the terms, scope and purpose of the relevant statute; (b) the degree and nature of control exercised by the authority over the risk of harm that eventuated; and
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(c) the vulnerability of those who depend on the authority to exercise its powers.
Pyrenees Shire Council v Day [1998] HCA 3 [8.340] The local council had knowledge that particular premises presented a dangerous fire risk and notified the tenant and the owner of the premises to rectify the problems creating the fire hazard. However, the council did not verify that the problems had actually been fixed. A fire later occurred in the property, which was then rented by different tenants (who were unaware of the fire hazard) and the fire also damaged adjoining properties. The former tenant and the local council were successfully sued for negligence in failing to fix the dangerous defects. In the High Court, the Council’s liability was based on its knowledge of the clear danger combined with its failure to exercise its powers to ensure that the defect was fixed when it knew of the substantial risk of serious harm that the fire risk posed.
One of the Ipp Committee’s terms of reference was to “address the principles applied in negligence to limit the liability of public authorities”. The Report recommended that: In any claim for damages for personal injury or death arising out of negligent performance or non-performance of a public function, a policy decision (that is, a decision based substantially on financial, economic, political or social factors or constraints) cannot be used to support a finding that the defendant was negligent unless it was so unreasonable that no reasonable public functionary in the defendant’s position could have made it.
The civil liability reforms throughout Australia have, generally, introduced this limitation on a public authority’s liability. Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-22 20:22:54.
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Business and the Law The hardest case we ever heard of lived in Arkansas. He was only fourteen years old. One night he deliberately murdered his father and mother in cold blood, with a meat-axe. He was tried and found guilty. The judge drew on his black cap, and in a voice choked with emotion asked the young prisoner if he had anything to say before the sentence of the Court was passed on him … “Why, no,” replied the prisoner, “I think I haven’t, though I hope yer Honor will show some consideration for the feelings of a poor orphan!” Artemus Ward.
Beyond the established categories Salient features [8.350] The removal of proximity as a test for establishing a duty of care has left the law of negligence with no satisfactory test to assist in the application of the neighbour principle from Donoghue v Stevenson. In most cases involving physical injury the lack of a comprehensive test is unproblematic because the vast majority of physical injury cases fit within well-known categories of negligence where a duty of care to avoid physical injury is ordinarily assumed. But how is the law to determine a duty of care, however, in situations that do not fall into a well-established category? A novel situation will arise where the relationship between the plaintiff and defendant has not previously come before the courts for consideration. In novel situations it is appropriate to consider what have been called the “salient features” of the relationship to determine whether a duty of care should be imposed. The following list of salient features may be used in combination with the Donoghue v Stevenson notion of reasonable foreseeability to assist with deciding whether to impose a duty of care: • reasonable reliance by the plaintiff on the conduct and protection of the defendant; • the vulnerability of the plaintiff, in the sense of whether the plaintiff is capable of protecting herself or himself from the harm caused by the defendant’s conduct; and
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• whether the defendant has voluntarily assumed responsibility for protecting the plaintiff against harm. This may be demonstrated by the defendant accepting payment from the plaintiff (eg where a doctor accepts payment to perform an operation on a patient). Arguably the most important salient feature is the capacity of the defendant to control the situation in a manner that protects the plaintiff from potential harm. Where the defendant has no capacity to control the creation of the reasonably foreseeable risk the law will be unlikely to impose a duty of care. Although the various High Court justices have differing approaches to the finding of a duty of care, it is worth remembering that these complex issues only become relevant in novel situations. Such a novel situation arose in Harriton v Stephens [2006] HCA 15 where the High Court was required to decide whether a child, born with profound disabilities, was entitled to claim compensation from a medical practitioner who negligently failed to warn the mother of the risk of the child being born with disabilities. It is uncontested that medical practitioners are under a duty to warn of potential risks and advise a mother of problems arising in her pregnancy, but does such duty extend to an unborn child? Can the child, after being born, claim compensation for being born with profound disabilities by arguing that a duty was imposed on the medical practitioner to warn the mother of the risks and give her an opportunity to have an abortion? In holding that there is no duty of care in these circumstances, the court referred to judicial decisions in other jurisdictions, legal policy considerations, social values, “encompassing the corporate welfare of the community, coherence and fairness” as a common law technique for dealing with novel claims. 420
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Chapter 8 Torts: Concepts of Liability
IN CONTEXT
Determining the existence of a duty of care outside established categories [8.360] In Harriton v Stephens [2006] HCA 15, Kirby J was the sole dissenting justice in a
decision of the High Court holding that a duty of care was not owed by a medical practitioner in a “wrongful life” case (see [8.270]). The approach of Kirby J to deciding the existence of a duty of care in cases falling outside recognised categories is nevertheless not in dispute (references omitted):
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Deciding the existence of a duty: In this appeal, the first issue of law is whether the respondent owed the appellant a relevant duty of care. In Australia there is no settled methodology or universal test for determining the existence of a duty of care such as is provided in most common law countries. The inability of this Court to agree on a principle of general application is unfortunate. Confusion approaching chaos has reigned. However, in practice, the absence of an agreed legal formula has not caused difficulty for the overwhelming majority of tort actions. Most tort actions fall within a recognised duty of care category. Of the actions that fall outside, or lie on the boundary of an established duty of care category, the test of reasonable foreseeability will ordinarily provide guidance in determining whether a duty is in fact owed. This is not because satisfying this test is sufficient to establish a duty of care. This Court has repeatedly affirmed that this is not the case. Rather, it is because, in so far as physical injuries arising from a positive act are concerned, it is accepted that if the reasonable foreseeability test is satisfied, the elusive additional component of a duty of care will generally exist.
Father protested vehemently, waving a volume of Blackstone under the justice’s nose to emphasize his outrage. “Sit down, Mr Allen!” the judge shouted, “I know the law”. “Of course you do, Your Honor,” Father replied, “I just wanted to read this to you to show you what a damned fool Blackstone was.” G E Allen, Presidents Who Have Known Me (Simon and Schuster, 1950).
Furthermore, instruction on the duty issue can be secured from several “salient features” (Perre v Apand Pty Ltd [1999] HCA 36) that have been identified as potentially relevant to the existence of a duty. In Sullivan v Moody [2001] HCA 59 three particular considerations were identified which will often point against the existence of a duty. These were (1) that finding a duty of care would cut across or undermine other legal rules (2) that the duty asserted would be incompatible with another duty, and (3) that to recognise a duty would expose the defendant to indeterminate liability. Elsewhere, factors capable of supporting a duty of care have been identified. These include (1) vulnerability on the part of the plaintiff (2) special control or (3) knowledge possessed by the defendant about the circumstances that gave rise to the damage suffered by the plaintiff.
Reynolds v Katoomba RSC All Services Club Ltd [2004] NSWCA 234 [8.370] A problem gambler alleged that a services club breached its duty of care to him by not advising
him to resign from the club and by continuing to cash cheques. The court accepted that “vulnerability” was a significant factor in establishing a duty of care: The discussion of vulnerability in … Perre v Apand Pty Ltd … and the authorities cited therein, place considerable emphasis on the practical inability of the injured party to take steps to protect him or her or itself; whether because of ignorance of the risk or otherwise. There was no such practical inability in the present case.
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Business and the Law It may well be that the appellant found it difficult, even impossible, to control his urge to continue gambling beyond the point of prudence. However, there was nothing which prevented him staying away from the club. The suggested duty on the club to advise him to resign his membership emphasises the point. He could have resigned at anytime … In my opinion this combination of circumstances is such that no duty of care was owed of the character for which the appellant contended. The risks were obvious. As Gleeson CJ said with respect to the analogous situation of a participant in sport. “The Appellant must accept responsibility for his own actions.” There was not a duty of care.
Frost v Warner [2002] HCA 1 [8.380] The High Court’s decision in Frost v Warner is a good example of the importance that the law
of negligence places on the defendant’s control in determining whether to impose a duty of care. Mr and Mrs Warner were the registered co-owners of a boat that sank when overloaded resulting in the death of five children. The relatives of the children sued, for nervous shock, both Mr Warner (who was driving the boat at the time of the accident) and also Mrs Warner, who was not on the boat at the time of the accident, on the basis that she was co-owner and the registered controller of the vessel. At the trial the plaintiffs succeeded against both Mr and Mrs Warner, but Mrs Warner’s appeal was successful. The High Court found that although Mrs Warner was the registered controller of the boat, she had no control over the situation which so tragically led to the loss of life and therefore did not owe a duty of care to the appellants.
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Spedding v Nobles [2007] NSWCA 29 [8.390] Does the owner of a hotel owe a duty of care to its customers to prevent injury being inflicted by third parties who are also in the hotel at the same time? When hotel patrons start drinking they sometimes become aggressive. Is the publican responsible for safeguarding all customers in the hotel? In this case the respondent’s friend had been assaulted in a hotel and had her watch stolen. The manager was informed but advised that he did not have enough manpower to recover the watch; when the respondent attempted to recover it she was seriously injured. The court held that a duty of care is owed by a hotel licensee to patrons in relation to the risks of violent behaviour by other patrons. This duty was based on the element of “control”. Although The Liquor Act 1982 (NSW) did not impose a statutory duty of care on licensees, enforceable by patrons, by conferring a power of control and an obligation to exercise that power, the statute provided the basis for a finding with respect to control, which in turn attracts the common law duty of care and informs its content. The statutory power of a licensee to remove from the premises customers affected by alcohol was influential.
IN CONTEXT
The duty of care and the civil liability reforms [8.400] The civil liability reforms do not codify the tort of negligence but restate principles
generally consistent with the common law. Section 5B of the Civil Liability Act 2002 (NSW) headed “General principles” provides that: (1)
A person is not negligent in failing to take precautions against a risk of harm unless: (a) the risk was foreseeable (that is, it is a risk of which the person knew or ought to have known), and
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Chapter 8 Torts: Concepts of Liability
(b)
the risk was not insignificant, and
(c)
in the circumstances, a reasonable person in the person’s position would have taken those precautions.
Special categories and situations Intoxication [8.405] The civil liability reforms place restrictions on the legal rights of intoxicated persons to recover damages for negligence (eg Civil Liability Act 2002 (NSW), ss 49, 50). [8.410] While the determination of a duty of care in novel situations may be problematic, in most cases the existence and scope of a duty of care is well-established.
If a statistical table of legal propositions should be drawn out, and the first column headed “Law by Statute” and the second “Law by Decision”; a third column, under the heading of “Law taken for granted” would comprise as much matter as both the others combined. O’Connell v The Queen (1844) 11 Cl & F 155 at 172 per Lord Denman.
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Nervous shock and mental harm [8.420] Historically, the courts have been reluctant to compensate for purely mental injuries, commonly known as nervous shock, without any accompanying physical injury. The reasons for denying plaintiffs in such cases are similar to those arguments that were used to deny plaintiffs in pure economic loss cases (see [8.1090]). These reasons were that the floodgates would be opened to numerous claims, genuine nervous shock involving psychiatric illness was difficult to verify, there were difficulties in establishing that it was the defendant’s action that caused the nervous shock, and the victim was viewed as being hypersensitive. Nevertheless with the advancement of medical science and an acceptance that nervous shock is as genuine an injury as physical injury, the tort of negligence developed to place tortfeasors under a legal duty to take reasonable care to avoid psychiatric injury to victims in appropriate cases.
Tame v NSW; Annetts v Australian Stations Pty Ltd [2002] HCA 35
Case Study
Background
[8.430] Tame v NSW is the reference for two cases decided by the High Court on the same day which provide guidance concerning when a defendant owes a duty of care in relation to negligence resulting in nervous shock. Facts In Tame the appellant was incorrectly recorded by police as having alcohol in her blood while driving, despite the fact that she did not drink alcohol. When Tame discovered the police mistake she developed a psychiatric condition as a result of her nervous shock, and became paranoid that the community thought of her as a drunk driver. Tame then sued the police for negligence in incorrectly recording her blood alcohol level which caused her to suffer nervous shock.
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In Annetts the parents of a young farm worker who died in a remote part of Australia after leaving the farm where he worked suffered a nervous shock after being told by the authorities that their son was missing in a remote part of Australia. The authorities informed the parents several months later that their son’s body had been found and it appeared that he had died soon after he went missing. The Annetts sued the owner of the farm for failing to adequately supervise their son which caused them nervous shock. Issues The key issue in both cases concerned whether or not the defendants owed the plaintiffs a duty of care to avoid nervous shock. An important question in both cases concerned whether the plaintiffs had to demonstrate a sudden mental injury as a result of the defendant’s conduct or whether the gradual mental deterioration could be sufficiently classified as a nervous shock to give rise to a duty of care. A further issue concerned whether the defendants should still owe a duty of care to the plaintiffs if they were more susceptible to mental illness than ordinary members of the general public, known as the normal fortitude test. Decision
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The High Court was divided on many issues of legal principle. However, it was held that Tame could not recover against the police because it would be unreasonable to require police to avoid making simple clerical mistakes so as not to cause nervous shock. In other words, a reasonable person would not have thought that a clerical error would give rise to a risk of nervous shock. The Annetts appeal was allowed because of the closeness of the relationship between the parties. The Annetts had only agreed to allow their teenage son to work on the farm on the condition that he was closely supervised, which the farm owner promised to do, but in fact failed to do. Several justices held that it was inappropriate to impose a duty to avoid nervous shock where the plaintiff had a predisposition to mental illness and was therefore more likely to suffer nervous shock. Implications This decision was significant for a number of reasons. Although the decision concerns nervous shock, the members of the court took the opportunity to give their views on many important aspects of the duty of care in negligence law including the scope of reasonable foresight and the distinction between recovery for physical injury and pure economic loss. The High Court’s decision on nervous shock preceded the civil liability reforms which limit liability for pure mental harm.
IN CONTEXT
Nervous shock and the civil liability reforms [8.440] The Ipp Report Recommendation 34 is:
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(a) There can be no liability for pure mental harm (that is, mental harm that is not a consequence of physical harm suffered by the mentally-harmed person) unless the mental harm consists of a recognised psychiatric illness.
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Chapter 8 Torts: Concepts of Liability
(b) A person (the defendant) does not owe another (the plaintiff) a duty to take care not to cause the plaintiff pure mental harm unless the defendant ought to have foreseen that a person of normal fortitude might, in the circumstances suffer a recognised psychiatric illness if reasonable care was not taken.
(c) For the purposes of (b), the circumstances of the case include matters such as:
(i) whether or not the mental harm was suffered as the result of a sudden shock;
(ii) whether the plaintiff was at the scene of shocking events, or witnessed them or their aftermath;
(iii) whether the plaintiff witnessed the events or their aftermath with his or her own unaided senses;
(iv) whether or not there was a pre-existing relationship between the plaintiff and the defendant; and
(v) the nature of the relationship between the plaintiff and any person killed, injured or put in peril.
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The civil liability reforms throughout Australia generally follow the recommendations in requiring something more than mere grief or sorrow, so a nervous shock plaintiff must show the existence of a medically recognisable psychiatric illness. The plaintiff must show that nervous shock (as the injury) was reasonably foreseeable by the defendant and that a reasonable defendant would have taken precautions to avoid the risk of causing nervous shock to the plaintiff. In NSW, Pt 3 of the Civil Liability Act 2002 (NSW) deals with the issue of mental harm. Particularly important are ss 30(2) and 32 on limitation on recovery for pure mental harm and duty of care in mental harm injury:
Sir, the law is as I say it is, and so it has been laid down ever since the law began; and we have several set forms which are held as law, and so held and used for good reason, though we cannot at present remember that reason. Fortescue CJ (1458) cited in William Holdsworth, A History of English Law (3rd ed, 1923) p 623.
30 Limitation on recovery for pure mental harm arising from shock
(2) The plaintiff is not entitled to recover damages for pure mental harm unless:
(a) the plaintiff witnessed, at the scene, the victim being killed, injured or put in peril, or
(b) the plaintiff is a close member of the family of the victim. 32 Mental harm –duty of care
(1) A person (“the defendant”) does not owe a duty of care to another person (“the plaintiff”) to take care not to cause the plaintiff mental harm unless the defendant ought to have foreseen that a person of normal fortitude might, in the circumstances of the case, suffer a recognised psychiatric illness if reasonable care were not taken.
(2) For the purposes of the application of this section in respect of pure mental harm, the circumstances of the case include the following:
(a) whether or not the mental harm was suffered as the result of a sudden shock,
(b) whether the plaintiff witnessed, at the scene, a person being killed, injured or put in peril,
(c) the nature of the relationship between the plaintiff and any person killed, injured or put in peril,
(d) whether or not there was a pre-existing relationship between the plaintiff and the defendant.
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(3)
For the purposes of the application of this section in respect of consequential mental harm, the circumstances of the case include the personal injury suffered by the plaintiff.
(4)
This section does not require the court to disregard what the defendant knew or ought to have known about the fortitude of the plaintiff.
Advocate’s Immunity
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[8.450] The doctrine of “advocates’ immunity” means that lawyers cannot be sued for negligent actions or omissions done in the conduct of a case in court or for acts or omissions done out of court, provided that they are “intimately connected” with the conduct of a case in court. The High Court has explained that: “the central justification for advocates’ immunity is the principle that controversies, once resolved, are not to be reopened except in a few narrowly defined circumstances” (D’Orta-Ekenaike v Victoria Legal Aid [2005] HCA 12). Although recent decisions have narrowed its scope by holding that the immunity does not extend to advice given o settle a case (Kendirjian v Lepore [2017] HCA 13) the doctrine remains part of Australian law. Given that other professionals –such as surgeons –are not protected from lawsuits arising from their negligence, and given that advocate’s immunity has been abolished in other common law countries including the United Kingdom, New Zealand and Canada, it is hardly surprising that it is a highly contentious doctrine.
Rescuers, volunteers and good Samaritans The duty of a court is to give the words of a statutory provision the meaning that the legislature is taken to have intended them to have. Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28 at [78] per McHugh, Gummow, Kirby and Hayne JJ.
If you are sure you understand everything that is going on, you are hopelessly confused. Walter Mondale.
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[8.460] Rescuers and volunteers have long posed a policy dilemma for the law of negligence because, unlike in most negligence cases, rescuers and volunteers are not acting in pursuit of their own interests in exchange for payment (which occurs in negligence cases when commercial defendants are negligent) or pursuant to any statutory obligation (which occurs when public authorities are negligent). Therefore, the policy justification for imposing liability in negligence on rescuers and volunteers is substantially less than the justification for imposing liability on other defendants in tort. If rescuers and volunteers are only acting in the best interests of the community, rather than for their own personal benefit why should they be liable for harm caused by their negligent conduct? More importantly, the imposition of tort liability on rescuers and volunteers may well deter them from assisting at all, a result that the community simply could not afford. These difficulties provide the framework for the civil liability reforms, which substantially exclude rescuers (referred to as “good Samaritans”) and volunteers from liability in negligence. The civil liability reforms generally provide that rescuers or “good Samaritans” do not incur liability by causing injury when assisting an injured person. The NSW provisions are typical. The Civil Liability Act 2002 (NSW) defines a “good Samaritan” –“a person who, in good faith and without expectation of payment or other reward, comes to the assistance of a person who is apparently injured or at risk of being injured” (s 55) –and provides (in s 57) that:
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Chapter 8 Torts: Concepts of Liability A good Samaritan does not incur any personal civil liability in respect of any act or omission done or made by the good Samaritan in an emergency when assisting a person who is apparently injured or at risk of being injured.
Under the civil liability reforms volunteers are generally excluded from liability in negligence for work performed for a community organisation such as a charity, provided that the work is done in good faith and does not constitute a criminal offence. For example s 61 of the Civil Liability Act 2002 (NSW) provides: A volunteer does not incur any personal civil liability in respect of any act or omission done or made by the volunteer in good faith when doing community work: (a) organised by a community organisation, or (b) as an office holder of a community organisation.
There are similar provisions in most other jurisdictions.
Dangerous recreational activities [8.470] The Ipp Report concluded (at [4.13]) that:
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there is widespread and strong community support for the idea that people who voluntarily participate in certain recreational activities can reasonably be expected, as against the provider of the recreational service, to take personal responsibility for, and to bear risks of, the activity that would, in the circumstances, be obvious to the reasonable person in the participant’s position.
The States (but not the Territories) have incorporated this philosophy in their civil liability reforms. In New South Wales for example s 5L of the Civil Liability Act 2002 (NSW) provides that: No liability for harm suffered from obvious risks of dangerous recreational activities (1) A person (“the defendant”) is not liable in negligence for harm suffered by another person (“the plaintiff”) as a result of the materialisation of an obvious risk of a dangerous recreational activity engaged in by the plaintiff. (2) This section applies whether or not the plaintiff was aware of the risk.
Related provisions provide that no duty of care exists in relation to recreational activities if there has been a risk warning (s 5M), and that the implied contractual term that recreational services will be rendered with due care and skill can be excluded or waived (s 5N). Section 139B of the Competition and Consumer Act 2010 (Cth) provides that a term of a contract for the supply of recreational services to a consumer by a person is not void only because the term excludes, restricts or modifies liability of the supplier.
Obvious risks
It is better the law should be certain, than that every judge should speculate upon improvements in it. Sheddon v Goodrich (1803) 32 ER 441 per Lord Eldon.
[8.480] Under the civil liability reforms, injured persons are presumed to be aware of obvious risks, and there is no duty to warn of obvious risks. The relevant provisions of the Civil Liability Act 2002 (NSW), which are mirrored in other jurisdictions, provide that: 5G Injured persons presumed to be aware of obvious risks. (1) In proceedings relating to liability for negligence, a person who suffers harm is presumed to have been aware of the risk of harm if it was an obvious risk, unless the person proves on the balance of probabilities that he or she was not aware of the risk.
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Business and the Law Act or omissions which any moral code would ensure cannot in a practical world be treated so as to give a right to every person injured by them to demand relief. Donoghue v Stevenson [1932] AC 562 at 580 per Atkin LJ.
(2) For the purposes of this section, a person is aware of a risk if the person is aware of the type or kind of risk, even if the person is not aware of the precise nature, extent or manner of occurrence of the risk. 5H No proactive duty to warn of obvious risk (1) A person (“the defendant”) does not owe a duty of care to another person (“the plaintiff”) to warn of an obvious risk to the plaintiff. (2) This section does not apply if: (a) the plaintiff has requested advice or information about the risk from the defendant, or (b) the defendant is required by a written law to warn the plaintiff of the risk, or (c) the defendant is a professional and the risk is a risk of the death of or personal injury to the plaintiff from the provision of a professional service by the defendant. (3) Subsection (2) does not give rise to a presumption of a duty to warn of a risk in the circumstances referred to in that subsection.
Obrljin v Beard [2010] NSWCA 93
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[8.490] Obrljin sought to recover damages in respect of personal injuries sustained during schoolies week
when his hand struck a ceiling fan installed in Beard’s Gold Coast apartment. It was held that the risk of injury from the fan was an obvious risk, and that no duty of care was owed in respect of the risk that the fan posed. It was unnecessary to take precautions such as installing a guard covering the fan. The court cited Gleeson CJ in Jones v Bartlett [2000] HCA 56: [There is no] such thing as absolute safety. All residential premises contain hazards to their occupants and to visitors. Most dwelling houses could be made safer, if safety were the only consideration. The fact that a house could be made safer does not mean it is dangerous or defective.
Liverpool Catholic Club v Moor [2014] NSWCA 394 [8.500] While wearing skating boots which he had hired from the appellant, the respondent began to descend a flight of stairs which provided access to an ice rink. As he did so, he slipped and fell backwards and suffered a serious fracture injury to his right ankle. There was a warning sign headed “No Responsibility” located inside the entrance to the sporting complex. An action was brought alleging breach of the occupier’s duty of care. The primary judge found that the appellant had been negligent in failing to take reasonable precautions against the risk of injury from slipping or falling when descending the wet stairs whilst wearing skates. The appellant should have provided one or both of two warnings. The first was a warning that patrons should not put on their ice skating boots before descending the stairs. The second was a verbal and diagrammatic warning and instruction for patrons to use a “duck walk” or splayed footed technique for negotiating the stairs and a statement alerting patrons to the stairs being slippery due to wetness. The appeal was successful. The Court of Appeal held that the duty of care required the skating rink to take reasonable care to avoid foreseeable risks of harm rather than a duty to avoid such risks (Civil Liability Act 2002 (NSW), s 5B). Although walking downstairs was not a dangerous recreational activity and although the 428
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Chapter 8 Torts: Concepts of Liability warning given by the “No Responsibility” notice did not address the risk of walking down the stairs with skating boots on, the risk was held to be an obvious risk within the meaning of s 5F and no duty of care was owed in respect of it.
Alameddine v Glenworth Valley Horse Riding Pty Ltd [2015] NSWCA 219 [8.510] The appellant was injured while riding a quad bike at the respondent’s recreational facility. The
respondent was guilty of negligence because the instructor caused the appellant to travel on her quad bike at an excessive speed. In the District Court the action for negligence and for non-compliance with the guarantees relating to the supply of services provided for by ss 60 and 61 of the Australian Consumer Law failed. The appellant was successful on appeal. • re s 5L of the Civil Liability Act 2002 (NSW): the appellant’s injury did not result from the “materialisation of an obvious risk of a dangerous recreational activitiy” engaged in by her. As a result, s 5L did not provide a defence. In light of the manner in which the activity was advertised and intended to be supervised, it was not “a dangerous recreational activity”. Nor did the injury result from the materialisation of “an obvious risk” of the activity as the risk that materialised was not inherent in, or an incident of, the activity.
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• re s 5M: section 5M did not preclude the respondents owing a duty of care to the appellant because, while the respondents warned the appellant (by a sign and in an application form) of the risks of riding a quad bike, the risk that materialised, being the risk of injury resulting from the respondents’ instructor’s negligence, was not inherent in, or incidental to, that activity. • re s 5N: the exclusion of liability clause that the respondents relied on did not form part of the contract as it was contained in a form that was signed after the contract was concluded. There was therefore no contractual exclusion clause whose efficacy was preserved by s 5N. In any event, the terms of the exclusion clause were not sufficiently broad to extend to the respondents’ negligence. It was held that the appellant was entitled to compensation from the respondents under the Australian Consumer Law as a result of the respondents’ failure to comply with the guarantee given to the appellant as a consumer under s 60 that they would perform their services with due care and skill given that the provisions of ss 5L, 5M and 5N were inapplicable.
Sharp v Parramatta City Council [2015] NSWCA 260 [8.520] Sharp suffered injuries when she landed awkwardly after jumping from the 10 metre diving platform at Parramatta War Memorial Swimming Centre. She claimed that the council was negligent in breaching its duty, as the occupier of the pool, to take reasonable care to avoid foreseeable risk of injury to those persons using the pool and diving tower. It was held that a warning sign at the base of the stairs to the diving tower provided a defence to the claim under s 5M. By its reference to using the platforms and springboards, the warning sign sufficiently identified the general nature of the risk of injury in undertaking the activity of jumping into the pool from the 10 m platform. Persons ascending the diving tower in the same way as the appellant were reasonably likely to receive and understand the warning said to have been given. The instructions given by the lifeguard did not contradict the warning given by the sign. The risk of injury from impact with the water surface from such a height was obvious. The activity was a dangerous recreational activity and the council was entitled to reply upon s 5L to deny liability in negligence for the harm suffered by Sharp.
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Business and the Law Pound spelled it out, applied it and amplified it, that law isn’t something that exists as a closed system within itself, but draws its juices from life. H B Phillips, Felix Frankfurter Reminisces: Recorded in Talks with Dr HB Phillips (Reynal, 1960).
Apologies and expressions of regret [8.530] Although the Ipp Report made no recommendation to this effect, the civil liability reforms throughout Australia include provisions to the effect that apologies and expressions of regret are not admissions of liability and are not admissible as evidence in court proceedings (eg Civil Liability Act 2002 (NSW), s 69).
Criminal activities [8.540] One aspect of negligence law that has attracted widespread media attention and subsequent public criticism is the situation where a person is injured while committing a crime and then sues the victim of the crime for negligence. In response, the civil liability reforms in most jurisdictions provide that no duty of care arises in respect of conduct engaged in self defence against unlawful activities. Furthermore, criminals are unable to recover damages for personal injury suffered during the commission of a serious criminal offence (eg Civil Liability Act 2002 (NSW), s 54).
Non-delegable duties
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[8.550] The law of negligence has long recognised that certain defendants such as employers, schools and hospitals have a special relationship of control over the persons in their responsibility. Therefore, the law has traditionally imposed a more onerous duty upon these defendants known as a non-delegable duty –so called as it cannot be discharged by delegating responsibility for the safety of the plaintiff to another, including the plaintiff. For example, an employer in charge of a building site could not discharge their duty of care to a worker by arguing that the worker was highly skilled and should therefore look after their own safety. The duty of care cannot be delegated to the worker. This has traditionally meant that defendants subject to a non-delegable duty are more easily found liable in negligence than other defendants to tort claims. In NSW v Lepore [2003] HCA 4, a case involving a sexual assault by a teacher, Gaudron J explained that (at [105], footnotes omitted): to describe the duty of a school authority as non-delegable is not to identify a duty that extends beyond taking reasonable care to avoid a foreseeable risk of injury. It is simply to say that, if reasonable care is not taken to avoid a foreseeable risk of injury, the school authority is liable notwithstanding that it engaged a “qualified and ostensibly competent” person to carry out some of all of its functions and duties.
In Burnie Port Authority v General Jones Pty Ltd [1994] HCA 13, the High Court expressed it in this way (at [36], references omitted): It has long been recognised that there are certain categories of case in which a duty to take reasonable care to avoid a foreseeable risk of injury to another will not be discharged merely by the employment of a qualified and ostensibly competent independent contractor. In those categories of case, the nature of the relationship of proximity gives risk to a duty of care of a special and “more stringent” kind, namely a “duty to ensure that reasonable care is taken”. Put differently, the requirement of a reasonable care in those categories of case extends to seeing that care is taken.
In the words of Gummow J in Scott v Davis [2000] HCA 52 at [248] “the characterisation of a duty as non-delegable involves, in effect, the imposition of strict liability upon the defendant who owes that duty”. 430
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Chapter 8 Torts: Concepts of Liability
New South Wales and Victoria now include in their civil liability reform laws the following provision. Civil Liability Act 2002 (NSW): 5Q Liability based on non-delegable duty (1) The extent of liability in tort of a person (the defendant) for breach of a non-delegable duty to ensure that reasonable care is taken by a person in the carrying out of any work or task delegated or otherwise entrusted to the person by the defendant is to be determined as if the liability were the vicarious liability of the defendant for the negligence of the person in connection with the performance of the work or task. (2) This section applies to an action in tort whether or not it is an action in negligence, despite anything to the contrary in section 5A.
Section 5Q inelegantly restates the common law –a person with a non-delegable duty is vicariously liable for the negligence of the person to whom performance of the duty has been delegated.
Johnson observed that “he did not care to speak ill of any man behind his back, but he believed the gentleman was an Attorney”. J Boswell, Life of Samuel Johnson (1791).
Fabre v Lui [2015] NSWCA 157
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[8.560] A landlord had engaged a tradesman to fix a stove rangehood to a wall in the kitchen. Three years later the rangehood fell on a lessee of the premises who sued the landlord in negligence. There was no dispute that the tradesman – an independent contractor for whom the landlord was not vicariously liable – had negligently installed the rangehood. The issue was that of negligence of the landlord in engaging the tradesman to install the equipment. The primary judge (at [19]) cited Bevillesta Pty Ltd v Liberty International Insurance Company [2009] NSWCA 169: There is no doubt also that this occupier’s duty of care is “delegable”, in the sense that it may be discharged in whole or in part by the occupier’s exercise of reasonable skill and care in engaging someone else to take steps to keep the property safe either generally or in particular respects. Discharge of the duty in this way requires reasonable skill and care in the selection of the other person, in arranging the terms of engagement of that person, and in confirming that the person does take appropriate steps. If it is reasonable for an occupier to seek to discharge or partly discharge the occupier’s duty in this way, and the occupier does exercise reasonable skill and care in all these respects, then if a person coming on to the property is injured due to the failure of the other person engaged to exercise reasonable skill and care to keep the property safe, the occupier may escape liability.
It was held that the landlord did not breach a duty of care owed to the tenant as the duty of care was “delegable”. If the duty had been a non-delegable duty, the tenant would have been successful as a duty to take reasonable care could not be satisfied by reasonably engaging a tradesman who did not take reasonable care.
8.4 THE STANDARD OF CARE: BREACH OF DUTY [8.570] Negligence depends on proving “fault”. Once it is accepted that a duty exists, its breach will result from a failure to meet the required standard of care. That standard requires reasonable care. Failure to take reasonable care is negligence. The fundamental test is the standard of the “reasonable person”, described by Baron Alderson as follows in Blyth v Birmingham Waterworks Co (1856) 11 Ex 781 at 784: Negligence is the omission to do something that a [reasonable person], guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and [reasonable person] would not do.
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Business and the Law The standard of foresight of the reasonable man eliminates the personal equation and is independent of the idiosyncrasies of the particular person whose conduct is in question. Some persons are by nature unduly timorous and imagine every past beset by lions; others of a more robust temperament fail to foresee or nonchalantly disregard even the most obvious dangers. Glasgow Corporation v Muir [1943] AC 448 at 457 per Lord MacMillan.
Who is a reasonable person?
The reasonable man eliminates the personal equation and is independent of the idiosyncrasies of the particular person whose conduct is in question. Some persons are by nature unduly timorous and imagine every past beset by lions; others of a more robust temperament fail to foresee or nonchalantly disregard even the most obvious dangers. Glasgow Corporation v Muir [1943] AC 448 at 457 per Lord MacMillan.
[8.590] In general this is a question to be decided objectively after weighing up a range of factors to determine what a reasonable response would be to the creation of the risk by the defendants conduct. This is judged according to the hypothetical “reasonable person” rather than the particular abilities, resources and circumstances of the defendant. Therefore, in Joslyn v Berryman [2003] HCA 34 (a case involving a drunk driver) it was said that the standard of care was not to be judged according to what a drunk driver might reasonably do in the defendant’s circumstances, but rather what a reasonable driver would do. The answer is, of course, that a reasonable driver would not drive if they were drunk. However, the fact that the standard of care is objectively assessed does not mean that there is only one universal standard. The standard of conduct required of the defendant is framed within the circumstances of the relationship between the plaintiff and the defendant.
[8.580] There are many descriptions of the reasonable person. One of the most comprehensive is (Poetic Justice, September 1995): The Reasonable Man –the standard you have when you don’t have a standard. The Reasonable Man is the greatest super hero of the common law world –if there ever was a skeletal principle to our system of law then he is it. Whenever there is a danger of the law seeming slightly unpredictable or irrational he steps into a phone booth and changes into the appropriate persona, whether it be the Fair and Reasonable Man; the Man on the Clapham Omnibus; the Man on the Street; the Ordinary Man; the Prudent Man; the Ordinarily Prudent Man; the Plain Man of Common Sense; the Reasonably Prudent Business Man; the Normal, Prudent Practitioner of the Same Experience and Standing; the Normal Dredge Owner; the Reasonable Intelligent Man Fully Apprised of the Circumstances; the Member of the Public of Ordinary Circumstances; the Right Thinking Member of Society; the Hypothetical Pedestrian; the Hypothetical Tenant; the Humane Man; the Man with Imperfect Recollection; the Just but not Loving Parent or Spouse; the Reasonable Drunk; the Reasonable Myopic Neurosurgeon with a chronic hand twitch … This empty vessel is here to stay –he will continue to trip up on your steps, drown in your hand basin, impale himself on your stapler, be nervously shocked by the rising of the sun and suffer detriment from your professional incompetence until the end of time.
What would the reasonable person do?
What risks does the reasonable person take into account? The defendant need only take precautions against not insignificant risks that a reasonable person would take precautions to avoid. The common law test have been incorporated into the civil liability reform statutes. For example, the Civil Liability Act 2002 (NSW), s 5B(2) states: In deciding whether a reasonable person would have taken precautions against a risk of harm, the court is to consider the following (among other relevant things) – (a) the probability that the harm would occur if care were not taken; (b) the likely seriousness of the harm; (c) the burden of taking precautions to avoid the risk of harm; (d) the social utility of the activity that creates the risk of harm.
Identical provisions exist in all other jurisdictions. 432
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Chapter 8 Torts: Concepts of Liability
Probability of the harm [8.600] One of the relevant elements to assess the standard of care, to answer the question of what a reasonable person would have done, is to assess the probability of the harm that occurred and ask the question of whether the risk of harm was foreseeable.
Bolton v Stone [1951] AC 850
Case Study
[8.610] Miss Stone was struck on the head by a cricket ball as she stepped out of her garden onto the public footpath. The ball had cleared a fence, the top of which was about 15 metres higher than the wicket, and travelled a great distance before striking Miss Stone. The evidence disclosed that the ball had only been hit over the fence about six times in 30 years. Although the risk was foreseeable, the House of Lords decided that the risk of someone being injured was so small that, in the circumstances, it could be disregarded.
Seriousness of the risk
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[8.620] The more serious the likely injury, the more significant the risk and the greater precautions the defendant must take. The practicability of precautions is measured in terms of expense, difficulty and inconvenience.
Paris v Stepney Borough Council [1951] AC 367 [8.630] The plaintiff was a motor mechanic employed by the defendant. He had lost the sight in one eye as the result of an earlier injury, and this was known to the defendants. He was blinded when a metal fragment lodged in his good eye while he was working under a motor vehicle trying to loosen a rusty bolt with a hammer. His employers provided safety goggles to their employees operating welding and grinding equipment, but not to the motor mechanics. The plaintiff was successful in a negligence action. The court held that, although the disability did not increase the likelihood of an accident occurring, the increased risk of serious injury if an accident were to happen was relevant in deciding what precautions the employer should take.
Burden of precautions [8.640] Even when the risk of harm is foreseeable and serious, the law does not always hold the defendant responsible. This is especially the case when the burden, difficulty and inconvenience of precautions are such that the failure to prevent foreseeable harm is “not unreasonable”.
Romeo v Conservation Commission of the Northern Territory [1998] HCA 5 [8.650] The High Court considered whether the public authority responsible for a public nature reserve in
the Northern Territory was in breach of its duty of care to Ms Romeo who had fallen off a cliff in the nature reserve after drinking with friends. Ms Romeo unsuccessfully sued the commission for negligently failing to
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Business and the Law fence off the cliff edge and also failing to erect a sign warning of the existence of the cliff edge. The High Court found that the failure of the Commission to build a fence around the cliff or to erect warning signs, when the dangers of approaching cliffs is obvious, was not a breach of its duty to users of the reserve. Kirby J stated that (at [132]): The proposition that such precautions were necessary to arrest the passage of an inattentive young woman affected by alcohol is simply not reasonable. The perceived magnitude of risk, the remote possibility that an accident would occur, the expense, difficulty and inconvenience of alleviating conduct and the other proper priorities of the Commission confirm the conclusion that breach of the Commission’s duty of care to the appellant was not established. The Commission’s failure to provide protection against the risk that occurred was not unreasonable
This court rather doubts the existence of the average man, or even a reasonable man. W Lewer, The Sydney Morning Herald (24 September 1966).
The reference by Kirby J to the expense, difficulty and inconvenience compared with the magnitude of the risk to the plaintiff is an application of the often quoted judgment by Mason J in Wyong Shire Council v Shirt [1980] HCA 12 (at [14]): If [a duty of care is imposed] it is then for the [court] to determine what a [reasonable person] would do by way of response to the risk. The perception of the [reasonable person’s] response calls for a consideration of the magnitude of the risk and the degree of the probability of its occurrence, along with the expense, difficulty and inconvenience of taking alleviating action and any other conflicting responsibilities which the defendant may have. It is only when these matters are balanced out that the [court] can confidently assert what is the standard of response to be ascribed to the [reasonable person] placed in the defendant’s position.
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Social Utility In determining whether a duty of care has been breached the social utility of the activity is an element that a reasonable person is entitled to consider.
Vairy v Wyong Shire Council [2005] HCA 62 [8.660] The appellant suffered catastrophic spinal injuries when he dived into the sea from a rock platform
at a popular surfing beach on the NSW Central Coast. The central issue in the appeal to the High Court was whether the council has breached a duty of care it owed to the appellant by not erecting signs warning against a prohibiting diving from the rock platform. The High Court, by a 4:3 majority, dismissed the appeal holding that the council had not breached its obligation to exercise reasonable case in not erecting warning signs. Hayne J held that a reasonable response did not require the erection of a warning sign (at [158]-[161]): Every form of physical recreation carries some risk of physical injury. The more energetic the activity, the greater are those risks. Fatigue, lack of fitness, slowness of reaction, general ineptitude can all contribute to injury. The magnitude and probability of occurrence of those risks rise if the activity is one in which there may be a collision between the participant and others, or between the participant and his or her surroundings. That risk of collision is evidently present in contact sports, but the solitary bike rider pedalling along a dedicated cycle track may fall from the bike and suffer serious injury. So too, the solitary swimmer may collide with an obstacle or strike the sea bed. There are many dangers associated with bathing in the sea – not least the danger of drowning. The form of danger with which this case is concerned – the danger of diving into water that is too shallow – is only one of the risks that attend this form of recreation. And the Council had to consider many forms of recreation conducted in many different areas of which the Council had the care, control and management. Swimming was but one of these many forms of recreation, every one of which had its risks and dangers. And even if attention could be confined to the
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Chapter 8 Torts: Concepts of Liability risks associated with swimming, the risk of spinal injury brought about by a swimmer’s collision with his or her surroundings is not confined to those who dive or plunge into the sea from a natural launching pad like the rock platform. Only by looking back at what actually happened in this case would it be right to confine the attention of a reasonable council to the foreseeable risks of swimming in the sea. When judged from the proper standpoint – looking forward at all forms of risk associated with all forms of recreation on or from land of which the Council had the care, control and management – what would the response of a reasonable council have been to the foreseeable risk of a diving injury like the appellant suffered? It was not reasonable to expect the Council to warn of this particular danger. The Council had done nothing to make the danger worse and had no knowledge of some feature of this particular area that was not readily discovered by someone contemplating diving or plunging into the water at this point.
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Callinan and Henderson JJ posed the question: “What then was the response that a reasonable council was obliged to take in fulfilment of the duty of care which the respondent correctly it owed to the appellant?” Their answer was that “the duty did not include an obligation to erect a warning sign or signs, to prohibit entry into the water from the platform, whether by signs or otherwise, or to construct, as it was at one stage suggested, a fence or other barrier to seek to deny access to the platform entirely”. Their Honours stated that (at [216]-[217]): The appellant was engaged in a physical recreational activity. This does not mean that the respondent owed him no duty of care but it does mean that the duty was conditioned very much by the fact that the appellant set out to extend himself physically, albeit not in any excessive way, against the elements, in particular, the sea … when adults voluntarily participate in sport they may be assumed to know the rules, and to have an appreciation of the risks of the game. The same may be said of diving into the sea from a rock platform, particularly when the dive is undertaken by a person of mature years, with a considerable experience and knowledge of the waters which he was entering … the seas too are dangerous and have been understood to be so for thousands of years. And, despite their allure, the sea waters of Australia, notoriously, are far from benign. Depending on how far north the traveller goes, sea lice, flotsam and jetsam, weed, blue bottles, stingers, quicksand, sea snakes, crocodiles, unpredictable waves, sand bars, sharks, absence of effective netting, shifting sea beds, broken bottles on the beach or in the water, sunstroke from sun bathing, and unpredictable tides and currents constitute a non- exhaustive catalogue of the risks a bather runs. Indeed, swimming itself, without more, can be hazardous … We do not think it could be seriously suggested that a shire should erect a multiplicity of signs in the vicinity of its beaches saying “swimming can be dangerous”.
The accident in this case pre-dated the Civil Liability Act 2002 (NSW). Such an unfortunate accident if held to be the “materialisation” of an obvious risk of a recreational activity is no longer within the scope of a negligence action (s 5L).
Roads and Traffic Authority of NSW v Dederer [2007] HCA 42 [8.670] A 14-year-old was rendered paraplegic when he dived from a bridge. The bridge was not designed to be a platform from which people might, for their own amusement, jump or dive into the water below. That was not its intended use. Yet it was a use that was regularly made of it, even though diving was prohibited, and “no diving” signs erected. His action against the local council responsible for the maintenance of the bridge was unsuccessful as his injuries were as a result of the “materialisation of an obvious risk of a recreational activity” within the meaning of s 5L. The action against the RTA which had been instituted prior to the introduction of the Civil Liability Act 2002 (NSW) proceeded but was also unsuccessful. The High Court held by majority that although the RTA
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Business and the Law owed a duty of care it had not breached its duty to take reasonable care in the circumstances. In the conclusion of Callinan J: A defendant is not an insurer. Defendants are not under absolute duties to prevent injury, or indeed even to take all such measures as might make it less likely to occur. They are obliged only to make such responses as can be seen to be reasonable in the circumstances. A proper balancing exercise which takes all of the relevant circumstances into account leads inescapably to the conclusion that the appellant, in responding to a risk that had not been realised for 40 years, by erecting the pictograph signs, acted reasonably and adequately.
Sanchez-Sidiropoulos v Canavan [2015] NSWSC 1139 [8.675] A 10-year-old attending the defendant’s school was hurt while playing a game of tag as a warm-up
activity during a PE class when she collided with another child and fell to the asphalt surface of the basketball court where the game was being played. Her negligence action failed. The defendant owed a duty of care to students attending the school but there was no breach of this duty. Schmidt J reaffirmed that “the exercise of reasonable care is sufficient to exclude ‘negligence’ (at [97]) and that “the duty to take reasonable care is always the same – to conform to the legal standard of reasonable conduct in the light of the apparent risk”: at [97]. His Honour noted that “what amounts to reasonable care in a given case must be seen in the context that it is neither practicable nor desirable to maintain a system of education that seeks to exclude every risk of injury” and cited McNair J in Jeffrey v London County Council (1954) 52 LGR 521 at 523:
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School authorities…must strike some balance between the meticulous supervision of children every moment of the time when they are under their care, and the very desirable object of encouraging the sturdy independence of children as they grow up.
IN CONTEXT
The civil liability reforms and the standard of care [8.700] The Ipp Report recommended that a person is not negligent in failing to take
[The reasonable man] is the embodiment of all the qualities we demand of the good citizen: and if not exactly a model of perfection, yet altogether a rather better man than probably any single one of us happens, or perhaps even aspires, to be. J G Fleming, The Law of Torts (7th ed, The Law Book Company Ltd, 1987).
precautions against a foreseeable risk unless the risk is “not insignificant” and a reasonable person in the same position would have taken precautions (taking into consideration the probability, likely seriousness, the burden of taking risks and the social utility of the risk- creating activity). This recommendation has been adopted throughout Australia. Sections 5B and 5C of the Civil Liability Act 2002 (NSW) provide that: 5B General principles
(1) A person is not negligent in failing to take precautions against a risk of harm unless:
(a) the risk was foreseeable (that is, it is a risk of which the person knew or ought to have known), and
(b) the risk was not insignificant, and
(c) in the circumstances, a reasonable person in the person’s position would have taken those precautions.
(2) In determining whether a reasonable person would have taken precautions against a risk of harm, the court is to consider the following (amongst other relevant things):
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(a) the probability that the harm would occur if care were not taken,
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Chapter 8 Torts: Concepts of Liability
(b) the likely seriousness of the harm,
(c) the burden of taking precautions to avoid the risk of harm,
(d) the social utility of the activity that creates the risk of harm. 5C Other principles In proceedings relating to liability for negligence:
(a) the burden of taking precautions to avoid a risk of harm includes the burden of taking precautions to avoid similar risks of harm for which the person may be responsible, and
(b) the fact that a risk of harm could have been avoided by doing something in a different way does not of itself give rise to or affect liability for the way in which the thing was done, and
(c) the subsequent taking of action that would (had the action been taken earlier) have avoided a risk of harm does not of itself give rise to or affect liability in respect of the risk and does not of itself constitute an admission of liability in connection with the risk.
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Professional negligence [8.720] Ordinarily a defendant will be judged according to the knowledge and skills of the hypothetical reasonable person in the particular circumstances of the case. How does this operate when the defendant is actually a highly skilled professional? The general rule is that the standard of care for professionals is determined by reference to the skills of a reasonable person skilled in that profession. The classic statement of professional standards of care is provided by Windeyer J in Voli v Inglewood Shire Council [1963] HCA 15, where he stated that (at [8]):
The person concerned is sometimes described as “the man in the street”, or “the man in the Clapham omnibus”, or, as I recently read in an American author, “the man who takes the magazines at home and in the evening pushes the lawn mower in his shirt sleeves”. Such imagery may be misleading. The “man in the street does not always show the care expected of a reasonably prudent man in the circumstances”. J W Salmond and R F V Heuston, Salmond on the Law of Torts (Sweet & Maxwell, 1953).
[a professional] undertaking any work in the way of his profession accepts the ordinary liabilities of any man who follows a skilled calling. He is bound to exercise due care, skill and diligence. He is not required to have an extraordinary degree of skill or the highest professional attainments. But he must bring to the task he undertakes the competence and skill that is usual among [persons] practising their profession. And he must use due care. If he fails in these matters and the person who employed him thereby suffers damage, he is liable to that person.
The determination of an appropriate standard for professional conduct has caused a great deal of controversy in recent times, particularly since the decision of the High Court in Rogers v Whitaker [1992] HCA 58, which overturned the previous Bolam principle (Bolam v Friern Barnet Hospital Management Committee [1957] 2 All ER 118) that stated that medical professionals would not breach the duty of care owed to patients if they acted in accordance with a practice responsibly adopted in that profession.
Rogers v Whitaker [1992] HCA 58 [8.730] The High Court in Rogers v Whitaker disagreed with the view that professionals were able to exclude
the court and thereby determine their own legal standards of care. The High Court found that it was for the court to decide whether a professional’s adoption of a particular practice, such as failing to advise of particular
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Business and the Law risks associated with an eye operation as was the case in Rogers v Whitaker, was reasonable and therefore not a breach of duty. The plaintiff in Rogers v Whitaker, Mrs Whitaker, had suffered a childhood injury to one eye, leaving her almost totally blind in that eye. Some 40 years later she decided to have an eye operation. She was advised by the defendant Dr Rogers, an ophthalmic surgeon, that the operation would improve the appearance of her injured eye and probably also improve the vision in it. The plaintiff underwent the surgery, but there was no improvement in the injured eye. She developed sympathetic ophthalmia in the good eye, and ultimately lost all sight in it, leaving her almost totally blind. The chance of sympathetic ophthalmia occurring was one in 14,000 such procedures. The plaintiff successfully sued not on the basis that Dr Rogers had negligently performed the eye operation, but rather on the basis of a failure to warn of the risk involved. There was evidence that she had sought relevant information and would not have undergone the operation had she known of the risk.
Judges, as unelected members of judicial institutions, should be careful about forming views about social and economic conditions. New South Wales v Commonwealth [2006] HCA 52 at 835 per Callinan J.
[8.740] The aftermath of Rogers v Whitaker has been profound with medical professionals complaining that the court is not qualified to determine what reasonable professional standards should be. This widespread criticism of the law of negligence was a significant factor that influenced the Federal Government to set up the Ipp Committee’s Review of the Law of Negligence (see [8.200]). One of the terms of reference of the review was that the panel of experts should devise a way to ensure that medical and other professional standards were determined in accordance with widespread practices in the profession rather than by the courts. The Civil Liability Act 2002 (NSW) provides: 5O Standard of care for professionals
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(1) A person practising a profession (a professional) does not incur a liability in negligence arising from the provision of a professional service if it is established that the professional acted in a manner that (at the time the service was provided) was widely accepted in Australia by peer professional opinion as competent professional practice. (2) However, peer professional opinion cannot be relied on for the purposes of this section if the court considers that the opinion is irrational. (3) The fact that there are differing peer professional opinions widely accepted in Australia concerning a matter does not prevent any one or more (or all) of those opinions being relied on for the purposes of this section. (4) Peer professional opinion does not have to be universally accepted to be considered widely accepted.
There are similar provisions in most other jurisdictions. The effect of provisions such as this is that a professional is able to escape liability for conduct that causes harm to another, provided that the conduct is widely accepted by other members of the profession, and the practice is not irrational. It remains to be seen whether the requirement for professional practice not to be “irrational” offers the same level of protection as the common law requirement to be “reasonable”.
8.5 CAUSATION [8.750] The law will not shift the loss from the plaintiff to the defendant unless it can be shown that the harm (consisting of damage) was caused by the defendant’s negligent 438
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Chapter 8 Torts: Concepts of Liability
act. The “but for” test is a formula used by the court to determine causation: the defendants fault is the cause of the plaintiff’s damage (at least for the purposes of determining whether the defendant should be liable in negligence) if the damage would not have occurred without, “but for”, it. [8.760] The civil liability reforms have altered the common law test of causation by adding a further element to the “but for” test. The civil liability reform statutes now also require that it is appropriate to extend the scope of liability to the defendant. The Civil Liability Act 2002 (NSW) provides: 5D General principles (1) A determination that negligence caused particular harm comprises the following elements:
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(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 of the negligent person’s liability to extend to the harm so caused (“scope of liability”). (2) In determining in an exceptional case, in accordance with established principles, whether negligence that cannot be established as a necessary condition of the occurrence of harm should be accepted as establishing factual causation, the court is to consider (amongst other relevant things) whether or not and why responsibility for the harm should be imposed on the negligent party. (3) If it is relevant to the determination of factual causation to determine what the person who suffered harm would have done if the negligent person had not been negligent: (a) the matter is to be determined subjectively in the light of all relevant circumstances, subject to paragraph (b), and
The great F E Smith, later Lord Birkenhead, was once cross- examining a boy whose right arm, the prosecution alleged, had been crippled through the negligence of the defendant, a bus company. “Will you show me”, FE asked with great sympathy toward the boy, “just how high you can lift your arm?” His face exhibiting great pain, the boy could barely bring his arm in line with his shoulder. “Thank you”, said FE, and “now will you show me how high you could lift it before the accident?” The boy’s arm immediately shot up in the air, and the defense had no further questions. P Hay, The Book of Legal Anecdotes (Harrap, 1989).
(b) any statement made by the person after suffering the harm about what he or she would have done is inadmissible except to the extent (if any) that the statement is against his or her interest. (4) For the purpose of determining the scope of liability, the court is to consider (amongst other relevant things) whether or not and why responsibility for the harm should be imposed on the negligent party.
There are identical provisions in all other jurisdictions. The meaning of this new two-stage test was considered in Ruddock v Taylor [2003] NSWCA 262, where Ipp JA (the chair of the Review of the Law of Negligence) attempted to provide guidance concerning what the two elements of this new statutory test of causation are concerned with. His Honour said (at [86]-[87]) that s 5D(1)(a) is concerned with “whether the negligent conduct in question played a part in bringing about the harm”, while s 5D(1) (b) is concerned with: … the appropriate scope of liability for the consequences of tortious conduct. In other words, the ultimate question to be answered when addressing [s 5D(1)(b)] is a normative one, namely, whether the defendant ought to be held liable to pay damages for that harm. This inquiry may involve normative issues of a general kind, or issues such as whether the defendant materially increased the risk and whether the damage claimed is too remote.
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The view has been expressed that medical negligence is like “a dagger at the doctor’s back”. Hatcher v Black [1954] CLY 2289 per Denning MR as reported in The Times (2 July 1954).
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Business and the Law
March v Stramare Pty Ltd [1991] HCA 12 [8.770] The High Court reviewed causation in March v Stramare Pty Ltd where, late at night, the defendant
had parked his truck in the middle of a well-lit four-lane road in Adelaide to unload goods for market. The truck was partially straddling two lanes, one in each direction, and was itself well-lit. The plaintiff was very drunk and was injured when he drove into the truck. The defendant argued that the plaintiff’s drunkenness was the sole cause of his accident, but the High Court held that the defendant was also responsible. Even though the plaintiff was successful, he was found to be 70 per cent responsible for his own injuries and damages were reduced accordingly. The High Court affirmed the use of the “but for” test but warned that it had to be applied in a common sense manner.
Strong v Woolworths Ltd [2012] HCA 5
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[8.780] Mrs Strong suffered serious spinal injuries when she slipped and fell on a greasy chip lying on the floor of a sidewalk sales area under the control of Woolworths. It was not in question that Woolworths owed a duty to take reasonable care for the safety of persons coming into the sidewalk sales area and that on the day of the accident, they had breached that duty by not having a system in place for periodic inspection and cleaning of it. The issue was one of causation. Applying the statutory test the Court of Appeal held that Mrs Strong had failed to prove on the balance of probabilities that Woolworths’ negligence caused her fall. The standard of care required was for periodical inspections, not constant vigilance. It could not be concluded that, had there been a dedicated cleaning of the area every 15 minutes, it was more likely than not that the appellant would not have fallen. The High Court held by majority that it was an error for the Court of Appeal to hold that it could not be concluded that the chip had been on the ground for long enough to be detected and removed by the operation of a reasonable cleaning system.
8.6 REMOTENESS [8.790] Until the decision of the Privy Council in Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd [1961] AC 388, known as The Wagon Mound No 1 Case, the rule was that the defendant was liable for all damages which were a direct consequence of the tort alleged. In The Wagon Mound No 1 that requirement was rejected and in its place was substituted the test of reasonable foreseeability.
Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd [1961] AC 388 [8.800] The facts in The Wagon Mound No 1 were simple enough. The defendant, while in charge of the ship Wagon Mound, negligently allowed oil to spill into Sydney Harbour. The oil spread to a wharf where ships were undergoing repair. It was not considered likely to catch fire but it did and caused damage to the ships and the docks. The unlikely fire started when molten metal from welding operations on the wharf set alight a rag floating on debris in the oil slick. Viscount Simonds held that: It does not seem consonant with current ideas of justice or morality that for an act of negligence, however slight or venial, which results in some trivial foreseeable damage the actor should be liable for all consequences however unforeseeable and however grave, so long as they can be said to be “direct”. It is a principle of civil liability, subject only to qualifications which have no present relevance, that a man must be considered to be responsible for the probable consequences of his act. To demand more of him is too harsh a rule, to demand less is to ignore that civilised order requires the observance of a minimum standard of behaviour.
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Chapter 8 Torts: Concepts of Liability His Lordship continued at 442-443: If it is asked why a man should be responsible for the natural or necessary or probable consequences of his act (or any other similar description of them) the answer is that it is not because they are natural or necessary or probable, but because, since they have this quality, it is judged by the standard of the [reasonable person] that he ought to have foreseen them.
[8.810] The Wagon Mound No 1 case was followed by another action based on the same event. In Overseas Tankship (UK) v Miller SS Co [1967] 1 AC 617 (The Wagon Mound No 2 case), the plaintiff was the owner of one of the damaged ships. The evidence presented at the second trial was sufficiently different to lead that court to conclude that the defendant should have known that the oil was capable of ignition. The risk of fire was remote but not impossible. Therefore the issue became, given that the fire was foreseeable, how foreseeable did it have to be? Was a very remote chance of fire sufficient or should it be likely, or probable? The Privy Council determined that the test of remoteness (and foreseeability) was met, in favour of the plaintiff, where the risk was “very likely” or “real”.
8.7 DEFENCES TO NEGLIGENCE
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[8.820] Although a plaintiff may establish the elements of negligence, the defendant may still escape some or all liability by resort to particular defences. The common law defences have been largely unaltered by the civil liability reforms.
Contributory negligence [8.830] Where the defendant establishes contributory negligence on the part of the plaintiff, the damages that are awarded by the court are reduced to the extent that the plaintiff contributed to the damage. Contributory negligence occurs when there is a failure by the plaintiff to meet the standard of care for her or his own protection and that failure is a legally contributing cause to the injury. In March v Stramare Pty Ltd [1991] HCA 1 (discussed above at [8.770], for example, the plaintiff’s damages were reduced by 70% as he was found to be 70% responsible for his own injuries. The common law rule is that the plaintiff’s own negligence disentitles her or him to relief. This rule has been changed throughout Australia by legislation that provides for the plaintiff’s contributory negligence to reduce and not extinguish the right to damages. A negligent defendant in a motor vehicle case may establish that the plaintiff contributed to the accident by driving at dusk without lights, for example. The proportion of the plaintiff’s responsibility is determined by the court and deducted from the total amount that would otherwise have been awarded.
One who takes part in such a sport accepts the dangers that inhere in it so far as they are obvious and necessary, just as a fencer accepts the risk of a thrust by his antagonist or a spectator at a ball game the chance of contact with the ball … The plaintiff was not seeking a retreat for meditation. Visitors were tumbling about the belt to the merriment of onlookers when he made his choice to join them. He took the chance of a like fate, with whatever damage to his body might ensue from such a fall. The timorous may stay at home. Murphy v Steeplechase Amusement Co 250 NY 479 (1929) at 482 per Cardozo J.
Joslyn v Berryman [2003] HCA 34 [8.840] This case concerned a situation where both the passenger and the driver of a vehicle were heav-
ily intoxicated. The passenger (J) noticed that the driver and owner of the vehicle (B) was falling asleep at the wheel and so B allowed J to take over the driving. B was aware that J had no licence because of a
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Business and the Law prior drink-driving conviction and had not driven a vehicle for at least three years. Furthermore, B knew trial J had consumed a large amount of alcohol the previous night. The car overturned while J was driving and injured both J and B. B sued J for negligence. The court found that B was contributorily negligent because he should have known not to allow J to drive. McHugh J explained contributory negligence in the following terms at [16]: A plaintiff is guilty of contributory negligence when the plaintiff exposes himself or herself to a risk of injury which might reasonably have been foreseen and avoided and suffers an injury within the class of risk to which the plaintiff was exposed.
IN CONTEXT
Contributory negligence and the civil liability reforms
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[8.850] The Ipp Report recommended, at [8.13], that: The progress of society is linked to the maintenance and continuance of industrial operations and fast methods of transport, and must therefore suffer the harms associated with them. The question is simply, who is to pay for their cost, the hapless victim who may be unable to pin conventional fault on any particular individual, or those who benefit from the accident-producing activity? John Fleming.
(a) The test of whether a person (the plaintiff) has been contributorily negligent is whether a reasonable person in the plaintiff’s position would have taken precautions against the risk of harm to himself or herself.
(b) For the purposes of determining whether a person has been contributorily negligent, the standard of the reasonable person is the same as that applicable to the determination of negligence.
(c) In determining whether a person has been contributorily negligent, the following factors (amongst others) are relevant:
(i) The probability that the harm would occur if care was not taken.
(ii) The likely seriousness of the harm.
(iii) The burden of taking precautions to avoid the harm.
(iv) The social utility of the risk-creating activity in which the person was engaged.
The Ipp Report also recommended that under apportionment legislation (the legislation providing for contributory negligence) a court should be entitled to reduce a plaintiff’s damages by 100 per cent where it is just and equitable to do so. These recommendations have generally been given effect to in the civil liability reforms of the states. The New South Wales provisions under the Civil Liability Act 2002 (NSW) are: 5R Standard of contributory negligence
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(1) The principles that are applicable in determining whether a person has been negligent also apply in determining whether the person who suffered harm has been contributorily negligent in failing to take precautions against the risk of that harm.
(2) For that purpose:
(a) the standard of care required of the person who suffered harm is that of a reasonable person in the position of that person, and
(b) the matter is to be determined on the basis of what that person knew or ought to have known at the time.
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Chapter 8 Torts: Concepts of Liability
5S Contributory negligence can defeat claim In determining the extent of a reduction in damages by reason of contributory negligence, a court may determine a reduction of 100% if the court thinks it just and equitable to do so, with the result that the claim for damages is defeated.
Voluntary assumption of risk [8.860] This defence, known by its Latin name, “volenti non fit injuria”, is available if the plaintiff has voluntarily assumed the risk. It equates to consent and therefore requires full comprehension and acceptance of the risk involved without being coerced by the defendant. It is a complete defence, meaning the plaintiff loses regardless of how negligent the defendant has been. An example is the person who accepts a lift from a drunken driver (Insurance Commission v Joyce [1948] HCA 17). The courts are reluctant to allow the defence to succeed in cases where that result would lead to unfairness, instead substituting contributory negligence so as to enable the apportionment of damages.
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Disclaimers which renounce a duty of care [8.870] A successful defence to an otherwise complete claim for negligence may be established by reliance upon an appropriate disclaimer. Such a case was Hedley Byrne v Heller [1964] AC 465 (see [8.970]) in which a disclaimer that accompanied negligent advice provided a successful defence to the negligence action. Disclaimers are not successful as a defence against a claim for breach of a statutory duty either with goods or services or financial advice. In fact, in terms of statutory liability it is an offence to attempt to disclaim liability.
Almost the wisest- looking thing in the world is a country boy who has been boarding in town three or four months, studying law. E W Howe, Country town sayings, 1911.
8.8 DAMAGES [8.880] While the development of the law of torts has been influenced by the deterrence of undesirable behaviour, the real purpose of that law as it now operates is to provide compensation for losses suffered in our complex society, where those losses can be categorised as resulting from the commission of a tort by the defendant. The nature of the loss suffered may vary widely, and can be a physical injury, an injury to reputation or integrity, a financial loss caused by negligent legal or investment advice, or one of a number of other losses. The damages are paid to compensate for the loss suffered and that often raises difficult questions. The amount of a financial loss might be clear enough, but to compensate for the loss of the ability to work, or play sport is far more complex. In this context, the explanation by Professor Luntz is very helpful. In H Luntz, “The Purpose of Damages in Tort Law”, in Finn (ed), Essays on Torts (Law Book Company, 1989) at p 243 he states that: It is trite law that where any legal wrong is to be compensated by damages, the aim of the court is to award such sum of money as well as nearly as possible put the person who has
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Business and the Law Defence counsel: After the accident, didn’t someone come over to you and ask how you felt? Farmer: Yes, I believe that is so. Defence: And didn’t you tell him that you never felt better in your life? Farmer: Yes, I guess I did. (Defence Counsel sits down. Plaintiff’s Counsel stands up.) Plaintiff’s Counsel: Will you tell His Honour the circumstances in which you made the response? Farmer: Yes. Not long after the accident, my horse, which had sustained broken legs, was thrashing around. A policeman … came up to the horse, put his revolver to its ear and shot it dead. He then went over to my dog, which had a broken back and was howling miserably. He put his revolver to the dog’s ear and shot it. Then he come over to me and asked: “How do you feel?”. I said, “I never felt better in my life”. Law Institute Journal, Law Institute of Victoria.
been injured, or otherwise suffered a loss, in the same situation as he or she would have been in if the wrong had not been sustained. The capacity of money to restore injured plaintiffs to their former positions is manifestly limited and emphasis needs to be placed on “as nearly as possible”. This applies not only to the obvious cases of personal injury or death, loss of reputation or infringement of dignitary interests, but also to loss of or damage to property. Thus, although money can in many instances purchase a replacement for a chattel that has been lost or destroyed, or secure repairs to property, real or personal, that has been damaged, room for flexibility remains. For instance, is the law to take account of the “new-for-old” principle and, if so, how is the betterment to be allowed for? In this context the precise purpose of the award of damages needs to be more closely considered. Even in choosing between the cost of replacement and the cost of repair when both are possible and the actual amount differs a court may be fulfilling objects other than pure compensation. So, too, in cases in which plaintiffs have been temporarily deprived of the use of property in circumstances where they would not have used the property, it is perhaps unreal to speak of “compensation” at all, and some other purpose for the awards of substantial damages which the law allows must be found.
[8.890] There are two basic principles that apply to the assessment of damages. First, at common law (the position has been altered by the civil liability reforms, see [8.900]) damages are assessed once only, at the time of the trial, and are paid in a lump sum. This is known as the “once and for all rule”. If the plaintiff’s condition deteriorates later, no further damages can be sought. As damages are awarded on a one-off basis, account is taken of the unknown variables in assessing future loss by making allowances for these possibilities. The second principle is known as the indemnity principle. The aim is to put the plaintiff back in the same position he or she was in before the defendant’s negligent act or omission. The assessment of compensation for those suffering serious personal injury can also raise anomalies. The assessment of compensation for the remaining lifetime of a young victim, perhaps a period in excess of half a century, is extraordinarily difficult. Amounts awarded in the early 1970s, which seemed generous at the time, became totally inadequate as Australia entered a period of high inflation. The award of a lump sum to provide for the victim’s lifetime may also bring about an unintended result if the victim should die early.
Special and general damages [8.900] In personal injury actions, damages are divided into special and general damages. Special damages are quantifiable for example by production of accounts, and include such matters as medical expenses and lost earnings. The purpose of general damages is to compensate for non-pecuniary loss, and includes loss of future earnings, pain and suffering loss of amenities and loss of expectation of life. The general damages component is usually much higher than the special damages and involves an element of informed guesswork as to future earning capacity and the likely duration and seriousness of any disability. The civil liability reforms have substantially limited the range of items that may be claimed as general and special damages and have also limited the amount that may be claimed under the various heads of general and special damages.
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Chapter 8 Torts: Concepts of Liability
The civil liability reforms have also altered the common law “once and for all rule” by introducing the staggered payment of damages awards (known as structured settlements). One problem with the common law rule is that it requires the defendant to compensate the plaintiff not only for the losses incurred up to the trial, but also for all losses and expenses that are likely to be incurred because of the injury from the finish of the trial to the estimated death of the plaintiff, meaning that a severely injured plaintiff could receive millions of dollars in one payment. There is now the possibility of the parties agreeing to a structured payment of damages award which allows the defendant, or more likely the defendant’s insurance company, to pay the damages in periodic payments over a long period of time. This has the advantage of allowing plaintiffs to have a guaranteed revenue source for years to come (there have been numerous cases where injured plaintiffs have exhausted their damages awards before their death by spending large amounts of money after the trial) and also lessens the burden on defendants and insurance companies who do not have to pay all of the damages in one year. Property damage is assessed on the basis that the plaintiff is entitled to the cost of repair or replacement, and is assessed at market value. For profit-earning property, damages are assessed as the value to the plaintiff as a going concern at the moment of loss.
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Compensation to relatives [8.910] At common law, the law of torts made no provision for payment of compensation to third parties who suffered loss because of the death of another. To overcome the injustice of that situation, all Australian States and Territories have passed “compensation to relatives” legislation (eg Compensation to Relatives Act 1897 (NSW)) allowing an action in tort to be brought (with a few exceptions, the most important being defamation), usually by the estate of the deceased, where the injured person, if alive, could have sued. The action and any damages awarded are for the benefit of the victim’s family. The damages awarded in such actions are restricted to compensation for the direct financial contribution the deceased would have made to the family if the injury had not occurred.
F E Smith was appearing for a tramway company being sued by the father of a boy who had been run over and blinded. The country court judge was clearly showing his sympathy for the plaintiff: “Poor boy, poor boy”, he said, “stand him on a chair and let the jury see him.” FE, as everyone called him, bridled: “Perhaps your Honour would like to have the boy passed round the jury box?” The judge: “That is a most improper remark.” FE: “It was provoked by a most improper suggestion.” David (ed), The Best of Everything.
IN CONTEXT
Damages and the civil liability reforms [8.920] As noted at [8.190]-[8.200], the Ipp Committee was established because of public concerns about the cost and availability of public liability insurance. The Ipp Committee was charged with reforming the common law of negligence “with the objective of limiting liability and quantum of damages arising from personal injury and death”. A significant proportion of the Ipp Report is devoted to considering options for limiting the amount of awards. Each jurisdiction has introduced civil liability reforms which limit damages awards in various ways for example by imposing thresholds below which general damages cannot be recovered to remove small claims from the system, by introducing caps on
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Business and the Law The law of torts has become essentially a system of accident compensation. The intentional torts, though important from a civil liberties point of view, do not occupy much of the courts. The action for negligence predominates. Harold Luntz.
maximum damages for non-economic loss which can be recovered, by imposing caps on loss of earnings claims, and by limiting legal costs and putting restrictions on lawyers’ advertising of personal injury legal services. In the context of the restrictions on damages awards noted at [8.120] many would argue that it is inappropriate to use the term civil liability reforms. The legislation across Australia has seen a significant reduction in negligence claims brought and there is evidence that insurance premiums have fallen. There is nevertheless increasing concern that the reforms – particularly the restrictions which cap damages and limit access to the courts – have gone too far.
At Last, A Museum on Tort Law J R Ralph Gardner, The Wall Street Journal (29 September 2015)
[8.930] The Wall Street Journal has recently reviewed the world’s first museum on tort law opened by Ralph Nader, the well-known US consumer advocate, in Winsted Connecticut.
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And by the way, what’s a tort? “It’s when someone wrongfully injures somebody, or property,” Mr Nader explained patiently. “Like defective cars. GM. Ignition switches. Who hasn’t known someone who hasn’t picked up a hospital-induced infection? Or a bad side effect of drugs like Vioxx? Or toxic exposure in the workplace?” I suppose there’s also this side question: as admirable as the fight on behalf of those who have been wronged, and may not have the power or knowledge to fight for themselves, is that compelling enough reason to persuade people to travel long distances –Winsted is in the rural, northwest corner of Connecticut –to see a museum dedicated to the subject? The museum kicks off with a tort history timeline that leads to the museum’s first gallery, devoted to precedent-setting cases. They’re illustrated with lighthearted cartoons, such as 1850’s “Brown v Kendall,” where in trying to separate two fighting dogs with a stick George Kendall accidentally struck George Brown in the eye.
The decision –Mr Kendall couldn’t be held liable –was one of the first to recognize fault as a basis for liability. There is also a children’s nook. Or rather a gallery devoted to “Worst Toys” and toy-related tragedy. Worst toys included a multicolored hedgehog with potentially hazardous hair, and one called Bottle Rocket Party, the name probably saying it all. But I was eager to get to the main gallery and a beautifully restored 1963 GM Corvair, the sporty-looking rear-engine car prone to crashes, as Mr Nader detailed in his pioneering work “Unsafe At Any Speed.” I suggested the vehicle might have more impact, no pun intended, if it was totaled. While the museum’s refrigerator magnets feature the notorious Ford Pinto bursting into flames, the Corvair is the only vehicle on display. “I had a Corvair that was smashed up,” Mr Nader reported. “That isn’t the way museum designers operate,” he said in reference to my suggestion. “This is a pretty car. Lethal but pretty.” Our last stop was the gift shop; perhaps the only museum gift shop in America where you’re likely to find Prosser, Wade and Schwartz’s textbook “Torts: Cases and Materials”. Autographed, no less.
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Chapter 8 Torts: Concepts of Liability
PART 2 NEGLIGENCE AND ECONOMIC LOSS [8.940] Pure economic loss refers to financial loss that is not a result of direct physical injury or property damage and is more commonly associated with business and commercial activities. Compensation has always been available for economic loss associated with personal injury or damage to the plaintiff’s property. There has been reluctance, however, on the part of the courts to extend the scope of the tort of negligence to include pure economic loss unless this loss was intentionally inflicted. Compensation for non-intentional pure economic loss has traditionally been the function of the law of contract. Why is there such restraint upon extending the tort of negligence to include purely economic loss as a protected interest? The compelling policy reason for the restriction has been clearly put, in the context of accountants’ liability, by the American jurist Cardozo CJ in Ultramares Corp v Touche 174 NE 441 (1932) at 444: If liability for negligence exists, a thoughtless slip or blunder, the failure to detect a theft or forgery beneath the cover of deceptive entries, may expose accountants to a liability in an indeterminate amount for an indeterminate time to an indeterminate class. The hazards of a business conducted on these terms are so extreme as to enkindle doubt whether a flaw may not exist in the implication of a duty that exposes to these consequences.
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In Tame v NSW [2002] HCA 35, Gleeson CJ explained the problem this way (at [6], footnotes omitted): One of the reasons for the rejection of a general rule that one person owes to another a duty to take care not to cause reasonably foreseeable financial harm is that the practical consequence of such a rule would be to impose an intolerable burden upon business and private activity. Furthermore, such a rule would interfere with freedoms, controls and limitations established by common law and statute in various contexts. Unscientific as may be the distinction between “pure” economic loss, “parasitic” economic loss, and damage to property, the care which the law requires people to show for the person or property of others is not matched by a corresponding requirement to have regard to their financial interests. The distinction is not based on science or logic; it is pragmatic, and none the worse for that.
This is also referred to as the “floodgates” argument. The courts have had a genuine concern that the risk to a defendant might be unmanageable unless some restraint was imposed. The problem is highlighted by contemporary methods of communication –negligent advice as to the value of an investment for example may be spread worldwide almost instantly across the internet.
It would place an unreasonable burden upon human activity to require people to anticipate and guard against all kinds of foreseeable financial harm to others that might be a consequence of their acts or omissions. Gifford v Strang Patrick Stevedoring Pty Ltd (2003) 198 ALR 100 at 102 per Gleeson CJ.
IN CONTEXT
Legal principles –duty of care for pure economic loss [8.950] In Marsh v Baxter [2015] WASCA 169 McLure P in the Western Australian Court of
Appeal outlined the development of the law for pure economic loss in negligence (at [295]- [296], some references omitted): The history of the law of pure economic loss in negligence provides a context for understanding the present stage of its development. Until 1964 there was no common
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The reluctance to impose a duty of care to avoid economic loss derives from concerns about indeterminate liability, the inappropriate interference in acceptable commercial activities and possible inconsistency with or intrusion into other areas of the law. If a case raises any of those concerns, it will be difficult, if not impossible for a plaintiff to establish a duty of care to avoid economic loss even though reasonable foreseeability of such harm can be established. Moorabool Shire Council v Taitapanui [2004] VSC 239 at [57] per Smith J.
law duty of care for pure economic loss in any circumstances. That line was first breached in the negligent misstatement case of Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 which was followed by the High Court in Mutual Life & Citizens’ Assurance Co Ltd v Evatt (1968) 122 CLR 556. From 1968 the absence of any duty of care for pure economic loss became a general rule to which there were limited exceptions falling into broad categories. One category is liability for negligent misstatements. In that context, a duty to take reasonable care to avoid economic loss may not arise if the plaintiff has failed to take reasonable steps to protect their own economic interests: Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) [1981] HCA 59 and Sutherland Shire Council v Heyman [1985] HCA 41. In effect, contributory negligence prevents a duty of care arising in pure economic loss cases whereas in physical damage cases, contributory negligence was (at common law) a complete defence to a claim in negligence. Another category is professional negligence claims for pure economic loss by an executor or beneficiary of a will against the solicitor(s) who drafted it: Hawkins v Clayton [1988] HCA 15 and Hill v Van Erp [1997] HCA 17. A further category that may be a true exception is where the plaintiff is in a contractual relationship with the defendant: Barclay v Penberthy [2012] HCA 40 as now explained in Brookfield Multiplex Ltd v Owners-Strata Plan No 61288 [2014] HCA 36. Outside the established categories are fact scenarios where relief has sometimes been given for pure economic loss. An example is where a defendant negligently inflicts physical damage on a third party as a result of which a plaintiff suffers pure economic loss. This is sometimes described as “relational loss”. Australian examples in this category are Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” [1976] HCA 65 and Perre v Apand [1990] HCA 36 (if the diseased potato crop grown by the third party from negligently infected seed potatoes supplied by the defendant constitutes physical damage). As to claims by non- parties to a building contract for pure economic loss for latent damage to buildings, see Bryan v Maloney [1995] HCA 17, Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16; and Brookfield Multiplex.
8.9 NEGLIGENT MISSTATEMENTS AND PURE ECONOMIC LOSS [8.960] Many professionals, such as lawyers, auditors, accountants and financial advisers give advice or information for a living. Advice may also be given by persons who, while not “professional advisers”, provide information that may have serious consequences. If the statement proves to be incorrect and someone acting on it loses money as a result, they may want to sue the maker of the statement for damages to make up for the loss.
In our complex society, the accountant’s certificate … can be [an] instrument for inflicting pecuniary loss more potent than the chisel or the crowbar. US v Benjamin 328 F 2d 854 at 863 (1964).
An innocent misrepresentation occurs when an incorrect statement, not known to be false, is made. Damages cannot be awarded for an innocent misrepresentation unless it is made negligently. Reference has been made to the tort of deceit that may be available when the misrepresentation has been made fraudulently. Deceit requires the plaintiff to 448
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Chapter 8 Torts: Concepts of Liability
show intention on the part of the defendant, and this can be very hard to prove. The development of the duty of care for negligent misrepresentations causing economic loss overcame the limitations of the actions for innocent and fraudulent misrepresentation. Before the decision in Hedley Byrne & Co Ltd v Heller and Partners Ltd [1964] AC 465, the courts took the view that only fraudulent misrepresentation was actionable. The House of Lords in Hedley Byrne recognised that a duty of care may be imposed in respect of negligent advice.
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 [8.970] Hedley Byrne, the plaintiff, was an advertising agency. Hedley Byrne wanted to establish the credit- worthiness of a company called Easipower with which it was dealing, so it made enquiries through its (Hedley Byrne’s) bank, the National Provincial Bank. The National Provincial Bank obtained a reference from the bankers of Easipower, Heller and Partners, which was headed: CONFIDENTIAL For your private use and without responsibility on the part of the bank …
It went on to state that the relevant company was a:
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respectably constituted company, considered good for its ordinary business engagements. Your figures are larger than we are accustomed to see.
There was no direct relationship between Hedley Byrne and Heller and Partners. The plaintiff lost money by relying on the reference and sued the bank in negligence for misrepresentation. The House of Lords confirmed there was an action on that basis, but found the bank not liable because of the disclaimer in the reference. It was accepted that some restraint had to be imposed on cases involving economic loss due to negligent misstatement and the limitation on liability imposed by the House of Lords was in three parts: 1.
A special relationship must exist between the parties.
2.
The defendant must have accepted responsibility in the circumstances of the advice.
3.
The plaintiff must have relied upon the misrepresentation.
Lord Pearce stated that: if persons holding themselves out in a calling or situation or profession take on a task within that calling or situation or profession, they have a duty of skill and care. In terms of proximity one might say that they are in particularly close proximity to those who, as they knew, are relying on their skill and care.
He thought that the circumstances importing such a duty would normally be a “business or professional transaction whose nature makes clear the gravity of the inquiry and the importance and influence attached to the answer”.
[8.980] It should be noted that the “special relationship” equates to Lord Atkin’s neighbour test from Donoghue v Stevenson. It should be further noted, however, that because the plaintiff lost, the comments on potential liability in Hedley Byrne are obiter dicta, and therefore not binding on judges faced with similar facts at a later time. However, the decision in Hedley Byrne has been applied and approved in Australia in several subsequent High Court decisions. The leading Australian case is MLC v Evatt [1968] HCA 74, in which Barwick CJ formulated a two-step test which remains the foundation for determining the
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duty of care in negligence misstatement cases today –would a reasonable advisor had realised that the advice would be relied on and is it reasonable for the advisee to so rely.
MLC v Evatt [1968] HCA 74
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[8.990] This case concerned negligent advice given by an officer of an insurance company (MLC) to a policy holder (Evatt) enquiring as to the financial stability of a subsidiary company before deciding to continue investing in it. When the subsidiary collapsed Evatt sued MLC in respect of the faulty advice. His claim was successful in both the New South Wales Court of Appeal and the High Court. At the time it was possible to appeal from the High Court to the Privy Council, which the defendant did. Evatt lost in the Privy Council, when their Lordships found for MLC. The majority in the Privy Council limited the availability of the action to cases where the person giving the advice does so in the course of a business or profession of giving such advice. However, despite the fact that the Privy Council’s decision was higher in judicial status than that of the High Court, Barwick CJ’s judgment in the High Court, rather than the Privy Council’s, provides the test that has been subsequently adopted by more recent High Court decisions. Barwick CJ’s two-step test remains the foundation for determining a duty of care in negligent misstatement cases today:
(i) The circumstances must be such as to have caused the speaker or be calculated to cause a reasonable person in the position of the speaker to realise that he is being trusted by the recipient of the information or advice to give information which the recipient believes the speaker to possess or to which the recipient believes the speaker to have access or to give advice, about a matter upon or in respect of which the recipient believes the speaker to possess a capacity or opportunity for judgment, in either case the subject matter of the information or advice being of a serious or business nature. The speaker must realize or the circumstances be such that he ought to have realized that the recipient intends to act upon the information or advice in respect of his property or of himself in connexion with some matter of business or serious consequence.
(ii) The circumstances must be such that it is reasonable in all the circumstances for the recipient to seek, or to accept, and to rely upon the utterance of the speaker. The nature of the subject matter, the occasion of the interchange, and the identity and relative position of the parties as regards knowledge actual or potential and relevant capacity to form or exercise judgment will all be included in the factors which will determine the reasonableness of the acceptance of, and of the reliance by the recipient upon, the words of the speaker.
Banca Nazionale del Lavoro SPA v Playboy Club London Limited [2018] UKSC 43 [8.1000] There are ample interesting Australian cases illustrating the application of the Hedley Byrne v
Heller principle but this case – involving a credit reference negligently supplied by a bank in respect of a person who subsequently defaulted is of particular interest because, as the UK Supreme Court (the renamed House of Lords and today the UK’s highest court) noted the similarity to Hedley Byrne. However there was one critical difference – the reference was not relied on by the party to whom it was addressed but by that party’s undisclosed principal. The issue for the Supreme Court was whether the bank was liable to the latter. The Playboy Club sought a reference from the bank for a gambler before granting him a credit facility. The Club obtained the reference via Burlington, a third party engaged by the bank to obtain credit references for it, and the bank was unaware that the reference would be communicated to, and relied on, by Playboy Club rather than the party who requested the reference. In reliance on the credit reference, Playboy Club allowed the gambler to draw cheques to the value of £1.25 million. In fact, the credit reference given “in strict confidence” turned out to be unreliable. The gambler only became a customer of the bank two days after the reference was 450
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Chapter 8 Torts: Concepts of Liability provided. The cheques were returned unpaid, resulting in a substantial loss to playboy Club. The negligence action was unsuccessful. Lord Mance commented that: Had the representation been made, expressly or impliedly, for the benefit of an unnamed (rather than an entirely undisclosed) principal or client of Burlington, the case would have paralleled Hedley Byrne v Heller, and the claim should then have succeeded. Had it been made, expressly or impliedly, for the benefit of any principal or client of Burlington, to which Burlington might make it available, the same would have applied.
It can be seen therefore, that this test builds on the decision in Hedley Byrne by its similar focus on reliance by the plaintiff on the defendant’s advice in circumstances where the defendant assumed responsibility for the accuracy of the advice. Barwick CJ’s statement concerning a matter of business or serious consequence (see [8.990]) was applied by the subsequent High Court decision in Shaddock & Associates v Parramatta City Council [1981] HCA 59.
Shaddock & Associates v Parramatta City Council [1981] HCA 59
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[8.1010] The plaintiff, Shaddock & Associates, requested information through its solicitor from the defendant council about any future road-widening proposals for an investment property it (Shaddock) was in the process of purchasing. By phone, and by not ticking the relevant box on a completed certificate returned to the solicitor by the council, the council indicated there were no such plans. When it was discovered that there were in fact road-widening proposals for the property, the plaintiff sought damages for the consequent reduction in the value of the property. The council was found to be liable, on the basis of the certificate rather than the telephone call. [8.1020] The decision in Shaddock is significant because it recognised that liability for negligent misstatement is not limited to professional advisers, but may arise wherever the advice may be reasonably relied on, and where the adviser assumes responsibility for the accuracy of the advice in circumstances where the likely adverse consequences are known to the adviser. In Shaddock, the council was accustomed to providing advice to the public concerning proposed road widening and the council should have known that incorrect advice on proposed road widening would cause lost profit to the owner of the land that would be reduced by the widened road.
Lord Atkin’s ambitious generalisation about duty relations – bounded only by the horizon of foreseeability of injury –could hardly have envisaged risks other than personal injury or damage to tangible property. J G Fleming, The Law of Torts (8th ed, The Law Book Co Ltd), p 177.
One interesting aspect to the Shaddock case concerned the High Court’s refusal to find liability on the basis of the telephone advice, because telephone advice should not have been relied upon, and the council would not have assumed responsibility for mere telephone enquiries. These issues arose again in the next significant decision in San Sebastian Pty Ltd v Minister Administering the Environment Planning & Assessment Act 1979 [1986] HCA 68.
San Sebastian Pty Ltd v Minister Administering the Environment Planning & Assessment Act 1979 [1986] HCA 68 [8.1030] A plaintiff purchased investment property on the basis of a proposed development plan for
Woolloomooloo in Sydney. When the plan did not eventuate, the plaintiff sued for the reduction in value of the property. The plaintiff was unsuccessful – partly for policy reasons because such plans are by their nature subject to alteration, and partly on the basis that the planning authority had made no specific representation to the plaintiff as an individual. In other words the plaintiff was a member of an unascertained class and there was no assumption of responsibility on the part of the Minister.
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Business and the Law Brennan J, after consideration of earlier authorities, made the following statement of principle at [19]: Where a representor gives information or advice on a serious or business matter, intending thereby to induce the representee to act on it, the representor is under a duty of care in giving that advice or information if three conditions are satisfied. First (corresponding with the first condition expressed by Barwick CJ), if the representor realises or ought to realise that the representee will trust in his especial competence to give that information or advice; second (corresponding with the third condition), if it would be reasonable for the representee to accept and rely on that information or advice; and third (applying the underlying principle of the law of negligence), if it is reasonably foreseeable that the representee is likely to suffer loss should the information turn out to be incorrect or the advice turn out to be unsound.
Esanda Finance Corporation Limited v Peat Marwick Hungerfords [1997] HCA 19 [8.1040] The High Court examined the liability of accountants in the Esanda Finance case. The plaintiff
(Esanda Finance) lent money to a third party relying on the accounts audited by the defendant. The third party went into receivership, and Esanda Finance sued the defendant for negligence. The High Court found that no duty of care was owed to the plaintiff. The various judgments included comments to the effect that mere foreseeability of harm is insufficient to give rise to a duty; a duty arises where the defendant realises, or ought to realise, that the plaintiff will rely on the statement, and that the reliance by the plaintiff is reasonable.
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Tepko Pty Ltd v Water Board [2001] HCA 19 [8.1050] The High Court considered a claim by a property developer for the lost profit caused by the collapse of a large-scale development. The collapse of the development occurred when Tepko’s financiers withdrew their support of the venture after Tepko failed to obtain an accurate costs estimate for the price of connecting water and sewerage to the proposed property subdivision. Tepko had pressured the Water Board into giving a broad estimate (a “ballpark” figure) of the likely cost of connecting water to the proposed subdivision, despite the policy of the Water Board not to give cost estimates for work that was usually the responsibility of private developers. The ballpark estimate turned out to be incorrect and Tepko’s financiers withdrew their financial support which prevented the development from proceeding. Importantly, Tepko did not advise the Water Board that an accurate costs estimate was vital for continued financing of the property development. The High Court held that it would be unreasonable to impose a duty of care on the Water Board when it had not assumed responsibility for the estimate, indeed, where it was reluctant to give any estimate and did so only after sustained pressure from Tepko. Furthermore, the court held that it was unreasonable for Tepko to rely on broad statements of likely costs rather than definite costs estimates. The significance of the Tepko case lies in the court’s emphatic support for Barwick CJ’s two-step test for negligent misstatement expressed in the High Court decision in MLC v Evatt
IN CONTEXT
The legal principles for negligent misstatement summarised [8.1060] The relevant principles that are applied in negligent misstatement cases were helpfully summarised by the Full Federal Court in ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 at [573]-[578] (references omitted):
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Chapter 8 Torts: Concepts of Liability
First, for there to be a duty to exercise reasonable care in making a statement or giving advice:
1. The speaker must realise, or the circumstances must be such that the speaker ought to have realised, that the recipient of the information or advice intends to act on that information or advice in connexion with some matter of business or serious consequence; and
2. The circumstances must be such that it is reasonable in all the circumstances for the recipient to seek, or to accept, and to rely upon the utterance of the speaker. In respect of the second limb, the nature of the subject matter, the occasion of the interchange, and the identity and relative position of the parties as regards knowledge (actual or potential) and relevant capacity to form or exercise judgment will all be included in the factors which will determine the reasonableness of the acceptance of, and of the reliance by the recipient upon, the words of the speaker. It is important to recognise that the list is not
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exhaustive. Second, proof of the criteria above establishes an assumption of responsibility or known reliance (or the converse, vulnerability), sufficient for a duty to be imposed. Additional, but related, points about the above criteria should be noted. A duty of care is imposed whether the information or advice is given in response to a request or volunteered. Further, a duty is also imposed where the information and advice is communicated to an identifiable class of people… Next, the fact that the person making the statement or giving the advice has some special expertise is consistent with (although not always necessary for) the imposition of the duty. … Central to the analysis required by the identified criteria is the purpose for which the statement is made or the advice is given. A recipient of information or advice is owed a duty by the speaker if (a) that recipient is part of a class to whom the statement or advice is directed and (b) reliance on the statement or advice by a member of the class is consistent with the substance of the purpose for which the statement is made or advice given. It [is] for those reasons that an auditor [has been] held to owe a duty to the company and possibly to its shareholders, but not to a lender
Auditors of a public company’s accounts owe no duty of care to members of the public at large who rely upon the accounts in deciding to buy shares in the company. If a duty of care were owed so widely, it is difficult to see any reason why it should not equally extend to all who rely on the accounts in relation to other dealings with the company as lenders or merchants extending credit to the company … In this jurisdiction I have no doubt that the creation of such an unlimited duty would be a legislative step which would be for parliament, not the courts, to take. Caparo Industries plc v Dickman [1990] 1 All ER 568 at 580 per Lord Bridge.
IN CONTEXT
Negligent misstatement and the statutory misleading conduct action [8.1070] The massive influence of the statutory “misleading or deceptive conduct” action under s 18 of the Australian Consumer Law (or in relation to financial securities and financial products, s 12DA of the Australian Securities and Investment Commission Act 2001 (Cth))
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is discussed in Chapter 19. The misstatement or misrepresentation that may be redressed through a negligence action may also be redressed, if in trade or commerce, through a misleading conduct action. The statutory action bypasses the specific requirements and limitations of the negligent misstatement action and can be used as an alternative to it. For example in Chiarabaglio v Westpac Banking Corp [1989] FCA 266, the plaintiff sought finance and was advised by a branch manager of the defendant bank that a loan could be obtained in a foreign currency at a low interest rate. This was reinforced by another bank officer at a subsequent meeting as being both good business and low risk. The plaintiff borrowed Japanese yen and in the next few years as the Australian dollar fell in value against the yen, he suffered serious losses. It was held that the representations by the bank officers gave rise to both negligence and misleading or deceptive conduct actions. The only disadvantage of the statutory misleading conduct action is that it is limited to conduct “in trade or commerce” whereas a negligence action is not so limited.
8.10 NEGLIGENT ACTIONS AND PURE ECONOMIC LOSS
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[8.1080] The force of the floodgates argument referred to at [8.940] was substantially reduced by a 1976 decision of the High Court that would fundamentally change the law of negligence in Australia and indeed throughout the common law world.
Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” [1976] HCA 65
Case Study
Background
[8.1090] The common law of negligence has traditionally prevented recovery for pure economic
loss, although a limited exception was created for negligent advice in the early 1960s in the Hedley Byrne case (see the discussion of negligent misstatement at [8.960]). Despite the existence of this limited exception there had been no High Court decision that allowed recovery for pure economic loss because of negligent conduct outside of professional advice scenarios (where arguably the party giving negligent advice should be liable because they are normally paid to give good advice). The law finally accepted that negligence resulting in pure economic loss could justify compensation in the Caltex Oil case. Facts The Caltex Oil case involved a dredge which damaged an oil pipeline in Botany Bay, Sydney, while deepening the water. If Caltex had owned the pipeline this case perhaps would have been consigned to history as just another example of negligent conduct resulting in property damage. However, Caltex sued the owner of the dredge not for the damage caused to the pipeline, because Caltex did not own the pipeline, but rather for the cost of transporting, at great expense, its oil around the bay using trucks rather than the damaged pipeline, which made the case one concerning pure economic loss. 454
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Chapter 8 Torts: Concepts of Liability
Issue The key issue in this case concerned whether Caltex was able to obtain compensation for pure economic loss. Decision The High Court held that the floodgates argument (ie that imposing liability would create an unreasonable liability of possibly limitless proportions) did not arise in this particular case because the class of potential plaintiffs was strictly limited – it was only Caltex that used the pipeline and therefore Caltex was the only potential plaintiff. Furthermore, Caltex’s use of the pipeline for transporting oil was well known in the area and should have been known to the owners of the dredge. This meant that the owners of the dredge should have been aware of the likely financial harm that negligently damaging the pipeline would cause. As Gibbs J stated (at [36]): The general rule that damages are not recoverable for economic loss which is not consequential upon injury to the plaintiff’s person or property, has an exception where a defendant has knowledge or means of knowledge that the plaintiff individually, and not merely as a member of an unascertained class, will be likely to suffer economic loss as a consequence of his negligence, and where he owes the plaintiff a duty to take care not to cause him such damage by his negligent act. Whether such a duty is owed will depend upon the facts of particular cases; but it will be material that some property of the plaintiff was in physical proximity to the damaged property, or that the plaintiff, and the person whose property was injured, were engaged in a common adventure.
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Implications The Caltex Oil decision is still one of the leading cases in the common law world concerning liability in negligence for pure economic loss. This case dramatically changed the law of negligence by expanding the scope of potential liability of the tort. Prior to this case, the only real exception to the rule against liability for pure economic loss was situations involving negligent advice (negligent misstatement), which is considered at [8.960]. The effect of Caltex Oil, however, is that Lord Atkin’s neighbour principle from Donoghue v Stevenson was substantially expanded to include not only compensation for physical injury and property damage but also lost potential profit. Despite the affirmation by the High Court in the Caltex Oil decision that liability may be imposed for negligence resulting in pure economic loss, there are still large differences in the law’s approach to the imposition of liability for physical harm and pure economic loss. This difference has been expressed by Gillard J in Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] Aust Torts Reports 81-692 at [705] in the following terms: As a general proposition, the application of the Atkinian formula [Lord Atkin’s neighbour test from Donoghue v Stevenson] to personal injury and property damage cases is more likely to produce a duty of care than in a case where the claim is purely economic loss. If one is to talk in terms of a bias, one may say that in personal injury and property damage cases, there is a bias towards finding a duty of care, whereas in purely economic loss cases, the bias is to the contrary.
Relational interests [8.1100] This form of economic loss arises where the plaintiff is not directly affected, but is a third party to the negligent event and who becomes affected (secondarily) because of her or his relationship with the primary victim. This often arises from damage to the
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455
Business and the Law The habit of lightly changing the laws is an evil … For the law has no power to command obedience except that of habit, which can only be given by time, so that a readiness to change from old to new laws enfeebles the power of the law. Aristotle, Politics.
property of the primary victim with whom the plaintiff has some relationship, such as a contract. Traditionally a plaintiff suffering financial loss from negligent damage to the property of another had no cause of action against the wrongdoer. This is demonstrated by the decision in Cattle v Stockton Waterworks (1875) LR 10 QB 453, an English case. The defendant negligently allowed water to enter a tunnel being constructed by the plaintiff, increasing the plaintiff’s cost of completing the lump sum contract and making the work unprofitable. The plaintiff was unsuccessful in attempting to recoup his losses. The Caltex Oil decision (see [8.1090]) represents the first time that relational interests gave rise to a duty of care, although it must be said in that case the class of potential plaintiffs was extremely limited (only Caltex). In a more recent decision discussed at [8.1110] the High Court has allowed recovery of compensation for pure economic loss on the basis of relational interest despite the fact that the class of potential plaintiffs was much broader than in Caltex Oil.
Perre v Apand [1999] HCA 36
Case Study
Background
[8.1110] Perre v Apand is a leading case on liability for economic loss, and illustrates how the law is developing to include new situations in which a duty of care is recognised.
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Facts The defendant (Apand) was a company that had 60 per cent of the potato crisping industry in Australia. While trialling imported seed on a property in South Australia, Apand negligently introduced a potato disease called bacterial wilt on to that land. The plaintiff (Perre) grew potatoes on a nearby property for export to Western Australia. The Western Australian market was more profitable than other markets for South Australian potato growers. Perre was unable to supply that market when the bacterial wilt was discovered because the Western Australian regulations prohibited the import of potatoes not only from property infected with the disease, but also from other properties within a 20-kilometre radius. Issues Perre sued Apand for purely economic loss (being the inability to sell potatoes to Western Australia). Perre lost at first instance, and on appeal, on the basis that Apand owed Perre no duty of care. Perre appealed to the High Court the issue being whether Apand whose careless conduct resulted in financial loss to others, unconnected with physical injury to their persons or property, owed Perre a duty of care such as to sustain an action for damages. Decision The High Court appeal was successful, all seven justices finding, in seven separate judgments using various differing approaches to the issue, that a duty of care was owed. The “proximity” test was nevertheless rejected and the existence of a duty of care was based on the combination of foresight of the likelihood of harm, knowledge or means of knowledge of an ascertainable class of vulnerable persons unable to protect themselves from harm, control of the occurrence of activity from which the damage flowed, and the imposition of a duty of care not impeding the legitimate pursuit by the defendant of its
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Chapter 8 Torts: Concepts of Liability
commercial activity. The High Court in Perre clearly establishes “vulnerability” as a significant issue in indicating a duty of care in pure economic loss cases. This was expressed most directly by Gleeson CJ who stated that (at [10]): knowledge (actual, or that which a reasonable person would have) of an individual, or an ascertainable class of persons, who is or are reliant, and therefore vulnerable, is a significant factor in establishing a duty of care
He added (at [11]) that vulnerability can arise from circumstances other than reliance. Implications Despite the emphasis on “vulnerability”, the judgments of the justices espousing the alternative approaches to establishing a duty of care underscores the problem business people have experienced for nearly 70 years with cases of alleged negligence causing economic loss: no lawyer can confidently advise where judges will draw the line. Justice Kirby said that it has been “suggested (of negligence law) that few areas in modern tort law are darker and more uncertain”: at [230]. Various epithets, ascending in anguish, have been applied to the efforts of the courts to express the applicable law. The decisions have been castigated as illogical, unjustifiable, historically suspect and “hopelessly deficient”. Justice Gaudron wrote:
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The law of liability for economic loss is a “comparatively new and developing area of the law of negligence”. It has not yet developed to a stage where there has been enunciated a governing principle applicable in all cases. Perhaps it never will.
Perhaps this statement is the only thing that can be said with any certainty about duty of care. Now it is up to Parliament to try and find a governing principle which will give the injured a fair go without crippling business and so allow lawyers to confidently advise clients. Unfortunately, the civil liability reforms provide little clarification because they merely state that no liability (including liability for causing pure economic loss) arises unless it is reasonably foreseeable that the defendant’s conduct would create a risk of harm that is not insignificant, and is one that a reasonable person would take precautions to avoid, which is hardly a clarification of this already difficult area. Earlier in this chapter we discussed the salient features that may assist the assessment of whether to impose a duty of care in novel situations. Nowhere are the salient features more relevant than in cases involving pure economic loss. Using those salient features to rationalise the Perre case, it can be said that: • The Perres were vulnerable to loss caused by Apand’s negligence because they had no way of knowing whether their neighbour’s crop was likely to be infected with the bacteria. • The Perres’ reliance on Apand distributing disease-free products to its customers was not unreasonable. • While Apand did not specifically assume responsibility for protecting the neighbours of its customers, the limited number of farmers who may suffer lost profit because of its negligence meant that it was not unreasonable to impose responsibility for those losses where Apand should have been aware of the potential consequences. • Apand had control over its production and distribution processes such that it was capable of identifying and eradicating the bacteria before it sold the potato seeds to its customers.
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Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2003] Aust Torts Reports 81-692 [8.1120] Esso was sued in Australia’s largest ever class action by tens of thousands of individuals and
businesses that lost money because of a month-long gas shortage caused by an explosion at the Longford gas plant which was owned by Esso. Esso had a long-term power supply contract with the Victorian State Government which contained various limitations on the potential liability of Esso in providing gas power to Victoria. The plaintiffs claimed that Esso should compensate them for profit lost while their businesses were without adequate power (eg many restaurants had insufficient power to cook food and had to close for the duration of the gas shortage). Esso defended the lawsuit by arguing that to find it liable for pure economic loss would open the floodgates, and further that even if liability for pure economic loss could be imposed any liability must be limited by the term of the power supply contract with the government. Justice Gillard found that despite the vast number of plaintiffs the floodgates argument did not prevent him imposing liability for pure economic loss. His Honour did, however, agree that the scope of that liability was to be limited by the terms of the supply contract.
Kakavas v Crown Ltd [2007] VSC 526 [8.1130] The plaintiff claimed that he lost $30 million dollars gambling at Crown Casino in Melbourne after
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he had specifically asked to be prohibited from entering because he had an uncontrollable and compulsive urge to gamble. It was alleged by the plaintiff that Crown Casino lured him back to the casino to gamble being aware of his disability and of the fact that he had excluded himself from the premises for that very reason. The issue to be considered was whether or not the casino owed the plaintiff a duty of care to ensure that he did not gamble and lose more money. Harper J held that a duty of care did not arise merely because of the Casino operator’s knowledge that the gambler had a gambling problem. In my opinion the law should not recognise a duty of care to protect persons from economic loss, where the loss only occurs following a deliberate and voluntary act on the part of the person to be protected. There may be, however, an extraordinary case where a duty should be recognised. The present case is not such.
Marsh v Baxter [2015] WACA 169 [8.1140] The context for this decision is set out at the beginning of Kenneth Martin J’s judgment in the Supreme Court (Marsh v Baxter [2014] WASC 187 at [1]-[2]). This is a conflicting land use dispute between rural neighbours at Kojonup, Western Australia. The feature of a dispute between (farming) neighbours immediately calls to mind Lord Atkin’s now famous dictum in Donoghue v Stevenson [1932] AC 562: 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. This litigation advances a claim for wholly financial injury which is asserted by one of the neighbours who farms organically, against the other farmer, who lawfully worked his land to plant, then harvest a genetically modified vegetable seed crop, in 2010.
Genetically modified canola from Baxter’s farm blew over Marsh’s farm which resulted in Marsh’s farm being stripped of its organic status. It was held that Marsh’s actions in negligence for pure economic loss and nuisance failed. Baxter had grown a legal crop and had used orthodox harvesting method, and could not be held responsible for what was described as an “unjustifiable” decision to revoke Marsh’s organic certification. 458
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Chapter 8 Torts: Concepts of Liability Both parties “from their different perspectives” placed either heavy positive or heavy negative reliance on Perre v Apand (see [8.1110]) – a case in which “economic loss was successfully recovered by a potato growing family, in the aftermath of diseased potato seeds – causing a potato blight and then an ensuing inability of the plaintiffs to sell their wholly unaffected potato crop at high prices into the Western Australian market.” Kenneth Martin J explained Marsh v Baxter [2014] WASC 187 at [321] that: In Perre, the plaintiffs’ “vulnerability” to an economic loss, emerged in McHugh J’s reasons as an important evaluative factor in allowing that claim … However, I am not at all comfortable that the vulnerability concept extends to catch what is a different and essentially self-inflicted contractual vulnerability to [an organic certificate] of Mr and Mrs Marsh, generating their claimed economic losses. Looking at the underlying facts in the leading pure economic loss cases decided by the High Court of Australia … there does seem to me to have been shown in all of them at least at some point in surrounding facts some physical injury to a person or to property such as pipeline damage, damage to a house, or damage (disease) to a potato crop.
His Honour held that no duty of care was owed:
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[T]he common law duty of care as contended for by the Marshes … is conceptually misconceived and cannot be made out, This is for many reasons. Not the least is, in a wholly novel case, the absence of a duty of care to avoid a foreseeable economic loss. Nor do I find any degree of vulnerability as arising from the contract the Marshes entered into with NCO/NASAA and under which they appear to have been wrongly denied their contractual right by NCO to use the label “NASAA Certified Organic” on their Eagle Rest produce. If there was contractual vulnerability in the Marshes to NCO, then from a Perre v Apand duty analysis perspective, I assess that as an ineligible vulnerability from a duty of care analysis perspective. This is because the exposure of the Marshes to NCO was wholly self-initiated by entering into the terms of such a contract.
On appeal, the court acknowledged that the appellant’s negligence claim against the respondent did not fall into any recognised category or case in which a duty of care to avoid pure economic loss has been upheld: “to that extent it is novel” (at [301]). The decision of the Supreme Court was upheld.
IN CONTEXT
Duty of care, economic loss and the concept of vulnerability [8.1150] A helpful statement of the issues involved in determining whether the law
imposes a duty of care against risk of economic loss is set out in the judgment of Bryson J in Chandra v Perpetual Trustees Victoria Ltd [2007] NSWSC 694 (at [74]-[76], references omitted): When it falls to be decided whether the law imposes a duty of care against a risk of economic loss, the path to decision established by judicial authority is not a clear path and there are not clearly stated rules or tests to apply: nor is there a clear order to importance of matters which should receive consideration; and it is difficult to know whether some matters are conclusive or are required to be weighed with other considerations … There is no generalisation which can express the basis upon which the Courts will hold that a duty of care exists …
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The reluctance to impose a duty of care to avoid economic loss derives from concerns about indeterminate liability, the inappropriate interference in acceptable commercial activities and possible inconsistency with or intrusion into other areas of the law. Moorabool Shire Council v Taitapanui [2004] VSC 239 at [57] per Smith J.
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There is no … unanimous treatment of the law of negligence and the finding of a duty of care with respect to economic loss. Bryson J noted that reasonable foreseeability of loss was the means “which sustained the long-continued and far-ranging extension of negligence law” since Donoghue v Stevenson. His Honour noted however that this approach “appears now to have ended” (at [90]): More is required for attributing a duty of care to guard against economic loss than a decision on reasonable foreseeability of loss. If there is no reasonable foreseeability of loss, the enquiry stops. If there is, the enquiry proceeds to any array of considerations of which it cannot be said that authority shows in what order they are important or which of them are categorically important so as to be necessary for or so as to exclude a conclusion that there is a duty of care.
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His Honour noted that the “proximity” is no longer seen by the High Court as the conceptual determinant of the categories of cases in which a duty of care exists holding that “vulnerability” is the key factor. He cited the leading judgment of the High Court in Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16 at [23]:
A barrister was quietly cross- examining the witness, when suddenly the question took a new and sharper tack: “I suggest to you that you were offered $2000 to throw this case”. The witness looked at the judge and made no reply. The barrister repeated the question, again getting no response. Finally, the judge said to the witness, who kept staring at him, “Can you answer that question, please, witness?” “Oh” said the witness, “did he mean me? I’m sorry, Your Honour – I thought he was talking to you.” B Tait, Court in the Act: Humorous Moments from Australian Courts (Federation Press, 1992).
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Since Caltex Oil, and most notably in Perre v Apand Pty Ltd the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed. “Vulnerability”, in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, “vulnerability” is to be understood as a reference to the plaintiff’s inability to protect itself from the consequences of a defendant’s want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant … So, in Perre, the plaintiffs could do nothing to protect themselves from the economic consequences to them of the defendant’s negligence in sowing a crop which caused the quarantining of the plaintiff’s land. In Hill v Van Erp (1997) 188 CLR 159, the intended beneficiary depended entirely upon the solicitor performing the client’s retainer properly and the beneficiary could do nothing to ensure that this was done. But in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) (1997) 188 CLR 241, the financier could itself have made inquiries about the financial position of the company to which it was to lend money, rather than depend upon the auditor’s certification of the accounts of the company. Bryson J commented in relation to “vulnerability” that (at [98]): [“Vulnerability” is a relatively new expression in negligence law, although the concept which it expresses is not. Vulnerability cannot in my understanding be expounded in a full and clear way; it is to be understood from decisions of authority which state its importance or refer to it. The concept of vulnerability may be a means of recognising a policy element underlying negligence law: imposing liability to pay damages can be supposed to increase care in the community and to reduce the occurrence of losses, but if people have no opportunity to act for their own protection, negligence law cannot be shaped to increase their vigilance and to protect them from risk by so doing. If damages are available too readily, people will tend to take less care of their own interests. To the extent that people can look after their own interests, they should.
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Chapter 8 Torts: Concepts of Liability
Solicitor’s duty to third parties [8.1160] A solicitor owes a duty to his or her client in both contract and tort. More contentious is the question of whether a solicitor owns a duty in the tort of negligence to third parties –an issue that may arise in drawing up a client’s will.
Hill v Van Erp [1997] HCA 9 [8.1170] This case concerned the will of a deceased third party. The appellant was the solicitor of the third
party and had drawn up the will naming the respondent as an intended beneficiary. The respondent’s husband witnessed the will, a fact known to the appellant, and the bequest failed. The reason for this was that under the law relating to the drafting of wills, there was a presumption that if a person was a beneficiary under a will and also a witness, there was a possibility that undue influence or something similar had been involved. A beneficiary in that situation could not take a benefit under the will. The respondent successfully sued the solicitor, Mrs Hill, for economic loss, the legal right being that of the right of a beneficiary to receive the benefit intended by the testatrix.
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Badenach v Calvert [2016] HCA 18 A solicitor prepared a will for a client by which the entirety of his estate was to pass to the Respondent (who was the son of the client’s long-term de facto partner). Following the client’s death, his daughter from a previous marriage (and for whom he made no provision in his will) successfully brought proceedings under the Testator’s Family Maintenance Act 1912 (Cth). As a result the client’s estate, and thus the Respondent’s inheritance, was successfully depleted. The Respondent sued the solicitor claiming that the solicitor had been negligent in failing to advise the client of the possibility that his daughter might make a claim under the Act and the options available to him to reduce or extinguish his estate so as to avoid such a claim. The High Court held that in the circumstances of the case the solicitor did not owe a duty of care to a beneficiary under a will to advise the testator of the options available to the testator to avoid exposing his estate to a claim under the Act. The interests of the client were not coincident with the interests of the respondent and as such the solicitor could not owe any duty to the respondent that was co-extensive with the solicitor’s duty to the client.
Liability for defective premises [8.1180] A builder owes duty in contract and tort to the client for whom premises are constructed. The issue of a negligent builder’s liability to subsequent owners of the premises raises more complex issues. The subsequent owners obviously have no contract action against the builder but is there an action in tort for damages for pure economic loss for the decreased value of the premises. This issue has been considered by the High Court in Bryan v Maloney [1995] HCA 17 and Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16.
The law of England has long passed beyond the range of any normally operating machinery for rationalisation. Sir Maurice Amos.
Bryan v Maloney [1995] HCA 17 [8.1190] This case concerned the liability of a builder for defects in the residential home (built several years earlier) which caused the value of the home to be substantially reduced. Mr Bryan built a home for his
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Business and the Law sister-in-law Mrs Manion on very favourable terms so that he made very little profit from building the home. Some time after the construction of the home was finished, Mrs Manion sold the home to new owners, who themselves sold the home several years later to Mrs Maloney. Mrs Maloney inspected the house before purchasing it and saw no cracks or other evidence of structural defects. However, soon after moving into the home the house began to develop severe cracks which demonstrated that the foundations of the house were improperly constructed by Mr Bryan. Mrs Maloney sued Mr Bryan for the reduction in value of the home (pure economic loss). The key issue was whether it was appropriate to impose a duty of care on the builder to take reasonable care not to cause harm on subsequent owners of the house. The High Court found that it was fair and reasonable to impose on the builder, a duty of care in constructing the house which extended not only to the builder’s immediate client but also to subsequent purchasers of the home. The decision bears close resemblance to Donoghue v Stevenson where the manufacturer was responsible to the end consumer of the ginger beer not just to the person who initially bought the drink. The High Court found that it was reasonable for a residential home builder to anticipate that any structural defect in the foundations of the home would cause pure economic loss to a subsequent purchaser of the home. In particular the court believed that: • a residential home would be purchased at a substantial cost and accordingly was intended by the parties to be a permanent structure that could be used for an indefinite period into the future; and • it would be more difficult for a subsequent owner of a house to inspect the adequacy of the foundations than it would be for the first owner.
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It was therefore reasonable to impose liability on the builder for defectively constructing the house, which resulted in pure economic loss being suffered by the subsequent owner of the house when the structural defects became apparent. The implications of this decision were massive for the building industry. The decision in Bryan v Maloney meant that builders may still be liable for defective buildings years after the completion of the building. One lingering question after Bryan v Maloney concerned whether the decision gave protection to the owners of commercial buildings as well as residential home buyers. There was widespread opinion that the issues given rise to in this case are more properly addressed by legislation. The issue as to whether commercial property owners could sue the builders of their factories or shops for defective work was later considered by the High Court in Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16.
Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16 [8.1200] The purchaser of an existing factory and office complex five years after its construction sued the builder for the cost of repairing the defectively constructed foundations of the building. The purchaser was unsuccessful, primarily because it had failed to adequately protect itself through the purchase contract with the original owner. The purchase contract could have included a warranty regarding structural defects and also could have assigned the original owners’ rights to sue the builder to any subsequent purchaser of the building. Furthermore, the purchaser did not require an expert to inspect the structural adequacy of the building prior to finalising the purchase. The failure to take any precautions against harm made it unreasonable to impose a duty of care on the builder because the purchaser was not vulnerable. It would therefore appear unlikely that a subsequent purchaser will be able to sue the builder for previous defective work unless the purchaser has reasonably protected themselves against loss in the purchase contract. McHugh J held that (at [71]): 462
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Chapter 8 Torts: Concepts of Liability I do not think that the ratio decidendi of Bryan v Maloney applies to the case of commercial premises. The ratio can be put no higher than that the builder of a dwelling house owes a duty to a subsequent purchaser to take reasonable care to avoid reasonably foreseeable decreases in its value arising from the consequences of latent defects caused by the house’s defective construction. Neither the stated reasons of the Court nor the material facts of the case justify any wider conclusion. Certainly, they do not justify the conclusion that the ratio of the case covers commercial premises. That is not to say that the reasoning in Bryan v Maloney – or by analogy its material facts – may not lead to the conclusion that the common law recognises an identical or similar duty in respect of the builder of commercial premises. That requires further analysis. But it does mean that the ratio decidendi of Bryan v Maloney does not automatically determine the result of this appeal.
Brookfield Multiplex Ltd v Owners-Strata Plan No 61288 [2014] HCA 36 [8.1210] The High Court unanimously held that a builder did not owe a duty of care to an owners’ corporation of a strata titled serviced apartment building to avoid the economic loss of the owners’ corporation having to repair latent defects in the building’s design or construction. The High Court held that the fact that there were detailed contractual arrangements between the builder, the developer and the purchasers of the apartment units which included expansive terms dealing with and limiting liability for defects was the key consideration.
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French CJ held that (at [34]-[35]): The purchasers of lots from Chelsea were effectively investors in a hotel venture under standard form contracts which were an integral part of the overall contractual arrangements. The standard form contract contained specific provisions relating to the construction of the building and Chelsea’s obligations to undertake repairs … This is not a case in which, for the purposes of the subsistence of a duty of care, the subsequent owners could be regarded as vulnerable … The position of the subsequent owners and the interaction of the contractual and statutory frameworks are antithetical to the proposition that Brookfield owed the Corporation [a] duty of care. Against that background, the relationship between Brookfield and the Corporation is not analogous to the relationship in Bryan v Maloney between the builder of a dwelling house and the downstream, arms-length purchaser of the house, who suffered economic loss by reason of latent defects in the construction. It is analogous, although not identical, to the position of the purchaser of the complex in Woolcock.
Hayne and Kiefel JJ held that (at [56]-[58]): Because these parties could not check the quality of what the builder was doing, it can easily be said that each relied on the builder to do its work properly. Reliance, in the sense just described, may be a necessary element in demonstrating vulnerability, but it is not a sufficient element … vulnerability is concerned with a plaintiff’s inability to protect itself from the defendant’s want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant. It is neither necessary nor profitable to attempt to define what would or would not constitute vulnerability. It is enough to observe that both the developer and the original purchasers made contracts, including the standard contracts, which gave rights to have remedied defects in the common property vested in the Owners Corporation. The making of contracts which expressly provided for what quality of work was promised demonstrates the ability of the parties to protect against, and denies their vulnerability to, any lack of care by the builder in performance of its contractual obligations. It was not suggested that the parties could not protect their own interests. The builder did not owe the Owners Corporation a duty of care.
Gageler J held (at [185]-[186]) that: The continuing authority of Bryan v Maloney should be confined to a category of case in which the building is a dwelling house and in which the subsequent owner can be shown by evidence to fall within a class of persons Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-22 20:22:54.
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Business and the Law incapable of protecting themselves from the consequences of the builder’s want of reasonable care. Outside that category of case, it should now be acknowledged that a builder has no duty in tort to exercise reasonable care, in the execution of building work, to avoid a subsequent owner incurring the cost of repairing latent defects in the building. That is because, by virtue of the freedom they have to choose the price and non-price terms on which they are prepared to contract to purchase, there is no reason to consider that subsequent owners cannot ordinarily be expected to be able to protect themselves against incurring economic loss of that nature … … If legal protection is now to be extended, it is best done by legislative extension of those statutory forms of protection.
PART 3 OTHER BUSINESS-RELATED TORTS
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8.11 PASSING OFF … in your report here, it says that you are an extremely dull person. Our experts describe you as an appallingly dull fellow, unimaginative, timid, spinster, easily dominated, no sense of humour, tedious company and irrefutability drab and awful. And whereas in most professions these would be considered drawbacks, in accountancy they are a positive boon. J Cleese et al, And Now for Something Completely Different (Screenplay, 1971).
[8.1220] While imitation may be the sincerest form of flattery, in the commercial world being copied is a serious matter. The tort of passing off has developed over centuries to protect a trader from a competitor misrepresenting an association likely to damage the trader’s goodwill. Passing off is one of the economic torts. It protects commercial interests by providing a remedy for purely economic loss. “The fundamental rule”, stated Lord Kingston over a century ago, “is that no man has the right to put off his goods for sale as the goods of a rival trader” (Leather Cloth Co v American Leather Cloth Co (1865) 11 H L Cas 523). A century later Danckwerts J stated (J Bollinger v Costa Brava Wine Co Ltd [1959] 3 All ER 800 at 805): The well-established action for “passing off” involves the use of a name or get-up which is calculated to cause confusion with the goods of a particular rival trader, and I think it would be fair to say that the law in this respect has been concerned with unfair competition between traders rather than with the deception of the public … [it] is not an action brought by the member of the public who is deceived but by the trader whose trade is likely to suffer.
Passing off derives from the common law’s recognition of a trader’s right to protect her or his mark. Under the ancient Assizes of Bread and Beer, medieval traders were required to distinguish their goods by marks in order that the makers of adulterated goods could be prosecuted. Customers began to select particular bakers and brewers whose product they enjoyed, on the basis of the distinguishing mark. Centuries before the enactment of trademarks legislation the common law extended its protection to the trader’s goodwill in her or his mark through an action that has become known as “passing off”. By early in the twentieth century the tort was capable of protecting goodwill in a range of circumstances. Equity freed the action from any requirement of deceit and established that the basis of the action was to protect the trader’s property in “the business or goodwill likely to be injured by misrepresentation rather than the narrower protection of a right of property in a mark, name, or get-up” (Spalding v Gamage (1916) 32 RPC 273 at 284). By 1981 it was held that (Cadbury Schweppes Pty Ltd v Pub Squash Co Pty Ltd (1981) 55 ALJR 333 at 336 per Lord Scarman (Privy Council)): [Passing off] is wide enough to encompass other descriptive material, such as slogans or visual images, which radio, television or newspaper advertising campaigns can lead the market to associate with a plaintiff’s product, provided always that such descriptive material has
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Chapter 8 Torts: Concepts of Liability Thirsty folk want beer, not explanations. If the public get the thing they want, or something near it, and get it under the old name –the name with which they are familiar – they are likely to be supremely indifferent to the character and conduct of the brewer, and the equitable rights of rival traders. Montgomery v Thompson [1891] AC 217 at 225 per Lord MacNaghten.
become part of the goodwill of the product. And the test is whether the product has derived from the advertising a distinctive character which the market recognises.
[8.1230] A further development that has substantially expanded the scope of the tort is its development from its classic formulation of a trader representing its products as those of a competitor, to a versatile action protecting promotional as well as trading goodwill. In Erven Warnink BV v J Townend & Sons (Hull) Ltd [1979] AC 731, Lord Diplock (at 742) held that the modern action for passing off comprises five essential elements: 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.
Later cases suggest that element (4) is expressed too narrowly in that actions can be brought not only by traders but also by persons with a business such as well-known personalities who can restrain unauthorised use of their name, likeness or persona through a passing- off action. The marketing of one’s personality is known as character merchandising.
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Erven Warnink BV v J Townend & Sons (Hull) Ltd [1979] AC 731 [8.1240] One of a number of Dutch companies producing a traditional Dutch liqueur known throughout the world as “advocaat” obtained an injunction to restrain the defendant, an English company, from using the word “Advocaat” in marketing a liqueur as “Keeling’s old English Advocaat”. In the House of Lords, Lord Diplock acknowledged that the plaintiff had no action under the classic formulation of passing off as it could not be established that any purchaser of the defendant’s product supposed, or would be likely to suppose, it to be goods supplied by the plaintiff or to be Dutch advocaat of any make. Lord Diplock applied the extended formulation of passing off referred to at [8.1220], and said (at 745) that: If a product of a particular character or composition has been marketed under a descriptive name and under that name has gained a public reputation which distinguishes it from competing products of different composition, I can see no reason in principle or logic why the goodwill in the name of those entitled to make use of it should be protected by the law against deceptive use of the name by competitors, if it denotes a product of which the ingredients come from a particular locality but should lose that protection if the ingredients of the product, however narrowly identified, are not restricted as to their geographical provenance.
[8.1250] Since Erven Warnink the scope and influence of passing off have expanded significantly, and it is now a versatile tort in a range of trading and promotional circumstances. A versatile range of remedies is available including injunction, damages or an account of profits and, in appropriate cases, delivery up or destruction of the offending articles or erasure of the offending mark. There is a substantial overlap between passing off and the statutory action based on misleading or deceptive conduct in breach of s 18 of the Australian Consumer Law. Although their doctrinal basis is different –passing off is designed to protect the plaintiff’s property
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There is nothing too absurd but that authority can be found for it. Henderson v Preston (1888) 4 rl R 632 at 633 per Manisty J.
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in the business or goodwill likely to be injured by the misrepresentation whereas s 18 is designed to protect consumers from misleading or deceptive conduct. However, both are activated by a misrepresentation and, as Mason J explained in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44 at [7]: The remedy to prevent deception of the public often has the incidental effect of protecting a competing trader’s goodwill which would also be injured by that description.
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Fraud is infinite in variety; sometimes it is audacious and unblushing; sometimes it pays a sort of homage to virtue, and then it is modest and retiring; it would be honesty itself if it could only afford it. But fraud is fraud all the same … Reddway v Banham [1896] AC 199 at 221 per Lord MacNaghten.
Section 18 is invariably pleaded as an alternative to passing off and in interpreting s 18 the courts habitually apply passing off principles. The passing off cases are discussed in detail in the context of misleading conduct at [19.930].
8.12 DECEIT [8.1260] The history of decisions relating to loss arising from negligent statements demonstrates a refusal, until the Hedley Byrne decision in the House of Lords, to allow a claim for financial loss arising from negligent advice. Damages for economic losses arising from misrepresentation could be awarded in a breach of contract action if the representation had contractual effect or in the tort of deceit if the representation was fraudulent but until the Hedley Byrne decision non-contractual negligent misstatements were not provided with a remedy of damages for financial loss. Successful actions for fraudulent misrepresentation in the tort of deceit are very rare because of the very high burden in establishing fraud which is clearly set out by the House of Lords in the celebrated case of Derry v Peek (1889) 14 App Cas 337. In the words of Lawson J in Foodco UK LLP v Henry Boot Developments Ltd [2010] EWHC 358 Although the standard of proof is the same in every civil case, where fraud is alleged cogent evidence is needed to prove it, because the evidence must overcome the inherent improbability that people act dishonestly rather than carelessly. On the other hand, inherent probabilities must be assessed in the light of the actual circumstances of the case.
Derry v Peek (1889) 14 App Cas 337 [8.1270] Derry v Peek was a remarkable case in many respects. It concerned a prospectus for a share
issue that advised prospective investors that the company being formed could operate trams with steam or mechanical power, instead of relying on horses. That ability was described as “one great feature of this undertaking to which considerable importance should be attached”. In fact the company had no such right and it collapsed. One subscriber for shares, Sir Henry Peek, took action against the directors, who had issued the prospectus, for fraudulent misrepresentation (at the time negligence alone was not a sufficient claim). Lord Herschell, in the House of Lords, delineated the parameters of the tort of deceit. He said at 374 that: to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice … fraud is proved when it is shown that a false representation has been made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless whether it be true or false.
Thus a very difficult hurdle was set in place for plaintiffs endeavouring to establish fraud. The facts of the case itself and the extraordinary endeavours of the members of the House of Lords to avoid bringing home liability to the directors possibly says more about social strata in London at the time than about the law. The almost impossibly strict test appears to have been engineered so that English company directors of the late nineteenth century should not be placed at undue risk. 466
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Chapter 8 Torts: Concepts of Liability
8.13 DEFAMATION [8.1280] For centuries it has been accepted that reputation is worthy of protection. In Scott v Sampson (1882) 8 QBD 491, Cave J explained that (at 503): The law recognises in every man a right to have the estimation in which he stands in the opinion of others unaffected by false statements to his discredit.
IN CONTEXT
Defamation law [8.1290] Defamation is a communication from one person to at least one other that lowers
or harms the reputation of an identifiable third person, where the communicator (the publisher) has no legal defence. The law of defamation aims to balance free speech with the right of an individual to enjoy a reputation free from an indefensible attack.
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While the news media tends to be the main target for defamation actions, people have also sued over poems, novels, cartoons, paintings, photographs, artistic criticisms, songs and satire. Threats of defamation actions are often used to stifle criticism or to settle other grievances such as invasion of privacy.
Fraud, or breach of trust, ought not lightly to be imputed to the living; for, the legal presumption is the other way; and as to the dead, who are not here to answer for themselves, it would be the height of injustice and cruelty to disturb their ashes, and violate the sanctity of the grave, unless the evidence of fraud be clear, beyond a reasonable doubt. Prevost v Gratz [1896] 19 US (6 Wheat) 481 at 498 (1821) per Story J.
The law of defamation is complex and often unpredictable. Defamation actions are very costly, difficult to defend and substantial monetary damages can be awarded. In some cases plaintiffs can obtain an “injunction” preventing any further communication of the offending publication or material. Information Sheet: Defamation Law, Arts Law Centre of Australia
IN CONTEXT
Defamation Law Reform [8.1300] Australia’s defamation laws were built for a different age. The last comprehen-
sive national review of defamation laws was in 1979, almost 30 years before Facebook was launched in February 2004 and the first tweet was sent in March 2006. The laws are increasingly unworkable and in desperate need of overhaul as slurs on social media and other digital platforms take off as a growing source of defamation claims. A five-year review of Australian defamation cases covering the years 2013-17, released this month by the Centre for Media Transition at the University of Technology, Sydney, found 51.3 per cent of the 189 cases involved digital publications such as tweets, emails, Facebook posts and news websites. One of those cases, now being considered by the High Court, involved a Melbourne man suing Google for defamation over search results linking him unfairly to underworld figures.
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While cases involving celebrities and other public figures suing traditional print media companies – such as Rebel Wilson’s record $4.56 million payout over defamatory articles in Woman’s Day magazine, now the subject of an appeal limited to the quantum of damages – are likely to attract the most attention, they do not account for the bulk of cases. The study found private individuals were more likely to be sued than media companies, who were the defendants in just 25.9 per cent of cases. Social media and search engine cases could not have been contemplated in 1979, and did not loom large when the states and territories passed broadly uniform defamation laws almost 15 years ago. The uniform laws, which commenced operation in the states and territories in early 2006 – between January 1 and April 26 – were modelled on NSW’s Defamation Act 1974. The NSW laws were already in need of reform, but the states and territories chose to delay major changes for at least another five years. The NSW government was statutorily required to conduct a review of the new Defamation Act “as soon as possible” after the fifth birthday of the laws, in January 2011. A report was to be tabled in Parliament within a year. The review was conducted but the report was never released. Last week, NSW Attorney-General Mark Speakman told Fairfax Media the government “intends to complete a review of defamation law” and “the impact of the developing technological environment on defamation law is an area of particular interest to me”. He pointed out that any changes would need to be co-ordinated at a national level.
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The pace of national reform is likely to be painfully slow. To address the most pressing problems, the states and territories might consider fast-tracking a small number of changes before undertaking a more comprehensive review. This might include inserting a new “serious harm” test in the Defamation Act, a change introduced in the UK in January 2014. This is designed to knock out cases that might be regarded as trivial, and would help avoid costly legal battles over tweets and other social media posts made to a tiny number of followers. A serious harm threshold is particularly important in a digital age where the parties do not have deep pockets and can be hit with legal bills totalling well over $100,000. The states and territories might also consider legislating to change the limitation period for suing over online publications. While a 12-month time limit applies in general to print publications, the limitation period for online slurs restarts every time the material is accessed online. It should be a source of embarrassment to Australia that it lags behind other countries in modernising its defamation laws. The time to act is now. Editorial, Sydney Morning Herald (27 March 2018)
[8.1310] It is the tort of defamation –originally developed in the common law but today largely codified in Australia’s Uniform Defamation Acts –that protects reputation. Despite the significance of reputation, defamation gives rise to opposing principles –on the one hand there is the preservation of individual reputation, and on the other there is the interest of freedom of speech. The most vocal critics of defamation laws are those people who are active in disseminating information to the public and who are likely to be the defendants in a defamation action, in particular the media. 468
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Chapter 8 Torts: Concepts of Liability
Historically each State and Territory had its own law of defamation. Some of the States had similar laws, others varied considerably. This meant that a plaintiff who was defamed nationally for example on national television, may have chosen to sue in a State which offered the best chance of success –a practice that was called “forum shopping”. After several attempts to introduce a uniform law of defamation Australia-wide, all States and Territories finally adopted the uniform Defamation Act in the mid-2000s. Any living person may sue for defamation, but the cause of action is extinguished with the death of either the plaintiff or the defendant. Since the commencement of the uniform defamation laws companies other than non-profit corporations with more than 10 or more employees cannot bring defamation actions. In some cases the injurious falsehood action may be available (see [8.1460]). The uniform Defamation Acts abolish the common law distinction between slander –spoken or transitory defamation –and libel –written or permanent defamation. At common law slander differs from libel in that the plaintiff had to prove actual damage. Today the distinction is abolished and the publication of defamatory matter is actionable without proof of special damage.
Elements of a defamation action [8.1320] To succeed in a defamation action the plaintiff must prove the following essential elements:
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• The statement is defamatory.
Shona Martyrr: There is a shadow there, I agree, which could be construed as being Mr Ettingshausen’s penis. Tom Hughes: It’s not a shadow. It is a white shape with what looks like pubic hair. Martyrr: Well, there is some grey there. There is a grey shape there … it could be a penis, yes. Hughes: It is a penis, isn’t it? Martyrr: Well, I assume if it is in that area … Hughes: What else could it be? A duck? Cross-examination from Ettingshausen v Australian Consolidated Press, The Australian Magazine (10 July 1993).
• The statement referred to the plaintiff. • The statement was published to a third party. A successful defamation action leads to an award of damages –sometimes substantial. In 2017, actress Rebel Wilson was awarded damages of $4.56 million (which were reduced on appeal by the Victorian Court of Appeal to $600,000) after successfully suing the publisher of the Women’s Day over a series of defamatory articles. See Bauer Media Pty Ltd v Wilson (No 2) [2018] VSCA 154.
The statement is defamatory [8.1330] In a defamation action the judge decides on a general basis whether the material in question (the “imputation”) is capable of bearing a defamatory meaning. If yes, it is then a question of fact for the jury to decide whether the material does convey a defamatory meaning. There have been various judicial descriptions of what may constitute defamatory material. Baron Parke in Parmiter v Coupland [1840] 151 ER 340 said it was “matter calculated to injure the reputation of another, by exposing him to hatred, contempt and ridicule”. In Sim v Stretch (1936) 52 TLR 669, Lord Atkin defined a defamatory imputation as one that may tend “to lower the plaintiff in the estimation of right-thinking members of society generally” (at 671). As these statements indicate, defamation requires more than hurt feelings. The meaning attached to the words by the author is irrelevant. The court looks at what the effect of the material would be on ordinary, sensible people or people of “fair average
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intelligence” (Slatyer v Daily Telegraph [1908] HCA 22), or “hypothetical referees” (Reader’s Digest Services Pty Ltd v Lamb [1982] HCA 4). Material has a natural and ordinary meaning –that is, how an ordinary, sensible person would understand it without requiring any special knowledge. Material may also have indirect or hidden meanings, or inferences, which are known in legal terminology as “innuendos”.
IN CONTEXT
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Defamation –The general principles That caution should be exercised before launching proceedings for defamation was confirmed by Holt CJ in 1704 when he said that he remembered another case very lately, where a fellow brought an action for saying of him, that he was a highway-man; and it appearing upon evidence that he was so, he was taken in court, committed to prison, and convicted and hanged the next session … Johnson v Browning (1704) HOLT KB 3 at 4.
[8.1340] In Orion Pet Products Pty Ltd v RSPCA (Vic) [2002] FCA 860 at [231]-[236], Weinberg J conveniently summarised the general principles to be applied in determining whether conduct is defamatory (references omitted): A defamatory statement is one which tends to lower a person in the estimation of his or her fellows. Frequently, it takes the form of an imputation calculated to bring the plaintiff into “hatred, ridicule or contempt”: Parmiter v Coupland [1840] EngR 168. Defamation is not limited to aspersions upon the private character of an individual. It also embraces disparagement of reputation in trade, business or office. Thus it would be defamatory to accuse a doctor of incompetence, a company of insolvent trading, or even to attribute authorship of an inferior book to a prestigious writer. It is clearly established at common law that in determining the meaning of words, the intention and knowledge of the publisher are immaterial. What imputation is conveyed by any particular words is to be determined on an objective test, that is, by the meaning which the “ordinary reasonable person” would accord those words. Another way of putting it is that whether a statement is defamatory depends upon the reaction aroused in a citizen of “fair average intelligence”: Slatyer v The Daily Telegraph Newspaper Co Ltd [1908] HCA 22 or “ordinary decent folk in the community, taken in general”: Gardiner v Fairfax (1942) 42 SR (NSW) 171. It is sufficient, for the purposes of this test, that the statement was calculated to stir up adverse feelings among a substantial group within the community, though not in all quarters. On the other hand, it is not sufficient that the words would be regarded as prejudicial by a small minority whose standards are so deviant that it would not be proper for the courts to recognise them. Not all falsehoods calculated to injure are defamatory. Defamation is confined to those statements which strike at character or reputation. A disparaging remark concerning the quality of merchandise may import a reflection on the plaintiff’s conduct of his business. To say that all his goods are shoddy would almost certainly do so. To say that one particular article was defective would almost certainly not. Whether or not a particular statement is defamatory may depend upon the meaning which is to be attached to that statement. Where words are ambiguous, they must be understood in their ordinary and natural sense. It matters not that the author did not intend them to have a defamatory meaning if they would be given that meaning by the ordinary sensible person to whom they are addressed. In Farquhar v Bottom [1980] 2 NSWLR 380 at 386 Hunt J observed:
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Chapter 8 Torts: Concepts of Liability
This ordinary reasonable reader does not, we are told, live in an ivory tower. He can, and does, read between the lines, in the light of his general knowledge and experience of worldly affairs … the ordinary reasonable reader is a layman, not a lawyer, and that his capacity for implication is much greater than that of a lawyer. … The ordinary reasonable reader of such an article he is understandably prone to engage in a certain amount of loose thinking. … … The reader of a book would read it with more care than he would a newspaper. In both the “newspaper” and in other cases, there is also a very wide degree of latitude given to the capacity of the matter complained of to convey particular imputations where the words are imprecise, ambiguous, loose, fanciful or unusual … It goes without saying that any publication must be read as a whole. An apparently innocent statement may conceal a defamatory innuendo. Where innuendo is relied upon, it must be specifically identified in the pleading.
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Reference to the plaintiff [8.1350] The defamatory statement must in some way identify the plaintiff. Often the defamatory statement names the plaintiff, so identification is not an issue. There is, however, no need to refer to the plaintiff by name for a defamation action to be successful. Where the plaintiff is not named, the plaintiff must show that the words would be understood by the “ordinary sensible person” to refer to the plaintiff. The standard is not high. There is no shelter behind pseudonyms and the intention to refer to the plaintiff is irrelevant. In Lee v Wilson [1934] HCA 60 a newspaper published allegations of bribery naming a “Detective Lee” in the Victoria Police Force. There were three police officers by the name of Lee in the force, and the reference was intended for a Constable Lee; the two other officers by the name of Lee, both detectives, successfully sued for defamation. Group defamation is generally not actionable, unless the group is small in number or a member of the group is clearly identifiable. An example of this would be a newspaper article making adverse comments about taxi drivers as a whole, but including a photograph of a taxi showing sufficient detail for a particular taxi driver to be identified.
Publication to a third party [8.1360] To constitute the tort there must be publication of the material to a third party. Publication to a single third party is sufficient, but it must have been made to a person capable of understanding the defamatory meaning. The use of the internet constitutes publication for the purposes of defamation. The more recent High Court case of Dow Jones & Company Inc v Gutnick [2002] HCA 56 found that a publication online could constitute defamation wherever that article was downloaded and viewed. Exceptions to the general rules on publication include: • There is no liability between spouses (alternatively this may be regarded as a situation giving rise to absolute privilege) that is where one spouse says something defamatory about a third party to the other spouse, the statement is not actionable. • The defendant will only be liable for accidental publication if the defendant was careless. For example, where the defendant writes a letter to the plaintiff containing
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The Supreme Court will set out to determine the meaning of the word “tart” in the context used by Australian Olympic cycling coach Charlie Walsh when allegedly describing Barcelona gold medalist Kathy Watt. Defence counsel for GTV, Mr Andrew Robson, said his client wanted to know how Watt defined the word “tart”. Mr Robson told Justice John Hedigan yesterday that the Macquarie Dictionary had several definitions of tart. These included a small and saucer-shaped shell filled with fruit or other sweetened preparation; to make attractive with cheap ornaments and cosmetics; a girl or a woman, formerly a sweetheart, but now of low character; or a prostitute. Sydney Morning Herald (7 December 1996).
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defamatory material about the plaintiff and the defendant sends it to the plaintiff’s business address without marking the envelope confidential or personal. A secretary opens it first and reads it; this is careless and liability arises as a result. If the envelope is clearly marked as being confidential, but is opened anyway, this would probably protect the defendant. • The defendant is not liable for repetition by others unless he intended it, authorised it or it was a natural and probable consequence. The defendant would not be liable for example where the defendant says something defamatory about the plaintiff to the local gossip “in confidence” (or “off the record” to a journalist). Every principal participant in the publication incurs liability. In the case of a newspaper article this would include the journalist, the editor and the proprietor. Each copy of the offending material gives rise to a separate cause of action.
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Defences to a defamation action Various ideas commend themselves. The judge might go to Flinders Street station, hand copies of the offending article to the first dozen passengers to step off the 8.00 am from Berwick, and get their decision. We should then have the immediate feeling of the ordinary reader, not the confused opinions of a formal jury bemused by weeks of evidence, hopelessly adrift in a sea of semantics, overwhelmed by the distinction between what is comment and what is fact, and finally sunk by the summing up of a judge and two powerful advocates. Alternatively, the plaintiff and the defendant might be ordered to toss a coin. Or fight a duel with dictionaries. D Bowman, The Age (23 November 1984).
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[8.1370] The more significant defences are discussed at [8.1380]-[8.1430]. The requirements of each defence, with the exception of “freedom of political discussion”, may vary from jurisdiction to jurisdiction within Australia.
Triviality [8.1380] In all States and Territories where the uniform Defamation Act applies the distinction between slander and libel has been abolished, and the statutory defence of triviality applies to oral imputations that are unlikely to injure the plaintiff.
Justification and contextual truth [8.1390] Justification is the legal terminology for truth. The untruth of the allegedly defamatory statements is assumed by the court. It is up to the defendant to show that the statements are true. If the defendant is able to prove the statements are true, there is no defamation because the plaintiff’s reputation has not been lowered, merely shown for what it really is. In many cases it is difficult to actually prove the material to be true and, particularly for journalists, the only means of establishing the truth may be via a confidential source of information, the identity of whom they are unwilling to divulge. The defendant having to show the truth of the allegedly defamatory statements is a reversal of the onus of proof: if defamation were the same as other civil actions the plaintiff would have to prove the statements were untrue. This reversal puts a brake on the dissemination of defamatory material. In all States and Territories truth alone is a defence. The uniform Defamation Act specifically provides for the following defence of contextual truth (Defamation Act 2005 (NSW), s 26): It is a defence to the publication of defamatory matter if the defendant proves that – (a) the matter carried, in addition to the defamatory imputations of which the plaintiff complains, one or more other imputations (contextual imputations) that are substantially true; and (b) the defamatory imputations do not further harm the reputation of the plaintiff because of the substantial truth of the contextual imputations.
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Chapter 8 Torts: Concepts of Liability
Absolute privilege [8.1400] Absolute privilege attaches not to the substance of what was said, but to specific occasions or proceedings. This is a defence regardless of the motives of the defamer – that is the defendant can make the statements maliciously in the full knowledge that they are untrue, and the defence remains still available. There are only a limited number of situations in which this defence applies: for example parliamentary or judicial proceedings, the lawyer-client relationship. The purpose of the defence is to allow absolute freedom of speech without fear of litigation in certain limited circumstances.
Qualified privilege
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[8.1410] For qualified privilege to be available, the occasion must be one where the parties have a reciprocal interest in the allegedly defamatory statement. This reciprocity was described in Adam v Ward [1917] AC 309 at 334 per Lord Atkinson: “where the person who makes the communication has an interest or a duty, legal, social, or moral, to make it to the person to whom it is made, and the person to whom it is so made has a corresponding interest or duty to receive it”. Examples are employment references and fair and accurate reports of judicial proceedings held in public. It is not possible to make an exhaustive list of when qualified privilege applies because the courts may extend the defence to new situations as they arise. This is a qualified privilege. The defence is conditional and will be lost if the defamatory material was motivated by “malice” (“malice” includes an improper purpose as well as spite) or if there is excessive communication.
There is danger of getting into the realm of the trivial in this matter of insulting language. No pressing social need requires that every abusive outburst be converted into a tort; upon the contrary, it would be unfortunate if the law closed all the safety valves through which irascible tempers might legally blow off steam. C Magruder, “Mental and Emotional Disturbance in the Law of Torts” (1936) 49 Harvard Law Review 1033 at 1053.
Fair comment/honest opinion on a matter of public interest [8.1420] Scott LJ in Lyon v Daily Telegraph [1943] KB 746 said (at 752): In the case of criticism in matters of art, whether music, painting literature or drama, where the private character of a person criticised is not involved, the freer the criticism is, the better it will be for the aesthetic welfare of the public.
The honest opinion defence (previously referred to as the defence of fair comment) is not restricted to material about “artists”, it may be used where the plaintiff is in public life of any sort for example a politician. For the defence to be successful, the material must relate to the public activity of the plaintiff, not to the plaintiff’s private life. It must be opinion, not a statement of fact; but distinguishing between the two can be difficult. The opinion must be based on facts that are true. The material must be fair, that is an honest expression of the defendant’s real opinion. There must be no “malice”.
Freedom of political discussion [8.1430] In 1994 the High Court of Australia made two landmark decisions in the area of defamation law, Theophanous v Herald & Weekly Times [1994] HCA 46 and Stephens v West Australian Newspapers [1994] HCA 45. In both these cases the plaintiffs were politicians who had been the subject of adverse comment in the defendant newspapers. In both cases the defendants were successful on the basis of the reading into the Constitution of an implied right to “freedom of political discussion”. This defence applies to the discussion of “political matters”. Just what is to be included in “political matters” remains to be defined by the courts. The defence as outlined had two separate aspects:
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(a)
the defendant need not prove truth but must show that it was not aware of falsity and that it did not publish the material recklessly with regard to its truth or falsity, and
(b)
the publication was reasonable in the circumstances.
Lange v Australian Broadcasting Corporation [1997] HCA 25 [8.1440] The leading case concerning the implied freedom of political communication is the High Court’s
decision in Lange v Australian Broadcasting Corporation, another case involving a politician, where a differently constituted High Court reviewed the scope of the rights recognised in Theophanous v Herald & Weekly Times Ltd [1994] HCA 46 and Stephens v West Australian Newspapers Ltd [1994] HCA 45. The joint judgment in Lange dispensed with the “constitutional defence” and developed instead the wider category of qualified privilege. With respect to the defence of qualified privilege outlined in the Lange case, the defendant must “establish that its conduct in making the publication was reasonable in all the circumstances of the case. In all but exceptional cases, the proof of reasonableness will fail as a matter of fact unless the publisher establishes that it was unaware of the falsity of the matter and did not act recklessly in making the publication” (at 573). Whereas the other defences may vary from State to State, this defence applies to all States and Territories.
Sydney Turns into World’s Libel Capital Michael Bachelard, Sydney Morning Herald (12 May 2017)
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[8.1450] Australia’s
punishing defamation laws have made Sydney the libel capital of the world, and people posting on Facebook and in blogs are the latest target for expensive legal action and threats. But the number of matters reaching court are a small proportion of total writs served –most cases are settled in advance to avoid the cost of a trial. London was traditionally considered the libel capital of the world, with its strict defamation laws, but the number of actions there has fall quickly in recent years. Legislation introduced in 2013 has made it more difficult to sue and has limited damages. Judge Gibson wrote that a growing problem was that “claims based on publications on the internet, emails and on social media, are now far more common than claims against traditional media defendants”. That means ordinary people increasingly find themselves defending defamation actions in court, often representing themselves in a complex and expensive area of law. In NSW,
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there is no limit on how much money the court can order in costs to the winner of a defamation complaint. Defending a court action for defamation costs between about $100,000 and $1.1 million, which far exceeds the legislated maximum damages of $381,000, the figures show. Australia’s Uniform Defamation Act was last amended in 2005 and does not differentiate between publishing by a media company or an individual, and makes no mention of internet, print or social media publication. In fact, under the law it is unclear who the publisher is of a post on social media. The law says there is a time limit of 12 months for someone to take legal action for defamation, but the High Court has ruled that each new download from the Internet can be considered a fresh publication. Defamation lawyer Matt Collins, QC, said Australia’s law was now “a Frankenstein’s monster” of rules and exclusions, and prevented
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Chapter 8 Torts: Concepts of Liability
good journalism from investigative reporters. “There are important, high-profile stories that don’t get told because of the chilling effect of defamation law, and the high cost of actions.” Fairfax Media lawyer Richard Coleman said only about 10 to 15 percent of defamation
claims made against the media organisation, publisher of The Age and the Sydney Morning Herald, made it to court. Many were settled for undisclosed sums because taking cases to court was too expensive.
8.14 INJURIOUS FALSEHOOD
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[8.1460] Injurious falsehood is an action for false statements which disparage another’s goods or business. In this respect it is similar to defamation. The differences are explained by Weinberg J in Orion Pet Products Pty Ltd v Royal Society for the Prevention of Cruelty to Animals (Vic) Inc [2002] FCA 860 at [198]: In some respects, this tort bears a marked resemblance to defamation. Both involve a false and harmful imputation concerning the plaintiff which is made to a third party. They differ, however, in that the law of defamation protects interests in personal reputation while injurious falsehood protects interests in the disposability of a person’s property, products or business. Defamation is generally actionable without proof of damage. Falsehood is presumed and liability is strict. In an action for injurious falsehood, the plaintiff must prove that he sustained actual economic loss, that the offending statement was false, and that it was made with intent to cause injury without lawful justification. The requisite state of mind is often described as malice.
Given that companies with 10 or more employees can no longer bring defamation action, injurious falsehood actions are increasingly used when the commercial reputation of such companies are called into question.
8.15 INTERFERENCE WITH CONTRACTUAL RELATIONS [8.1470] Commercial property interests are one of the interests protected by the law of tort. The most common form of legal mechanism that regulates the existence, usage and transfer of commercial property rights is a legally enforceable contract and the law places high importance on protecting the sanctity of legal contractual relations. The law of tort seeks to protect the integrity of contractual relationships through the tort of interference with contractual relations. The tort of interference with contractual relations is committed when a person intentionally hinders or otherwise interferes with parties who are attempting to form contractual relations. The tort may also be committed where a person intentionally interferes with a party’s rights under a contract. Examples of tortious interference include inducing one of the parties to the contract to breach it or preventing one of the parties from performing their obligations under the contract. In Short v The City Bank (1912) 12 SR (NSW) 186 Street J commented (at 202) that: I think that a person complaining of a breach of contractual relations brought about by these means must show that the person whose actions are complained of did something in the
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Business and the Law nature of effectually persuading or prevailing upon the other party to the contract to violate his obligations under it. The persuasion may take the form of advice or friendly solicitation, or it may take the form of intimidation or molestation, but in every case I think that it must be shown that the defendant deliberately intervened between the contracting parties either with the express design of depriving the plaintiff of the benefit of his contract, or under such circumstances that he must have known that the effect of his intervention would be to deprive the plaintiff of that benefit.
The interference to the contract may be either direct or indirect, although where the interference is merely indirect, then the act of interference must itself be an illegal act such as unprotected strike action or an anti-competitive boycott under the Competition and Consumer Act 2010 (Cth). It is a defence to the commission of the tort of interference with contractual relations if the person interfering with the contract has reasonable justification for that interference.
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In Daebo Shipping Co Ltd v The Ship Go Star [2012] FCAFC 156 the Full Federal Court stated that the tort of inducing a breach of contract requires the following elements: i.
there must be a contract between the plaintiff (or applicant) and a third party;
ii.
the defendant (or respondent) must know that such a contract exists;
iii.
the defendant must know that if the third party does, or fails to do, a particular act, that conduct of the third party would be a breach of the contract;
iv.
the defendant must intend to induce or procure the third party to breach the contract by doing or failing to do that particular act;
v.
the breach must cause loss or damage to the plaintiff.
The court stated that: The gravamen of the tort is the defendant’s intention to induce or procure the breach in the knowledge that such a breach will interfere with the plaintiff’s contractual rights. As Lindgren J explained, the defendant must have “a fairly good idea” that the contract benefits another person in the relevant respect. He said that knowledge of the contract may be sufficient for the purpose of grounding the necessary intention to interfere with contractual rights, even though the defendant does not know the precise term that will be breached. Reckless indifference or wilful blindness can amount to knowledge for this purpose.
Sanders v Snell [1998] HCA 64 [8.1480] The High Court considered a situation involving the termination of the employment of the chief
executive of the Norfolk Island Tourist Bureau. The Minister for Tourism removed the board of directors of the Tourist Bureau and appointed new directors after his direction to the previous board to terminate the chief executive’s employment was not followed. The newly appointed Bureau members were aware that the Minister wanted the chief executive’s employment to be terminated. The newly constituted Bureau then terminated the employment of the chief executive without giving sufficient notice, which meant that the termination of the contract was unlawful. The dismissed chief executive then sued the Minister for inducing the Bureau to breach his employment contract. The High Court found that the tort of interference with contractual relations was not committed because the Minister had not made the decision to terminate (and thereby breach) the 476
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Chapter 8 Torts: Concepts of Liability contract of employment. That decision was made by the directors of the Bureau, and despite the fact that they no doubt understood what the Minister wanted, it was their decision. The High Court noted that there is a difference between intending or hoping that a party to a contract will breach that contract and actually procuring that party to breach the contract. In this case the Minister did not require the Bureau to unlawfully terminate the chief executive’s employment contract which would have constituted the tort of interference with contract. Rather the Minister directed the Bureau to terminate the contract, which the Bureau had chosen an unlawful method of implementing (ie termination without sufficient notice).
While the tort of interference with contractual relations is well established there is less certainty as to the existence of a tort of interference with trade or business interests by unlawful means. In Sanders v Snell the High Court referred to this tort as “embryonic or emerging”. In Whittaker v Child Support Registrar [2009] FCA 188 the Federal Court was prepared to accept that it forms part of Australian law.
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8.16 NUISANCE [8.1490] Nuisance is a property-based tort which protect an occupier’s use and enjoyment of land from unreasonable interference. Whereas an action for trespass to land requires proof of direct or intentional interference an action in nuisance requires proof only that the interference was unreasonable. The action deals primarily with indirect harm –physical damage from flood or fire, interference with enjoyment of land by noise or smell; such as current (at time of writing) proceedings brought by the owners of Selbourne and Wentworth Barristers’ Chambers against Fratelli Fresh Holdings in respect of the emission of odour from a grease trap in the basement at its outlet (Sydney Morning Herald, 18 June 2018). Another topical example as the current litigation for “public nuisance and unreasonable interference with business” in respect of the construction of Sydney’s delayed $2.1 billion light rail project (Sydney Morning Herald, 18 June 2018). In Southern Properties (WA) Pty Ltd v Executive Director of the Department of Conservation and Land Management [2012] WASCA 79, McLure P noted that (at [118]-[119]): Nuisance protects a claimant’s interest in the beneficial use of land. It is not confined to the actual use of the soil but extends to the pleasure, comfort and enjoyment which a person normally derives from occupancy of land. Thus nuisance covers physical damage to property and non-physical damage. To constitute a nuisance, the interference must be unreasonable. In making that judgment, regard is had to a variety of factors including: the nature and extent of the harm or interference; the social or public interest value in the defendant’s activity; the hypersensitivity (if any) of the user or use of the claimant’s land; the nature of established uses in the locality (eg residential, industrial, rural); whether all reasonable precautions were taken to minimise any interference; and the type of damage suffered. This exercise involves weighing the respective rights of the parties in the use of their land to make a value judgment as to whether the interference is unreasonable. Although the “fault” of the defendant may be a relevant consideration in an assessment of whether the interference with the claimant’s enjoyment of land is unreasonable, the duty not to expose one’s neighbours to nuisance is not necessarily discharged by the exercise of reasonable care.
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477
Business and the Law Liability in nuisance is strict. Once a prima facie case has been established, it is for the defendant to prove its defence …
It was held in that case that the physical damage from smoke (by reason of a prescribed burn which interfered with the plaintiff’s use of their land for grape growing for the purpose of producing wine) did not in the end constitute an unreasonable interference with a grape producer’s land. The question of balance is obviously significant and was explained in these terms by Lord Wright in Sedleigh-Denfield v O’Callagan [1940] AC 880 (at 903): A balance has to be maintained between the right of the occupier to do what he likes with his own, and the right of his neighbour not to be interfered with. It is impossible to give any precise or universal formula, but it may broadly be said that a useful test is perhaps what is reasonable according to the ordinary usages of mankind living in society, or more correctly in a particular society.
In Marsh v Baxter [2015] WACA 169, organic farmer Marsh alleged “airborne incursions” of genetically modified canola seeds from Baxter’s farm into Marsh’s farm land which stripped it of its organic certification constituted unreasonable interference with private use of land. The Court of Appeal dismissed the appeal holding that farmers do not fall under an obligation to limit their farming activities on their own land so as not to interfere with an “abnormally sensitive” organic neighbour farm.
8.17 BREACH OF STATUTORY DUTY Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
[8.1500] Breach of statutory duty is a tort based on a statutory duty imposed on the defendant and owed to the plaintiff as opposed to the public at large. The action is distinct from, but frequently overlaps with, an action in negligence. An action for breach of statutory duty is based on duties imposed by the relevant legislation. An action for negligence is based on duties imposed by common law which may nevertheless be shaped having regard to statutory obligation. The elements of the breach of statutory duty action are summarised by Luntz et al (Torts: Cases and Commentary (7th ed, LexisNexis, 2012)) as follows:
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1.
The right to the performance of the particular statutory duty that forms the basis of the claim is enforceable by an action in tort. This may be in negligence or some other tort.
2.
The duty is imposed, and can be interpreted that way, in respect of this particular defendant.
3.
The plaintiff is someone who can claim the protection afforded by the statutory duty.
4.
The loss, damage or harm suffered by the plaintiff is within the class or ambit of risks at which the statute is aimed.
5.
The defendant was in breach of the duty encapsulated in the statute.
6.
The breach of the statute caused the loss suffered by the plaintiff, and for which the plaintiff seeks damages.
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Chapter 8 Torts: Concepts of Liability
In Jane Doe v Australian Broadcasting Corporation [2007] VCC 281, damages were awarded for, inter alia, breach of statutory duty in a case where the ABC had published information identifying the plaintiff as the victim of a sexual assault in breach of the Judicial Proceedings Act 1958 (Vic).
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QUESTIONS 1.
In the context of compensation for personal injury, discuss the concepts of “fault” liability and “no fault” liability. Which model do you regard as most appropriate?
2.
What is the role of the duty of care in the tort of negligence? Explain the factors relevant to the question of whether a duty of care exists in a particular case.
3.
Norm, a mild- mannered business law student, is driving home from lectures one evening and stops at the Georgia Chicken Bar for some food to take home. He buys a “Quik-Pack” of chicken, which he starts to eat as he drives along the Eastern Freeway. One piece of chicken has a peculiar flavour, so Norm turns on the car light, takes a quick glance and sees that he has been eating a crumbed fried mouse. He feels ill immediately, and loses the control of the car, which crashes into a car in the next lane, driven by Paula. Both Norm and Paula suffer injuries in the accident, and are taken to hospital. Norm’s mother, Edna, visits him that night in the casualty department of the hospital and is so distressed by his sad tale about the mouse that she subsequently develops a serious allergy to chicken and mousetraps.
Norm, Paula and Edna are all keen to sue someone. Advise each of them, and the Georgia Chicken Bar, as to their respective rights and liabilities.
4.
Because of financial hardship to wheat farmers as a result of the drought the NSW Government is considering the introduction of a wheat subsidy. Under this proposal the Government will compensate wheat farmers in particular areas of the state. The proposal is obviously of great interest to wheat farmers as in some cases their survival depends on receiving the subsidy. It has attracted wide media attention particularly as an election is due to be held within six months and some media commentators have suggested it is simply a cynical vote-buying exercise in marginal electorates in country NSW currently held by the Opposition.
To bring an end to the distracting media focus the Government decides to introduce the wheat subsidy. Claretta Reasons, the Minister in charge of the wheat subsidy scheme, calls a press conference at which she announces that the subsidy will be introduced after the election. She distributes a document outlining the financial arrangements and the areas in which the subsidy will apply. The West NSW Chronicle, a newspaper distributed in the far east of NSW, carries the story on its front page. Barnaby, a far west businessman, reads the article with interest as he is currently considering buying two wheat farms, both of which are in drought subsidy areas. After reading the article, and doing a financial analysis, he decides to buy both properties. While the properties are not viable without the wheat subsidy they are with it.
When the scheme is finally introduced nine months later, Barnaby is financially destroyed. One of the properties does not qualify for the subsidy. The West NSW Chronicle has incorrectly drawn the boundaries of the subsidy area. Because there
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was some doubt as to the boundary on the Minister’s map they had contacted her office for clarification but she had not got back to them before the paper had to go to press. The other property was entitled to a subsidy but this was much less than the article indicated. The Minister had by accident distributed an earlier working draft with more generous subsidies.
Advise Barnaby, the minister and the West NSW Chronicle.
WEB REFERENCE Insurance Council of Australia http://www.ica.com.au
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480
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9
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9
Property and Securities Law: Concepts of Ownership Ross Hodgson BUSINESS CONTEXT A business is unlikely to become or remain an ongoing concern without adequate protection of its property rights. Accordingly, a business proprietor cannot hope to operate a business successfully without an understanding of the concept of “property”. Therefore, knowledge of this concept is essential for the purposes of classifying particular property and, consequently, how it can be protected, transferred, encumbered, or owned. The law of property has been developed over many centuries, originally for the express purpose of protecting interests in land and, later, interests in other things where rights of ownership can be exercised, such as tangible property (eg goods and chattels) and intangible property (eg debt and intellectual property). The concept of property, both real property (interests in land) and personal property (interests in property other than land), largely concerns rights in or over things, rather than the things themselves, and the enforcement of those rights at law. It focuses on how property may be classified and how interests in property, such as title (ownership rights) and security interests (rights to enforce payment or performance obligations), can be created, protected, transferred, or discharged. This chapter explores the legal meanings of “property” and, in particular, how the notions of property are broken down into legally understood interests. The following matters are discussed:
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• the classification of property into real property and personal property and the differences between “ownership” and “possession”; • different types of interests (“estates”) one may have in land, and the ways those interests may be held and dealt with, including a discussion of the Torrens system (title by registration) and the meaning of “fixtures” (attachments to land which legally become part of the land); • the classification of personal property into tangible property (which the law refers to as “choses in possession”) and intangible property; • the difference between legal and equitable interests in property, and how that notion underpins the law of trusts, leading to a discussion of the requirements for a trust, the different types of trust and how they are often used in the context of family and business dealings; and • the use of property as security for borrowings or other credit arrangements (encumbrances) and, in particular, the law relating to the use of land as security (mortgages), the ways that personal property can be used as security (security interests).
9.1
THE CONCEPT AND MEANING OF PROPERTY ........................................................................................... 483
[9.20]
Historical recognition of rights in property as “real” or “personal” .................................................. 483
[9.40]
The meaning of “property” ....................................................................................................................... 484
[9.60]
Classifications ............................................................................................................................................. 485
[9.80] Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
9.2
Real property and personal property ..................................................................................................... 486 TRUSTS ...................................................................................................................................................................... 486
[9.100]
The elements of a trust .............................................................................................................................. 486
[9.190]
Classification of trusts ............................................................................................................................... 489
9.3
REAL PROPERTY .................................................................................................................................................... 493
[9.310]
Land and fixtures ....................................................................................................................................... 493
[9.390]
Freehold estates .......................................................................................................................................... 497
[9.400]
“Joint tenancy” and “tenancy in common” ............................................................................................. 497
[9.420]
Native title ................................................................................................................................................... 498
[9.430]
Dealing with interests in land .................................................................................................................. 499
[9.450]
The Torrens system ..................................................................................................................................... 499
[9.470]
Strata title ..................................................................................................................................................... 502
[9.480]
Other interests and restrictions ............................................................................................................... 502
9.4
PERSONAL PROPERTY ......................................................................................................................................... 503
[9.550]
Personal property defined ........................................................................................................................ 504
[9.560]
Choses in possession ................................................................................................................................. 504
[9.610]
Choses in action .......................................................................................................................................... 506
[9.620]
Dealing with personal property .............................................................................................................. 507
[9.650]
The sale of personal property –goods .................................................................................................... 510
[9.860]
Bailment ....................................................................................................................................................... 521
[9.1000]
Liens .............................................................................................................................................................. 527
[9.1010]
Sale of personal property –shares .......................................................................................................... 528
9.5
INTELLECTUAL PROPERTY ................................................................................................................................ 529
9.6
PROPERTY AS SECURITY .................................................................................................................................... 529
482
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Chapter 9 Property and Securities Law: Concepts of Ownership
[9.1060] 9.7
The nature of security ................................................................................................................................ 530
SECURITIES OVER PERSONAL PROPERTY .................................................................................................... 530
[9.1080]
Types of security .......................................................................................................................................... 531
[9.1090]
Registration of “security interests” ......................................................................................................... 532
[9.1100]
Personal Property Securities Act 2009 (Cth) ......................................................................................... 532
9.8
SECURITIES OVER LAND .................................................................................................................................... 537
9.9
CORPORATE SECURITIES ................................................................................................................................... 538
9.1 THE CONCEPT AND MEANING OF PROPERTY [9.10] Property law in Australia –its peculiarities and language –has its roots in English feudal history. A brief historical examination is necessary to appreciate the distinction drawn between real property (interests in land) and personal property (interests in property other than land), the sub-classes of both, and to understand essential differences in how the law deals with the various classes.
The institution of property, when limited to its essential elements, consists in the recognition, in each person, of a right to the exclusive disposal of what he or she have produced by their own exertions, or received either by gifts or fair agreement, without force or fraud, from those who produced it. John Stuart Mill, Principle of political economy (1848).
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Historical recognition of rights in property as “real” or “personal” [9.20] In English feudal society, land was originally in the ownership of the Crown (sovereign –king or queen) who granted rights to the dukes (the highest members of the nobility) to hold and use the land. The price was their loyalty and their obligation to perform administrative services and provide military support. The dukes could then grant rights over the land to lower orders of nobles, in turn obtaining their loyalty. A person granted a right to use land could profit by farming the land, or having others farm it for a price, such as a cash rent, or share of profits or products. Thus, “property” in respect of land came to be understood as differing rights or interests in the land, referred to as “estates”, rather than the land itself. The Crown was the only person who had absolute ownership of property; all others held lesser interests carved out of that granted initially by the Crown. This largely remains the position in Australia today: the Crown (“State”) has the only absolute title to land and the people generally recognised as the “owners” in fact only have some lesser “interest” in the land (although the rights of Indigenous peoples to certain lands –referred to as “native title” –to some extent sit alongside the absolute rights of the Crown). [9.30] Interests in property other than land fell outside the scope of these laws. Hence, different laws emerged regarding interests in what became known as personal property, which initially encompassed only tangible, movable things –“goods” or “chattels” – but which now includes intangible things, such as intellectual property (eg patents and trade marks) and shares in companies. This gives rise to the broad classification of property into real property (dealing with interests in land) and personal properly (dealing with all non-land interests). The names Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-22 20:23:01.
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emerged from the type of court action one could take when wrongfully dispossessed of property. Real actions led to recovery of possession of the thing sought. But these actions were restricted to interests in land –because they were more important for the functioning of the feudal system. Other actions were personal and would not generally lead to recovery of possession but only the payment of damages for a wrongful interference with a person’s personal rights.
The meaning of “property” That low, bestial instinct which men call the right of property. Leo Tolstoy.
[9.40] “Property” can mean different things. It can be a reference to a thing itself (such as a parcel of land, a car or shares in a company) or to an interest in a thing (such as title or a security interest). Consequently, it is important to recognise exactly what is being referred to in any particular case. So, what is “property”? In McCaughey v Commr of Stamp Duties (NSW) (1945) 46 SR (NSW) 192, Jordan CJ described property as follows (at 201) (emphasis supplied): The word “property” is used in different senses. It may denote either objects of proprietary rights, such as pieces of land, domesticated animals, and machines; or the proprietary rights themselves … In common parlance it is usually employed in the former sense, but in the language of jurisprudence in the latter … Property, in the sense of proprietary rights, may exist in relation to physical objects, or to intangible things such as debts or patent rights. Each separate piece of property consists of a bundle of proprietary rights relating to a particular object, including rights of administration and rights of enjoyment, the totality of which may be vested in a single person, or may be divided amongst a number of persons, as for example when they are shared by several who together own them all, jointly or in common.
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[9.50] The generally accepted attributes of property were provided by Lord Wilberforce in National Provincial Bank Ltd v Ainsworth [1965] AC 1175, at 1247-1248: Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable in its nature of assumption by third parties, and have some degree of permanence and stability.
The reference to being “capable in its nature of assumption by third parties” means that it must be capable of being transferred or assigned –so the legal notion of property incorporates the concept that the property can be handed on in some way to another person (eg transfer by sale, inheritance and so on). In R v Toohey; Ex parte Meneling Station Pty Ltd [1982] HCA 69 –a case which concerned whether a grazing licence was “property” –Mason J of the High Court of Australia considered that it was generally correct to say that a proprietary right must be capable in its nature of assumption by third parties, even though some forms of property are made incapable of assignment or transfer by statute. Thus, property may be legally described as anything which, by its nature, is capable of being possessed exclusively and assigned. This includes, as separate items of “property”, each of the rights that may be created in or over such property. For example, a lease is a form of property, in particular, being an interest in real property that constitutes a right of exclusive possession by the lessee (tenant) over land owned by the lessor (landlord) or, in the case of a headlease, by the sub-lessee over land leased by the head-lessee.
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Chapter 9 Property and Securities Law: Concepts of Ownership
The lease is to be contrasted from another form of interest in real property, the licence, which constitutes a right of non-exclusive possession by the licensee over land owned by the licensor. A licence also can be granted over personal property, such as copyright, designs and trademarks, and can be either an exclusive licence or a non-exclusive licence.
Classifications [9.60] As stated above, the major classification is between real property and personal property. Accordingly, real property is concerned with interests in land and things fixed to the land (see [9.310]), whereas personal property is concerned with interests in any other form of “property”. Thus, personal property is concerned with interests in “goods” or “chattels” –both tangible things and non-tangible things –to which various laws give “property” status. Tangible property interests things are those capable of being physically possessed, such as cars, horses, clothing and books. In law, such a personal property right is called a “chose in possession” –which translates as “a thing held”.
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Intangible property interests are things that cannot be physically held and so only can be claimed or enforced by legal action, such as shares in companies, debts and intellectual property (including patents, trademarks and copyright). In law, such a personal property right is called a “chose in action” –a thing recognised in law only by way of legal action. [9.70] As Figure 9.1 shows, there are further sub-classifications within those broad classes. In particular, property rights can be either legal or equitable, which are discussed at [9.80].
We speak of the legal ownership of the trustee and the equitable or beneficial ownership of the cestui que trust [the beneficiary]. But they are not really conflicting. Equity does not say that the legal owner is not the owner. On the contrary, it says that he is, but insists that he use his legal rights in accordance with the terms of his trust. Windeyer V, Legal History (1957).
Figure 9.1: Interests in property Property
Real and Personal
Land
Fixtures
Legal and equitable interests in property
Chattels personal
Choses in action
Choses in possession
• absolute ownership • possessory ownership • possession by finding
Trusts
Chattels real
Intellectual property specifically protected by legislation
Trademarks
Patents
Rights generally
Designs
Copyright
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Real property and personal property Legal and equitable interests [9.80] What existed as sufficient for a feudal society is not so for a more developed and complex one. Where more sophisticated and specialised interests in property are to be recognised, equity provides the answer. In contrast to the legal interest already recognised at common law, the concept of an equitable interest in property developed slowly. Under this dichotomy, ownership of property may be “legal” or “equitable”. Where there are equitable interests in property, the legal owner (usually the registered owner) must deal with the property having regard to those equitable interests, whatever they may be and which are usually unregistered. At its simplest, the distinction means that a person who is registered as the owner of land, and who is therefore the legal owner, will have to acknowledge the rights of those who have (unregistered) equitable interests in that land if such interests exist. The equitable interests, being unregistered, will fall short of legal ownership and may consist of the rights of a mortgagee (lender) holding an unregistered mortgage over Torrens title land, or of a spouse in a matrimonial home or of a beneficiary in a trust.
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Equity fashions a trust with flexible adaptation to the call of the occasion. Adams v Champion, 294 US 231 at 237 (1935) per Cardozo J.
At [9.90] is a discussion of the emergence of trusts, which developed from the recognition of equitable interests in property.
9.2 TRUSTS [9.90] The concept of the trust is exceptionally old in English law. A trust is a device that separates legal ownership from beneficial ownership. Trust law does not remove the legal owner’s title; it simply ensures that the legal owner (the trustee) holds and applies that interest for the benefit of another (the beneficiary).
The elements of a trust [9.100] The broad scope of operation of modern trusts is such that they may come into existence in widely differing circumstances and, accordingly, will have different forms and components. In a commercial sense, however, trusts created intentionally will comprise: • the settlor; • the trustee; • the trust property; and • the beneficiary. Equity then imposes on the trustee an obligation to deal with the trust property on behalf of and for the benefit of the beneficiary and in the best interests of the beneficiary (not the trustee). The terms of that obligation will normally be set out in detail in the trust deed.
Settlor [9.110] The settlor actually creates the trust by making a settlement of property, frequently by way of gift, on the trustee upon terms that it should be held by the trustee for
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Chapter 9 Property and Securities Law: Concepts of Ownership
the beneficiary. For tax purposes (which are frequently the motivation for the intentional establishment of trusts in Australia), the settlor must not be, and must not be able to become, a trustee or beneficiary.
Trustee [9.120] The trustee is the legal owner of the property “settled” by the settlor, but holds that legal interest entirely for the benefit of the beneficiaries. If, for example, the property is land, then the trustee will be the registered legal owner of the land. In exercising the rights of that legal ownership, however, the trustee must act for the benefit of the beneficiary in accordance with the terms of the trust. The trustee may be one or more natural persons or corporations.
Trust property [9.130] The trust property is the subject matter of the trust. It may be any type of property, real or personal, tangible or intangible, present or future, or any combination thereof. It is in respect of this property that the beneficiary has an equitable interest requiring the trustee to act in accordance with specific fiduciary duties for the protection of the beneficiary’s interests.
A trust is an office necessary in the concerns between man and man, and … if faithfully discharged, attended with no small degree of trouble and anxiety. Knight v Earl of Plymouth (1747) Dick 120 at 126 per Lord Hardwire LC.
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At the commencement of the trust, the trust property will comprise whatever property was settled by the settlor. During the operation of the trust, the trust property may be extended either by further such settlements, by property acquired by the trustee on behalf of the trust, or by accumulations of income or capital. [9.140]
Figure 9.2: Elements of a trust Settlor (settles trust property on Trustee)
Trustee (legal owner of trust property; owes fiduciary duties to Beneficiary)
Beneficiary (beneficial or equitable owner of trust property)
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Beneficiary I am “in a fiduciary position” –which is always an uncomfortable position. FW Maitland (1850- 1906), The Letters of Frederic William Maitland (1965).
[9.150] The beneficiary (sometimes referred to as the cestui que trust) is the person for whose benefit the trust property is held. The beneficiary holds the equitable interest (as distinct from the legal interest which is held by the trustee). The trustee may also be a beneficiary (where there is more than one), but cannot be the sole beneficiary.
Duties of the trustee [9.160] The trustee is a fiduciary of the beneficiaries (and potential beneficiaries). The primary duties of the trustee are: • to perform in accordance with the terms of the trust; • to preserve the trust property; • to act in the best interests of the beneficiaries; • to refrain from dealing with the trust property for the benefit of the trustee; • to ensure that the trustee’s personal interests do not come into any position of conflict with its duty to act for the benefit of the beneficiaries.
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Keech v Sandford (1726) 25 ER 223 [9.170] The possibility of a conflict in performing the primary duties is a matter in respect of which
the trustee must be extremely careful. In Keech v Sandford, the trustee held a lease on trust for a beneficiary. On expiry of the lease, the trustee sought a renewal of it to be held again on similar terms for the beneficiary. Upon that renewal being refused, the trustee obtained a new lease and on his own behalf. The Lord Chancellor, Lord King, held that, because of the possible conflict of interests, the new lease was to be held by the trustee upon the same trusts as the original lease, despite the fact that the lessor (owner) had refused to grant a new lease on those terms: Though I do not say there is a fraud in this case, yet he should rather have let it run out than to have the lease to himself. This may seem hard, that the trustee is the only person of all mankind who might not have the lease; but it is very proper that the rule should be strictly pursued, and not in the least relaxed; for it is very obvious what would be the consequences of letting trustees have the lease on refusal to renew.
The possibility of conflict is enough. Although the trustee may have acted honestly in this case, the consequences of allowing a trustee to take the benefit of a lease in such circumstances may interfere with the trustee’s discharge of the duty to do the best it can to obtain the renewal for the beneficiary.
[9.180] In trusts established by trust deed, the obligations and duties of the trustee in relation to the property will normally be set out in considerable detail. In trusts which arise otherwise than in writing, those obligations and duties generally will be found in the principles of equity and, specifically, in the Trustee Acts of the various States.
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Chapter 9 Property and Securities Law: Concepts of Ownership
Classification of trusts [9.190] The two principal categories of trusts are: • express trusts: being those trusts that are purposefully created either during the creator’s life or after death by will, and • resulting trusts and constructive trusts: being those trusts that come about because of the operation of the law rather than a deliberate act.
Express trusts [9.200] An express trust is simply one that is clearly expressed, usually in writing by its creator. Express trusts are frequently created by will and so come into effect on the death of the testator. Nearly all trusts encountered in commercial arrangements or in family and estate planning are express trusts and in writing. To create an effective express trust, three certainties must be established:
All trusts are either, first, express trusts, which are raised and cleared by act of the parties, or implied [now called constructive] trusts, which are raised or created by act or construction of law. Lord Nottingham, Cook v Fountain, c 1681.
• certainty of intention to create a trust; • certainty as to the trust property; and
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• certainty as to the beneficiaries. State and Territory legislation stipulates certain formal requirements in the creation of express trusts. Any trust of land whereby an interest in the land is created or disposed of, thus including nearly all trusts of land, must be evidenced in writing and signed by the person creating it. See, for example, s 23C of the Conveyancing Act 1919 (NSW). The legislation of the other jurisdictions is as follows: • Property Law Act 1958 (Vic), s 53; • Property Law Act 1974 (Qld), s 11; • Law of Property Act 1936 (SA), s 29; • Property Law Act 1969 (WA), s 34; • Conveyancing and Law of Property Act 1884 (Tas), s 36; • Civil Law (Property) Act 2006 (ACT), s 201; • Law of Property Act 2000 (NT), s 62. Additionally, any declaration of trust of an equitable interest in any property, real or personal, must be written. Virtually, the only express trust that may be created without writing and without breaching the statute is a trust of a legal interest in personal property.
Resulting trusts [9.210] A resulting trust generally arises where an intended trust fails. There are two main categories of resulting trusts: 1.
when an owner transfers property without effectively providing for ownership of the beneficial interest;
2.
where the object or purpose of a trust fails or lapses.
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There being no intent that the trustee should benefit, when a resulting trust occurs, the trust “results” or reverts in favour of the transferor (original owner). For example, if donations are received for a particular charitable purpose, then any moneys received in excess of the required amount of funds will be held under a resulting trust in favour of the original donor. This was the case in Re Gillingham Bus Disaster Fund [1958] Ch 300.
Re Gillingham Bus Disaster Fund [1958] Ch 300
Case Study
Background
[9.220] This case is a good example of the problems that can arise when the objective of the trust is fully met and excess funding remains. Facts In December 1951, 24 Royal Marine Cadets were killed when they were run down by a bus while out marching. Several more were badly injured. In response to an overwhelming public reaction, three mayors from the surrounding towns of Gillingham, Rochester and Chatham established a relief fund. A letter was published in The Daily Telegraph promoting the memorial fund intended, “among other things”, to defray funeral expenses, to fund care for the boys who had been injured, and to fund other “such worthy cause or causes … as the Mayors may determine”.
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Issue Nearly £9,000 was raised from street collections, football matches and by general public contributions. Some donors were known, but most were anonymous. Only £2,368 was needed to cover all of the expenses as described. The question then arose as to what was to become of the remaining funds. Decision The Chancery Division found that the anonymous donations were not an out-and-out gift but, rather, they were money given for a specific purpose. Because the donations largely were anonymous, the donors could not be located to allow excess money to be returned. The money was paid into the court and held upon a resulting trust in the same manner as for any trust in which the beneficiaries could not be found. Implications Deeds should be drafted so as to make it clear what is to happen in such cases. But, better still, when requests for donations are made, it should be clearly stipulated how excess funds may be used so as to avoid the necessity of resorting to a resulting trust.
Constructive trusts [9.230] Essentially, constructive trusts are trusts that arise by operation of law or that are created by the court in the interests of justice without reference to any actual or presumed intention of any party. This category of trusts is elusive and lacks clear definition and certainty. Many examples exist of when a constructive trust will be imposed. For example, a constructive trust will be imposed in circumstances where a person acquires property and where it would be improper for her or him to retain beneficial ownership of 490
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Chapter 9 Property and Securities Law: Concepts of Ownership
it. If A mortgaged her or his property to B and, following default, B sold it and recovered an amount greater than the debt, B would become a constructive trustee for A in respect of the surplus. A further example is that of an agent who, in the course of carrying out duties for a principal, makes a secret commission. Equity will impose a constructive trust on that commission in favour of the principal. In recent years, courts have extended the constructive trust to apply to property acquired or contributed to in the course of a domestic relationship. In those cases, where the property in question is owned in one name but contributed to by both parties of a domestic relationship, a constructive trust in relation to contributions made by the party not on the property title may be possible. This is often known as a “Baumgartner” constructive trust, so named after the High Court case of the same name: Baumgartner v Baumgartner [1987] HCA 59. The principles may be equally applied to domestic relations between same-sex couples: West v Mead [2003] NSWSC 161.
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Trusts in the family context [9.240] The trust offers extraordinary flexibility in the range of proprietary interests that may be created. Its early significance related especially to interests created by wills. In modern times the trust is also commonly used to create rights and interests while all parties are still alive (known as inter vivos trusts). Its scope encompasses the creation of fixed interests for beneficiaries (interests arising under fixed trusts), which are in many respects akin to legal rights, through to the conferring of interests dependent upon the exercise of the trustee’s discretion (interests arising under discretionary trusts). It is this flexibility, both as to the conferring of interests and the resulting taxation consequences, that has made the trust a useful vehicle through which to hold and control family wealth (in the form of various items of property).
Trusts in the business context [9.250] The flexibility discussed under the previous heading also makes trusts suitable vehicles through which to conduct certain business activities. Over the years, trusts have been used successfully to conduct family-run businesses as it is possible to achieve limited liability for the principals by utilising a corporate trustee while retaining flexibility in the distribution of income to achieve better overall tax outcomes.
A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him to a trustee. Beatty v Guggenheim Exploration Co 225 NY 380 at 386 (1919) per Cardozo J.
Over the years, a type of fixed trust known as a unit trust (see [9.270]) has been used extensively to hold significant real property interests so that units in the property trust can be marketed to the investing public. A unit trust can accommodate such arrangements more flexibly and efficiently than companies.
Fixed trusts [9.260] In a fixed trust, each beneficiary has a predetermined right to a proportion of income or capital (assets) of the trust and, hence, the interests of beneficiaries are fixed. The trustee holds the assets of the trust to distribute the income generated from those assets and any capital of the trust in the manner and proportions set out in the Deed of Trust. Different beneficiaries may have fixed entitlements to income from those having fixed entitlements to the capital of the trust fund. For example, a trust could be created so that
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Business and the Law The precise legal difference between real and personal property is very confusing and, in an Irish case where the question was whether a dung-heap was real property, a lawyer made an admirable argument to show that it was. Then the farmer was called upon to reply and said, “I’m puzzled indeed by all these strange words. But the lawyer says –fair play to him –that cows is personal property and the hay they eat is personal property, and I ask your Honour, as one man to another, how, barring miracles, personal property can go on eating personal property and evacuating –he used a homelier word –real property. Well, your Honour, it’s beyond my understanding.” EA, The Oxford Book of Legal Anecdotes.
four “income beneficiaries” are each entitled to 25% of any income derived during a year, while two “capital beneficiaries” are entitled to half each of the assets of the trust fund upon it being wound up. [9.270] A common form of fixed trust is the unit trust, where the proportionate interests of beneficiaries are measured in terms of the number and type of units held (in a similar way to the interests of shareholders in a company). Such unit trusts are often used for holding interests in real property and, in fact, many public property trusts exist whereby the units in them may be bought and sold on the securities exchange. The major difference between a unit trust and a company is that a unit-holder generally has an interest in the assets of the trust fund, whereas a shareholder in a company has no interest in the assets of the company (see Charles v Federal Commissioner of Taxation [1954] HCA 16). The manner in which distributions from a trust are taxed also differs from that applicable to distributions (dividends) from companies to shareholders.
Discretionary trusts [9.280] There are a significant number of discretionary trusts in Australia. This is largely due to a combination of two factors: the desire to protect family assets or wealth from creditors in a bankruptcy and the desire to minimise taxation. The former desire largely can be achieved through the mechanism of having a company trustee of the family trust, which is under the directorial control of the heads of the family. The second goal largely is achieved through the mechanism of discretionary distributions of trust income or capital. Under a discretionary trust, the trustee usually has a wide discretion as to who may receive any distributions from the trust in any particular year from broad classes of persons named under the Deed of Trust. These classes of beneficiaries are known as “discretionary objects”; they are not really “beneficiaries” until the trustee exercises its discretion to make a distribution in their favour.
IN CONTEXT
Example of a family discretionary trust [9.290] The Jones Family Trust has derived $15,000 income in the current year. The Deed of Trust names the following classes of “beneficiaries” (discretionary objects):
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A
Alice Jones and her spouse, Brian Jones (“the Principal Beneficiaries”);
B
any child of a Principal Beneficiary;
C
any spouse or child of a child of a Principal Beneficiary;
D
any brother, sister or parent of a Principal Beneficiary;
E
any company in which any person in any of the classes of beneficiaries named above holds a share; and
F
any trust fund in which any person in any of the classes of beneficiaries named above can or may benefit from a distribution from such trust fund.
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Chapter 9 Property and Securities Law: Concepts of Ownership
Alice and Brian both earned sufficient income each during the year so as to place them in the top tax bracket. Accordingly, they decide (as the directors of the trustee company) to distribute the $15,000 trust income equally to their three adult children, who are studying at University and have no other income. The result is that no tax is payable on the $15,000 (as opposed to tax payable on taxable income of $180,001 and over at $54,097 plus 45c for each $1 over $180,000, based on the 2018-2019 tax rates, which would have been payable by Alice or Brian should they have received the income as taxed in their own hands). Note that this may not be the case if the children receive any government payment, like youth allowance; moreover, the trust income must be declared to Centrelink and will reduce any government benefits payable to them.
Trusts are children of equity; and in a court of equity they are at home –under the family roof-tree, and around the hearth of their ancestor. Kupperman v McGehee 63 Ga 250 at 256 (1879) per Bleckley J.
[9.300] It is readily apparent that the flexibility of the discretionary trust has potential for considerable advantages. However, a unit trust may better suit a particular arrangement, especially where the participants desire fixed entitlements or shares of income or capital, certainty of interests and transferability of interests. The discretionary trust is less suitable for joint ventures between unrelated parties given the lack of certainty as to entitlements.
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Both types of trust can be used to hold investments or to conduct businesses (known as trading trusts). Discretionary trusts are often established under wills (known as “testamentary trusts”) to take advantage of certain tax concessions regarding minor beneficiaries under wills, which concessions are not generally available for trusts established during the lifetime of the settlor (known as “inter vivos trusts”).
9.3 REAL PROPERTY Land and fixtures [9.310] The general understanding of real property, or realty, is that it comprises ownership, possession or other interests in land. It has already been observed that the division between real property and personal property (personalty) was originally a procedural one, real actions enabling a recovery of possession of realty (hence the name). It has also been noted that the feudal origins of property law had the result that those aspects of property that were important to the feudal system were recognised as being within that category of real property. For that reason, the classification of real and personal property is somewhat arbitrary (eg leasehold interests are classified as personalty at law, even though they confer an interest in real property). [9.320] But what is included in “land”? In theory, it includes everything under it to the centre of the earth, everything above it to the heavens and everything affixed to it: see Mitchell v Mosley [1914] 1 Ch 438. But, in practice, that which goes with the land is more limited. Often the Crown (being the relevant government) will reserve to itself the entire mineral rights existing beneath the surface of the land. The Crown can do this as
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the original absolute owner, the reservation being part of the original Crown grant that created an ownership interest in the land. Courts have been reluctant to permit landowners to regulate all activities in the airspace above their land in order to permit public use of such airspace by way of air transport and similar uses. Accordingly, interests in land may only extend above it “to such height as is necessary for the ordinary use and enjoyment of [the] land and the structures upon it”: see Bernstein (Baron) v Skyviews Ltd [1978] 1 QB 479 at 489 per Griffiths J. But, a landowner’s rights with respect to airspace above the land would normally be sufficient to curtail overhanging branches from a neighbour’s tree, or buildings and structures overhanging the land, and incursions into airspace by cranes and the like used in construction activities on a neighbour’s property.
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Property is the most ambiguous of categories. It covers a multitude of rights which have nothing in common except that they are exercised by persons and enforced by the state. RH Tawney, The Acquisitive Society (1921).
There is also considerable scope for argument as to whether an item that commenced life as personal property is included in land by virtue of being affixed to it. If something meets the legal requirements for being a “fixture”, then it is actually part of the land –it is “realty”. [9.330] Fixtures comprise items of personal property which have been affixed to the land so that they thereby lose their identity as separate property and become part of the land. Buildings are fixtures (also known as “improvements”) as are many items in turn affixed to buildings. Items of personal property that are not fixtures are known as chattels. The important practical consequence is that a fixture, being part of the land, will pass automatically to a purchaser of the land, or may, if the land is leased, become the property of the landowner despite having been affixed by the tenant. It is not always clear whether an item has become a fixture –the courts consider the degree to which something has been attached and the intention of the person who attached it. The more securely attached and the more permanent the intention that it remain so, the more likely the item has become a fixture. There are various practical matters that may be considered in forming a conclusion in relation to a particular item, as demonstrated in the case examples set out at [9.340]. In the leading case of Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700, Jordan CJ held that the test to be applied in determining whether an item is a fixture is, basically, one of intention.
Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700 [9.340] Coroneo bought land and built a movie theatre on it. The equipment used in showing movies was fixed to the building. The theatre was also used for purposes other than showing movies, so Coroneo installed several rows of chairs that could be removed (ie they were fixed together but not actually fixed to the floor). Occasionally, the rows of chairs were hired out for parties outside of the hall. Coroneo obtained finance by taking several loans secured by a mortgage over the property. Several transfers of the property took place over the next few years and a dispute arose as to who owned the items in the theatre.
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Chapter 9 Property and Securities Law: Concepts of Ownership Jordan CJ decided that some of the items were fixtures (and hence subject to the mortgage). In doing so, he set out the key principles for determining whether an item is either a fixture or a chattel: • The question whether a chattel has become a fixture depends upon whether it has been fixed to land and, if so, then for what purpose. • The test of whether a chattel which has been to some extent fixed to land is a fixture is whether it has been fixed with the intention that it shall remain in position permanently or for an indefinite or substantial period (in which case it is a fixture) or whether it has been fixed with the intent that it shall remain in position only for some temporary purpose (in which case it is a chattel). • The intention of the person fixing it must be gathered from the purpose for which, and the time during which, use of the item in the fixed position is contemplated. • If an item has been securely fixed so that it cannot be detached without substantial injury to the item or to that property to which it is attached, then this is strong evidence that a permanent fixing was intended. • If the degree of affixation is very slight, then this supports an inference that it was not intended to be permanent. The items of property that were bolted through cement into the floor (principally the movie projector) and were not moved during the various uses of the theatre were obviously not intended to be removed and, therefore, were fixtures. The removable chairs, on the other hand, were not intended to remain with the property and, therefore, were chattels.
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The Coroneo decision demonstrates that it is the objective intention of the party fixing the item to the land that is relevant. That intention can be seen by the degree to which the item is affixed.
Belgrave Nominees Pty Ltd v Barlin-Scott Air Conditioning Pty Ltd [1984] VR 947 [9.350] In the Belgrave Nominees case the owner of a building took action against a builder who had
agreed to install an air-conditioning system for the building. The dispute concerned the large coolers on the roof that rested by their own weight while sitting on a specially constructed platform on the roof. The issue concerned whether the coolers were fixtures or chattels. The court found that the proposed use of the coolers demonstrated that the coolers were intended to remain permanently. The coolers were also installed to improve the use of the building rather than the coolers themselves (this may be compared with cases where a purely ornamental use, such as the hanging of paintings, has made the items chattels). The court stated that: Whether the intention of the party fixing the chattel was to make it a permanent accession to the freehold is to be inferred from the matters and circumstances including the following: • the nature of the chattel; • the relation and situation of the party making the annexation vis-à-vis the owner of the freehold or the person in possession; • the mode of annexation; and • the purpose for which the chattel was fixed.
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National Australia Bank Ltd v Blacker [2000] FCA 681 [9.360] Blacker owned a farm that had an irrigation system comprising in-ground pipes, pumps and sprin-
kler heads. Blacker borrowed money from the National Australia Bank (NAB) which was secured by a mortgage over the real property. When Blacker failed to repay the loan, the bank sought to take possession of the land and the issue arose as to whether the pumps, valves and sprinkler heads were fixtures (and therefore part of the land owned by the bank) or chattels (and therefore owned by Blacker and could be removed). The items were held to be chattels because: • they could be easily removed without damaging the property; • the items were easily replaceable so that the irrigation system would still be capable of use even if Blacker removed them; and
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• the NAB failed to prove that the items were fixtures despite the fact that they rested only by their own weight.
O Lord, thou knowest that I have nine houses in the City of London, and that I have lately purchased an estate in fee simple in Essex. I beseech Thee to preserve the two counties of Middlesex and Essex from fires and earthquakes. Prayer of John Ward MP, 1727, quoted in Hine’s Uncommon Attorney.
Tenant’s fixtures [9.370] An exception to the rule about fixtures becoming part of the land was developed in relation to so-called “tenant’s fixtures”. The rules relating to tenants’ fixtures effectively reverse the presumption that something attached to a building is a fixture (and so becomes part of the building). Instead, tenants are presumed to have the right to remove “tenants’ fixtures” before the end of the tenancy (or within a reasonable time after the tenancy ends if it is not for a fixed term) so long as the removal does not damage the building or, if it does, then that damage is repaired. Many commercial leases have a requirement that the tenant’s fixtures be removed at termination and that the building be restored to its pre-lease condition.
IN CONTEXT
Examples of fixtures [9.380] • An ordinary house is a fixture. • A relocatable house may not be: it depends on the evidence suggesting that it has been located on specific land indefinitely. • An unattached caravan is not a fixture. • A painting that is hanging on a hook is not a fixture but a large painting screwed or cemented to the wall may be. • Sinks, baths and built-in cupboards are fixtures.
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Chapter 9 Property and Securities Law: Concepts of Ownership
• A moveable screen is not a fixture but curtains installed in the room for which they were made generally are. • In one case, a dishwasher installed in specially built housing and connected to the plumbing was held to be a fixture while a clothes dryer sitting on wall brackets was not (Thomas v Beck (1983) ANZ Conv R 200).
Freehold estates [9.390] As discussed, the law does not recognise “property” in the “land” itself –real property consists of interests in the land, known as “estates”. The most important are the “freehold estates” which emerged out of the feudal system of land tenure. There are three main types of freehold estates: • tenancy in fee simple; • life tenancy; and
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• tenancy in remainder. The tenancy in fee simple is virtually absolute ownership –no one but the Crown has greater rights over the realty. All land in private ownership is ultimately held from the Crown subject to the conditions of the original grant; to own the fee simple is to own the greatest interest in land and one which is not subject to restrictions as to sale or gift, either during the owner’s life or, after death, by will. Ownership of land, as it is commonly understood, refers to ownership of the fee simple. A life tenancy arises where a person has possession of the land for life, usually created by a trust in a will and so constitutes an equitable interest in land that, under the Torrens system, can be the subject of separate folios (for the life tenant and for the tenant in remainder) recorded in the Register. A life tenant is entitled to the benefits of the property during that time (eg rents, profits from working the land etc) but is obliged to leave it intact on death. The person or people who are entitled to the property on the death of the life tenant have a tenancy in remainder. Upon the death of the life tenant, the tenants in remainder inherit a greater interest, usually the fee simple (generally, it is now illegal to set up a series of life tenancies).
What I am interested in is having the government of the United States more concerned about human rights than about property rights. Property is an instrument of humanity. Humanity isn’t an instrument of property. Woodrow Wilson (1912).
“Joint tenancy” and “tenancy in common” [9.400] Where property is owned by two or more people, they will hold interests in it either as joint tenants or as tenants in common. While the practical effects of both forms of ownership are similar, there are some significant distinguishing characteristics. In a joint tenancy, all interests must be identical, whereas tenants in common may hold varying interests (eg one may hold a one-quarter interest and the other a three-quarter interest). The other important distinction is that joint tenancy creates a right of survivorship. This means that, on the death of one joint tenant, the other (or others) will automatically inherit that interest (regardless of any trust in a will purporting to dispose of the interest). Thus, a joint tenant cannot dispose of their interest by will. It is a form of ownership commonly used by and suitable for married couples. Conversely, tenants in common can
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dispose of their interests to their beneficiaries by will. Moreover, tenants in common can transfer their interests (by sale or by gift) during their lifetimes without the permission of their co-tenants (unless they have specifically agreed otherwise). However, in a joint tenancy, all joint tenants must unanimously agree to a transfer for it to occur. Generally, the relevant acts in the States and Territories presume that registered co-owners of real property are joint tenants.
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Requirements for a joint tenancy In questions which respect the rights of property, it is better to adhere to principles once fixed, though, originally, they might not have been perfectly free from all objection, than to unsettle the law, in order to render it more consistent with the dictates of sound reason. Marine Insurance Co of Alexandria v Tucker, 7 US 357 at 388 (1806) per Washington J.
[9.410] In order to have a joint tenancy, four elements –the “four unities” –must be present: • unity in time (all the co-owners have co-ownership at the same time); • unity in possession (all the co-owners must have the right to possess the property); • unity in title (all of the co-owners must have derived their title from the same act or instrument); • unity in interest (all of the co-owners must have the same legal interest/rights in the property). Essentially, each joint tenant must have an equal share. Although these four unities may be present in tenancy in common, joint tenancy is distinguished from tenancy in common by the right of survivorship and by the fact that joint tenants must hold their interest equally. The absence of any of the four unities will create a tenancy in common and thus will preclude the operation of the doctrine of survivorship. Only unity in possession is required for a tenancy in common. Further, a tenancy in common can be created as a result of the severance of a joint tenancy by a unilateral severance (ie a severance by one of the joint tenants) under the relevant provisions of Torrens system legislation (see [9.450]) or by operation of law (eg the bankruptcy of one of the joint tenants because a sequestration order against the debtor tenant’s estate will destroy the unity of title): Peldan v Anderson [2006] HCA 48.
Native title [9.420] In Australia, some land may be subject to the prior claims of certain Indigenous peoples, who have maintained a connection with the land since colonisation of Australia. This form of title is referred to as “native title”. However, native title cannot exist where the Crown has dealt with the land in a way which is inconsistent with the continued subsistence of native title. Classically, that would occur where the Crown has granted a fee simple in the land (the most common form of landownership). Native title thus only exists in practice over parcels of land that are still ultimately held by the Crown. This is why native title can affect land held under certain pastoral or mining leases and many wilderness areas because such lands may still beheld by the Crown which has done nothing in the intervening period to displace native title (if it otherwise exists in relation to that land). The concept of native title is discussed in more detail in Chapter 1. The Commonwealth enacted an Act to deal with native title issues in 1993, called the Native Title Act 1993 (Cth). 498
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Chapter 9 Property and Securities Law: Concepts of Ownership
Each State and Territory has complementary legislation to facilitate the application of the Commonwealth Native Title Act. Each of the States and Territories also has other legislation dealing with the rights of Indigenous peoples to certain lands –usually there is more than one Act in each jurisdiction.
Dealing with interests in land
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[9.430] Fortunately, we now have the “Torrens system” which regulates most dealings in land (discussed at [9.450]). Prior to its introduction in the mid-to-late 1880s, owners had to prove their title to land each time they dealt with it. This necessitated the tracing of an unbroken chain of title from some document which was evidence of a dealing in the whole legal or equitable estate in the property, so that the title was properly identified – this was known as a “good root of title”. It is then necessary to trace that title from the date of the document evidencing the good root of title up to the time of current dealing. The procedure involved is difficult and time-consuming and, because of its complexity, frequently leads to delays and sometimes errors. This process is still necessary for the few parcels of land remaining in the country (known as “old system title”) that are not registered under the Torrens system. For land under the “old system” of title, a registration process is available and documents dealing with interests in land must be registered. When registration is neglected, then a prior interest may lose precedence over a later registered interest. Registration itself does not transfer the interest: the document does that. Registration simply protects those taking an interest prior in time to third parties who register their interest. If an owner of land fraudulently enters into two similar dealings (for instance, for sale or for mortgage), then the first to be registered will, in most circumstances, take priority (provided that there is no notice of any prior unregistered interest).
It has been said that the law of land in countries under the Common Law of England is a “rubbish heap which has been accumulating for hundreds of years, and … is … based upon feudal doctrines which no-one (except professors in law schools) understands –and rather with the implication that even the professors do not thoroughly understand them or all understand them the same way.” Miller v Tipling (1918) 43 OLR 97 per Riddel J.
[9.440] A contract for the sale of land must be evidenced in writing and the transfer of land must be in writing. This requirement is mandated in various State and Territory Acts and is a modern manifestation of old rules designed to prevent fraud which may be traced back to the English Statute of Frauds 1677 (Imp).
The Torrens system [9.450] To overcome many of the difficulties inherent in proving good title to land, a system of title by registration was designed by Sir Robert Torrens, a parliamentarian and Registrar-General of Deeds in South Australia during the 1850s. The new Torrens system was introduced by legislation in South Australia in 1858 and eventually was adopted throughout Australia. Almost all land in Australia now is registered under the Torrens system, although there are still some parcels of land that remain to be converted from Old system title to Torrens title. The simplicity of the Torrens system is striking in contrast to the complexity of the Old system. In essence, the Torrens system requires the government to issue a certificate of title to any given piece of land which is conclusive evidence of the ownership of that land. A register is maintained on which transfers, mortgages, easements and other dealings (such as registered leases) are recorded as well as being recorded on the certificate of
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title (held by the owner, the registered proprietor of the land, or, if the land is subject to a registered mortgage, then typically held by the mortgagee, the lender). Accordingly, title to land no longer is established by the execution of deeds and the verification of a good root of title but by the registration of dealings on a public register. Upon registration, the title of a purchaser becomes indefeasible unless the purchaser is guilty of fraud and, in the event of such fraud, innocent persons who subsequently acquire interests in the land (for value and without notice of the fraud) are guaranteed either their interests and anyone prejudiced by the issue of a certificate of title in error is entitled to compensation guaranteed by the relevant government. [9.460] The system rapidly spread throughout Australia and has in fact been adopted in many other countries. Most of the States adopted the system by passing a Real Property Act (although not all are called by that name), the concept frequently being referred to as the Real Property Act system. The legislation of each State and Territory regulating the transfer of real property is as follows: • Conveyancing Act 1919 (NSW); • Real Property Act 1900 (NSW); • Property Law Act 1958 (Vic); • Transfer of Land Act 1958 (Vic); • Land Title Act 1994 (Qld); • Property Law Act 1974 (Qld); Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
• Real Property Act 1886 (SA); • Law of Property Act 1936 (SA); • Property Law Act 1969 (WA); • Transfer of Land Act 1893 (WA); • Conveyancing and Law of Property Act 1884 (Tas); • Land Titles Act 1980 (Tas); • Land Title Act 2000 (NT); and • Land Titles Act 1925 (ACT). As mentioned at [9.450], title to land under the Real Property Act system, unlike under the “old system”, depends upon registration. A person taking a certain interest in land must register that interest not only to protect priority but to complete the creation of the interest itself. In this respect, it differs from the old system where the document itself creates the interest. The Torrens system also differs in that the significance of registration is such that a person with a later interest will, if first registered, take legal precedence over an earlier unregistered interest, even if he or she had notice of it. Limited rights granted by a landowner to another, for example, an easement allowing that other to exercise a right of way over the land to enable access to adjoining land, must be registered on the title to be fully effective and enforceable. Similarly, a covenant –often referred to as a Tulk v Moxhay covenant after the leading case (Tulk v Moxhay 1848 2 Phil 774) –restricting the landowner’s otherwise unfettered right to use the land 500
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Chapter 9 Property and Securities Law: Concepts of Ownership
(eg forbidding construction of a building above a certain height) requires registration and will be noted on the title itself. There are some exceptions to the indefeasibility of title once registration has been effected under the Real Property Act system. These include omissions, errors or misdescriptions of easements and some short-term tenancies. The most significant “general” exception, however, arises where the registration of title was obtained through fraud or, in some circumstances, to dishonestly defeat certain unregistered interests. Further, a means by which the title of a registered proprietor of land can be extinguished is known as “adverse possession” or “possessory title”. This involves the possessor of the land in question having “possession which is open, not secret; peaceful, not by force; and adverse, not by consent of the true owner” (Mulcahy v Curramore Pty Ltd [1974] 2 NSWLR 464, 475 (Bowen CJ in Eq)) and which possession is not successfully challenged by the rightful owner within the 12-year limitation period.
Adverse Possession
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McFarland v Gertos [2018] NSWSC 1629
[9.465] In 1997, the first defendant, Bill Gertos, noticed that 6 Malleny Street, Ashbury in New South Wales, a residential property, appeared to be unoccupied and in disrepair, and he observed it to be in that state for over a year. Consequently, in 1998, he concluded that the property was unoccupied and so commenced to take possession of it and to pay its outgoings, spending a total of around $150,000 between 1998 and 2014 to restore and repair it. The property was leased from 2003 onwards with Mr Gertos named as the landlord. In 2017, Mr Gertos made an application under s 45D(1) of the Real Property Act 1900 (NSW) to the Registrar-General (the second defendant) so as to be recorded in the Register as the proprietor of the fee simple in the land. Subsequently, in October 2017, the Registrar-General gave notice of its intention to grant that application. On 17 November 2017, the plaintiffs, a daughter and two grandchildren of the deceased registered proprietor, Mr Downie, commenced an action seeking a declaration that Mr Gertos is not entitled to be registered on the title to the property on the basis that they were persons entitled to take on
intestacy and thus had a chose in action to see that the estate was duly administered. Ultimately, the Court found in favour of Mr Gertos (Darke J, [67]): Having considered the totality of the evidence, viewed in the light of the character of the property being a single dwelling suburban block, I am comfortably satisfied that since about late 1998 Mr Gertos has been in factual possession of the land with the intention of possessing the land. In essence, Mr Gertos succeeded in taking and maintaining physical custody of the land, to the exclusion of all others, and he has assumed the position of a landlord. I do not accept the submission that he did not actually take possession because he only occupied the property for the limited purpose of obtaining rental income. In my opinion, the actions taken by Mr Gertos (in particular his engagement of a managing agent to arrange leases and entry into leases as the landlord) clearly signify an intention to possess the property to the exclusion of all others, including the registered title holder. His actions are not equivocal in that respect. Mr Gertos has plainly acted as the person who has the possession of the land, able to confer leasehold interests upon tenants. Mr Gertos accepted rent from the tenants … He has made full use of the land in a way an owner would.
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Strata title
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[9.470] As discussed at [9.320], “land” theoretically includes all the airspace above it. Accordingly, a system needed to be devised to enable people to have separate title to apartments and commercial units in high-rise developments. Such title to different strata above the ground could only be statutorily created: the response of the various State Governments was to enact strata title legislation. Anglo-Saxon times … [were] a simple age in which a man’s moveable possessions were limited to his weapons, tools and other personal effects, his household goods and furniture and his horses and cattle. Of these, cattle were the most valuable. It is not without significance that the word cattle, when called “chattels”, became later a general term to describe all ordinary articles of personal property. Windeyer, Legal History (1957).
The legal effect of such legislation is to create title over various blocks of airspace above the ground surface (and, sometimes, below it). Each owner “owns” their block of airspace –it becomes a statutory form of property –and may deal with it as real property under the Torrens system (eg may sell or assign it, mortgage it and so on). The Acts also create mutual rights of support (for walls, floors and the like) so that one owner cannot disturb another’s enjoyment of their strata property. Under the Acts, a form of corporation known as a body corporate is created to own and control common property, such as stairwells, lifts, foyers, gardens, pools and the like. Each owner of a strata in an apartment complex also becomes a member of the body corporate, with rights to vote in meetings and obligations to contribute to the body corporate for the upkeep and maintenance of the common property.
Other interests and restrictions [9.480] There are many types of interests that may be created in or over land, and many restrictions can apply to owners of land or interests in it. Common forms of interests and restrictions include the following:
Leases [9.490] A lease vests in the tenant (lessee) a possessory interest in the land the subject of the lease as against the landlord (lessor) in return for rent. That possessory interest is, generally, at the exclusion of all others, including the landlord (who usually is granted limited rights of access under the lease for purposes such as periodic inspections of the property). Many residential leases are governed by statutes protecting tenants’ rights as are commercial leases under separate legislation. Leases can be registered (recorded on the title of the property and noting any term of renewal subject to an option to renew) or unregistered (if of short duration).
Licences [9.500] A licence is a permission to enter or remain on land where it would otherwise constitute a trespass. A licence confers no interest in the land itself (unlike the lease) and so it does not confer an exclusive right of possession.
Profit à prendre [9.510] A profit à prendre is a licence to enter upon another’s land and to take something from it. It is most commonly used when granting people rights to fell timber and remove
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Chapter 9 Property and Securities Law: Concepts of Ownership
it as their own, but can be used in a multitude of circumstances including the taking of fruit from another’s orchard and taking the product of crops on another’s land.
Easements [9.520] An easement is a dealing in land by which the parcel of land subject to the easement (the servient tenement) is burdened for the benefit of another parcel of land (the dominant tenement) so as to afford better use of the dominant tenement (being land held in different ownership). Common forms of easements are those created to provide a right of way over the servient tenement in order to allow access to the dominant tenement (eg a driveway or footway). Other common forms of easements include rights of support of a building on adjacent land and rights relating to party walls (eg walls common to adjoining terrace houses) and fences. Easements can be created by agreement, usage and by statute (eg rights granted to various authorities which supply utilities to land such as water, sewerage and power). An easement does not confer any exclusive possession over the servient tenement but, upon being created (usually by registration), that land becomes subject to the easement thereafter for the benefit of the dominant tenement.
The dichotomy between personal liberties and property rights is a false one. Property does not have rights. People have rights. The right to enjoy property without unlawful deprivation, no less than the right to speak or the right to travel, is, in truth, a “personal” right, whether the “property” in question be a welfare check, a home, or a savings account. In fact, a fundamental interdependence exists between the personal right to liberty and the personal right in property. Neither could have meaning without the other. Lynch v Household Finance Corp 405 US 538 at 552 (1972) per Stewart J.
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Restrictive covenants [9.530] A restrictive covenant operates to prevent a landowner from doing something with their land which they would otherwise be free to do. There is a considerable overlap between restrictive covenants and easements. Modern restrictive covenants act as a form of land-use planning and development control, and are often imposed at local or State Government level by statutes or regulations relating to town planning subdivisions and building. Common forms of restrictive covenant relate to the type of building materials that must be used when constructing dwellings on the relevant land (often stipulating that buildings must be of brick construction with tiled roofs and suchlike), the position of buildings on lots, and the use to which buildings may be put.
9.4 PERSONAL PROPERTY [9.540] The general rule that whatever is not realty is personalty has already been noted. Other legal systems distinguish between moveable and immoveable property, but the distinction arising out of English feudal tenure is not so straightforward. The distinction is not simply between land and things that are not land. There are interests in land which nevertheless are personal property, and known as chattels real, in distinction to chattels personal. Such an interest is the lease. In fact, a long-term lease of land may be of substantially the same character and effect as the interest of a tenant for life. Yet, the first is personalty and the latter is realty. The reason for this curious result is that, in feudal times, the grant of a leasehold did not carry an obligation for military service to the Crown, or its nobles, and accordingly was not subject to the same legal processes as realty. It has been seen that the terms real and personal derive from the legal actions available to property owners to protect their rights. If an owner was dispossessed of land, then that owner could recover it –the action sought the return of the thing itself and became
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known as a real action. Property other than land might not be so recoverable –it might have ceased to exist –and any action was therefore against the wrongdoer as a personal action. Thus, the legal process provided the description of the property involved as either real or personal.
Personal property defined [9.550] Personal property is usually divided into: • choses in possession –physical things; and • choses in action –intangible things. Choses in possession are physical objects. Examples include cars, sawn timber, books, a desk, a computer, a chair and so forth. They constitute goods as that word is generally understood. By their nature, they are capable of being physically possessed. The owner is able to exert physical control over such objects, albeit in differing ways. Choses in action are generally intangible things unable to be physically enjoyed. Instead, it is a right that only can be claimed or enforced if necessary in a court of law. Many such rights exist, including patents and copyright, shares, insurance policies and debts.
Choses in possession
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Absolute ownership and possessory ownership The law the lawyers know about is property and land; But why the leaves are on the trees, And why the waves disturb the seas, Why honey is the food of bees, Why horses have such tender knees, Why winters come when rivers freeze, Why Faith is more than what one sees, And Hope survives the worst disease, And Charity is more than these, They do not understand. HDC Pepler, The Devil’s Devices (1915).
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[9.560] It was observed earlier that the law regards property primarily as a right rather than as an object. What it is describing is a right of ownership that falls into two major classifications. Absolute ownership [9.570] There is first the right of absolute ownership, being a right to property (real or personal) that is superior to any right which might be established by another. The Torrens system provides the means for establishing that right with respect to real property. In the case of personal property, it is necessary to establish the basis –the chain –of ownership. That chain will be short in the case of the artist who creates a painting but longer if the owner bought the painting from someone else. Possessory ownership [9.580] The second right of ownership is the right to possessory ownership. This right is subject to being overridden by a claim from the absolute owner, but is otherwise a good title against the rest of the world. If the painting had been sold to its current possessory owner by someone who had stolen it, then the person from whom it was stolen could reclaim it from the purchaser. In the absence of such a claim, however, the possessory owner could demand the return of the painting from anyone else who stole it. The right to possession may also arise from the creation of a bailment ([9.860]) or lien ([9.1000]) in respect of the item of property.
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Chapter 9 Property and Securities Law: Concepts of Ownership
IN CONTEXT
Possession by finding [9.590] The basic rule was established as long ago as in the case of Armory v Delamirie
(1722) 93 ER 664. In that case, a chimneysweep’s boy found a jewel in a flue and took it to a goldsmith to be valued. The goldsmith refused to return it to him and the boy succeeded in an action to recover it. The fact of the boy’s possession of the jewel was sufficient evidence of ownership against anyone who had no better title. If the true owner had appeared and demanded the jewel, then it would have had to be returned, but, unless and until that event occurred, the boy’s ownership was good against others with no prior right.
Without the sense of security which property gives, the land would still be uncultivated. Francois Quesnay, Maximes.
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This rule also applies to goods found on private property but in a place to which the public is invited. An example is Bridges v Hawkesworth (1851) 21 LJ (QB) 75. In that case, the finder picked up a packet of money from the floor of a shop. The identity of the true owner was not established and the finder was held entitled to the money over the claim of the owner of the shop in which it had been found. However, where premises are not open to the public, the owner of the premises is entitled to claim items found on the property subject, of course, to any claim by the true owner of those items. That the old adage “finders keepers, losers weepers” is not entirely accurate is further established by cases dealing with lucky finds by the buyers of goods. In 1841, the court in Merry v Green (1841) 151 ER 916 decided that money found in a desk bought at auction had to be returned to the vendor, even though he had no knowledge of its existence. He had the prior possessory title. These cases all demonstrate the importance of lawful possession; generally speaking, if a person has lawful possession, then it is only the true absolute owner who can dispute such title.
National Crime Authority v Margaret Elizabeth Flack [1998] FCA 932
Case Study
Background
[9.600] The extent to which the law will protect the interests of a claimant in possession but without true ownership is demonstrated in this somewhat humorous case. Facts On 13 April 1994, police officers executed a search warrant on Mrs Margaret Flack’s premises at 6 Broughton Street, Glebe. The police officers had executed the search warrant hoping to locate narcotics suspected of being stored on the premises by Mrs Flack’s son, Glen Flack. Despite the search, no prosecutions were launched against Glen. During the search, police uncovered a black briefcase containing $433,000. The case was found at the top of a high cupboard behind old, empty bags. On being shown the briefcase, Mrs Flack stated that she did not know whose case it was and that she had never seen the case before. After the case had been opened and the contents exposed, Mrs Flack responded with exclamations of “Oh my God” and “I’ve never seen it before, I swear”. Some of the notes were dated just a few days prior to the search, suggesting that the bag had only recently been
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placed in the cupboard. On Mrs Flack’s own assertions, she had not been to that part of the cupboard for possibly 12 years. Mrs Flack was renting the premises from the NSW Department of Housing, and had done so for some 12 or 13 years. Both Mrs Flack’s daughter and son Glen had keys to access the premises. Clearly, NCA investigators suspected that the bag had been placed in the cupboard by Glen and that the money was possibly the result of a bank robbery. The bag and money were seized. Issue Mrs Flack later laid claim to the money and the question was whether this claim could be maintained. Decision Despite Mrs Flack’s own admission that the existence of such a large amount of money in her home could not be explained and was “very suspicious”, she was found to have the right to retain the money in the absence of a claim by the true owner. Justice Heerey concluded: Mrs Flack was a real possessor since she was the occupier of a private house and is to be taken to have manifested an intention to control goods within the house. Somebody else was the true owner, and Mrs Flack could not resist a claim by that person to hand over the cash. If as a result such other person was at risk of prosecution and conviction for a criminal offence, then the criminal law would have to take its course.
Implications
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This case confirms the legal value placed on possession in the absence of ownership, or even knowledge, of goods.
Choses in action I do not sit here to make new rules, but to administer the settled rules of property, and to keep the land-marks of the law sacred. Sugden LC, Marjoribanks v Hovenden (1843).
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[9.610] The classic definition of choses in action comes from Torkington v Magee [1902] 2 KB 427 at 430: All personal rights of property which can only be claimed or enforced by action, and not by taking physical possession.
Hence, it is the legal rights in relation to property and not actual possession of the property that become the focus. A share in a company is a chose in action, despite the fact that it is represented by a tangible share certificate and is stated to be personal property under s 1070A of the Corporations Act 2001 (Cth). The reason is that the true meaning and value of the share spring from the rights it carries, for example, to a dividend, to vote, to participate in a winding-up, and so on. Those rights can only be enforced by legal action. The possession of the share certificate itself is of little comfort. When one recalls the issue of a certificate of title to land discussed earlier, the distinction becomes apparent. The owner of the land has the certificate and the land. The owner of shares has the certificate and rights against the company.
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Chapter 9 Property and Securities Law: Concepts of Ownership
A debt, like a share, cannot be physically enjoyed. The creditor simply has a right to recover whatever is outstanding. Despite being sorely tempted (and despite the definition of “larceny” excluding an honest claim of right made in good faith), creditors should not simply descend on their debtors and physically take the money. Recourse must be had to the right of action. Aspects of intellectual property (such as patents and copyright) are examined separately below.
Dealing with personal property
I can’t stand this proliferation of paperwork. It’s useless to fight the forms. You’ve got to kill the people producing them. Vladimir Kabaidze, manager in Russia in the pre-Glasnost era.
Sale, deed, gift or assignment [9.620] At the beginning it is necessary to examine the distinction that the law draws between choses in possession (tangible objects) and choses in action (intangible rights).
Access to Digital Assets Upon Death or Disability
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[9.625] In August 2018, the NSW Law Reform
Commission released a consultation page Access to digital assets upon death or incapacity. The significance of digital assets and the need to address issues of access to them is introduced in Chapter 2 (references omitted): The nature of property and our methods of communication have changed significantly in recent years. Most people now have at least some items and communications stored digitally, either on a tangible electronic device (such as a laptop or phone) or on a third party’s server. This might include, for example, emails, online bank accounts, social media profiles and photographs. In this paper, we refer to such items and communications as “digital assets”. There are practical and legal problems in managing the digital assets of people who have died. Similar problems arise if someone can no longer manage their digital assets because of, for example, a brain injury, dementia or a serious illness. Users
of digital assets may not consider the fate of these assets when they can no longer manage them, and often do not expressly provide for their disposition in the event of death or incapacity. Even when they do, their instructions may conflict with the terms of service agreements that users enter into when they set up online accounts. Some service providers have explicit policies on what will happen to a person’s account when they die, but many do not. Even when these policies are included in a service agreement, users may not be fully aware of their effect, and may fail to make provision for accessing these assets or applying the policies. Access to a person’s digital assets upon their death or incapacity is increasingly important. Personal representatives such as executors, administrators, attorneys under a power of attorney and trustees may need access to digital assets to deal effectively with a person’s financial or personal affairs. Friends and relatives may also want access to these assets for sentimental reasons. Arguably, the current law in NSW does not effectively address these issues.
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Take Action on Digital Assets [9.628] Duncan Hughes, Australian Financial Review (21 July 2018) roverdrover1 ?
Possum1949 ?
QWERTY123 ? Rabbitohs14 ?
Kookachook49 ?
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49Greenham ?
Have you made plans to protect or pass on your digital assets –financial and personal –after you die? If not, you’re in good company. Most Australians don’t know they are at risk of losing all their online chattels if they are killed or incapacitated. That’s because they could take their secret passwords to the grave, have their assets locked away in perpetuity by social media networks or exhumed by digital grave robbers and sold on to the dark web, an online “netherworld” for trading
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illegal and stolen goods from identification to drugs and guns. An estate planning report last year by Charles Sturt University and The University of Adelaide found that of Australians who had digital assets, just over 70 per cent had made no contingency plans for them. “This is a major cause for concern as legislation regarding digital assets and their transferability or access by executors or beneficiaries on death is non-existent in Australia as it is in most jurisdictions”, the report said.
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Chapter 9 Property and Securities Law: Concepts of Ownership
Baby Boomers, who have grown up and old with digital technology, are the richest generation in the nation’s history and will be passing on trillions of dollars in assets over coming decades. There is more than $400 billion worth of property owned by people in their 80s and hundreds of billions of dollars in shares, bank accounts and other assets.
will only increase as social media becomes more entrenched in our everyday lives”, Hacker says.
But financial assets such as PayPal accounts, details of share trading accounts and financial institution accounts, bitcoin, photographs, potentially valuable domain names or online businesses could follow their owners into eternity without trace, or ownership pass on to online providers.
It typically happens because they die intestate (without a will), having been killed in an accident or other unforeseen incident.
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“These valuable social media and digital financial assets are at risk”, warns Anna Hacker, national manager of estate planning for Australian Unity Trustees.
Investors in Bitcoin and other types of cryptocurrency, such as Ethereum, Litecoin and Ripple, could routinely be taking their profits to the grave because they have failed to provide a third party with details of their account.
“Ownership of digital assets is a difficult legal area, as legislation and the social media platforms themselves have struggled to keep up with developments, but it is nevertheless an area that should be considered in your estate planning”, says Hacker.
Digital assets cover anything from images to multimedia files, videos, music, blogs, online records, games that have monetary and/ or sentimental value to the creator or successors.
Within decades the number of accounts set up by people who have since died is expected to exceed the number of those owned by the living, creating some complex legal issues and a potential treasure house of assets and data.
“Facebook pages, YouTube comments and other social media will live on after we die, a trend that
…
Take stock Online assets owned by Australians Email accounts Social media accounts Financial institutions & payment accounts Personal & financial records (medical, tax) Online action site accounts (eBay, Gumtree) Government department records (business, tax) Cloud storage (Dropbox, LiveDrive) Content drivers (Google, Amazon, iTunes) Share trading accounts None of the these Domain names and websites Software as a service Blogs 0
10
20
30
40
50
60
70
SOURCE CHARLES STURT UNIVERSITY, THE UNIVERSITY OF AOBLADE
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Choses in possession [9.630] Apart from the complexities involved in assigning choses in action (see [9.640]), personal property, like real property, is readily assignable. Items of physical property are generally transferred in one of the following ways: • gift; • sale; • deed; • will. This simple list involves some complications, for example, the fact that a “gift” (without an accompanying deed) must include delivery of the goods to the recipient in order to be valid. The more usual manner of disposal is by contract for sale. The formal requirements are much less than those for the sale of land. Indeed, every purchase of goods in a supermarket constitutes a contract for the sale of personalty. However, contracts for the sale of goods are subject to the Sale of Goods Act of the relevant State or Territory, which makes special provision as to transfer of title and terms to be implied in the sale. That legislation is discussed fully in Chapter 20.
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Choses in action [9.640] Before legislative enactment, choses in action were not assignable at common law. Equity, therefore, provided the means for assignment but the rules became highly complex. All Australian States now have enacted provisions to allow assignment at law (eg Civil Law (Property) Act 2006 (ACT), s 205; Conveyancing Act 1919 (NSW), s 12; Law of Property Act 1936 (SA), s 15; Property Law Act 1958 (Vic), s 134; Property Law Act 1969 (WA), s 20). The legislation requires that the assignment be absolute (ie transfer of the whole of the chose in action or debt by the assignor to the assignee) and be in writing under the hand of the assignor, and be notified to the person responsible for performing under the chose in action (usually the debtor). Where those conditions cannot be or are not met, then the assistance of equity is needed to enforce the assignment and it is available (albeit on restricted terms). There are also certain choses in action which, by their nature, are equitable and these can only be enforced and assigned through the equity courts. Examples are interests in a trust, in a partnership, or in an estate. Assignment of contractual rights is discussed in more detail in Chapter 13.
The sale of personal property – goods Much of the existing wealth in this country takes the form of rights that do not fall within traditional common law concepts of property. Goldberg v Kelly 397 US 254 at 262 (1970) per Brennan J.
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[9.650] The fundamental objective of a contract of sale is the transfer of property or title in the goods from the seller to the buyer (as discussed above, in this context “property” refers to legal interests in the items concerned, and so colloquially we may refer to this as transferring “ownership” –it is different to “possession”). The time at which property in the goods passes to the buyer is particularly significant. At that point, the buyer becomes the owner of the goods and can exercise the rights that ownership confers in respect of them. The time of the passing of property is also significant because, unless otherwise agreed, risk passes with ownership from the seller to the buyer (and may require
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Chapter 9 Property and Securities Law: Concepts of Ownership
consideration of insurance of the property by the seller up until transfer and by the buyer from that point onwards). Each State and Territory has virtually identical legislation regulating sale of goods: Sale of Goods Act 1954 (ACT); Sale of Goods Act 1923 (NSW); Sale of Goods Act 1972 (NT); Sale of Goods Act 1896 (Qld); Sale of Goods Act 1895 (SA); Sale of Goods Act 1896 (Tas); Goods Act 1958 (Vic); Sale of Goods Act 1895 (WA). There is also potential for the Competition and Consumer Act 2010 (Cth) to apply to a sale from a corporation to a consumer as defined (“business to business” sales having been almost entirely regulated by the Sale of Goods Acts). [9.660] Importantly, goods can remain in the possession of the seller even though property in them has passed to the buyer; or, as is very common in commerce, goods can be in possession of the buyer without property yet having been transferred to the buyer. There are a multitude of other practical scenarios where “property” and “risk” need to be determined: for example, who owns goods while being transported to the buyer’s premises and who bears the risk if they are lost or damaged in transit? The importance of determining when property has passed was summarised by PS Atiyah, The Sale of Goods (8th ed, Pitman, 1990) p 285, in these terms: • If the property in the goods has passed to the buyer, then the buyer will generally have a good title to them if the seller becomes insolvent or bankrupt while the goods remain in the seller’s possession.
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• If the goods are sold subject to a retention of title clause and they have been delivered to the buyer, then the seller may have a good title to the goods if the buyer becomes insolvent or bankrupt. • The right to sue a third party for damage to, or loss of, the goods may depend upon which of the seller or the buyer has the property in them. • Who bears the risk of loss or damage to the goods prima facie passes when property passes (Sale of Goods Act 1954 (ACT), s 25; Sale of Goods Act 1923 (NSW), s 25; Sale of Goods Act 1972 (NT), s 25; Sale of Goods Act 1896 (Qld), s 23; Sale of Goods Act 1895 (SA), s 20; Sale of Goods Act 1896 (Tas), s 25; Sale of Goods Act 1895 (WA), s 25; Goods Act 1958 (Vic), s 25). • Usually the seller can only sue for the price of the goods if property in them has passed to the buyer (Sale of Goods Act 1954 (ACT), s 52; Sale of Goods Act 1923 (NSW), s 51; Sale of Goods Act 1972 (NT), s 51; Sale of Goods Act 1896 (Qld), s 50; Sale of Goods Act 1895 (SA), s 48; Sale of Goods Act 1896 (Tas), s 53; Sale of Goods Act 1895 (WA), s 48; Goods Act 1958 (Vic), s 55). Readers should also understand that terms for payment are often agreed independently of property and risk. So, it is not unusual for a buyer to have possession, property and risk in goods, but still owe the seller the price.
Risk [9.670] Unless otherwise agreed, the goods remain at the seller’s risk until the property in them is transferred to the buyer. When property is transferred to the buyer, the goods are at the buyer’s risk, whether delivery has been made or not. However, if
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If you have no money, be polite. Danish proverb.
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delivery has been delayed through the fault of either the buyer or seller, then the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault. “Risk” includes deterioration and damage, whether accidental or caused by third parties. In the absence of agreement to the contrary, and subject to the exceptions noted, the buyer assumes the benefits and the burdens of ownership from the time of the passing of the property in the goods, at which time risk passes from the seller to the buyer (or in practice where significant contracts are involved, from the seller’s insurance company to the buyer’s insurance company).
Allied Mills Ltd v Gwydir Valley Oilseeds Pty Ltd [1978] 2 NSWLR 26 [9.680] This case demonstrates the interaction of property, risk and fault.
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A buyer purchased 130 tonnes of grain meal, held in the seller’s store, for $55 per tonne. Under the rules for ascertaining when property passed (see [9.690]), property in the meal passed at the time the contract was made. There was a fire at the store and the meal was destroyed. The seller argued that the meal was at the risk of the buyer as property had passed, even though not yet delivered to the buyer. However, the buyer argued that the seller had failed to deliver the meal on time, as set out in their contract, and so the buyer’s loss was caused by the seller. Despite the fact that property, and therefore risk, had passed to the buyer, the seller was held liable for the loss suffered by the buyer. This was because delivery was delayed due to the fault of the seller, making the seller liable for any loss that flowed from that delay. It is of course better to have contractual conditions for when property and risk should pass, rather than relying on these legal defaults. However, even in such cases, the law may intervene as it did in this case.
Rules for the passing of property [9.690] Property passes at the time the parties intend for it to pass –this would usually be set out in any contract between them. Where the parties have failed to agree, or their intention is otherwise unclear, the Sale of Goods Acts provide a set of rules for determining when property passes (Sale of Goods Act 1954 (ACT), s 23; Sale of Goods Act 1923 (NSW), s 23; Sale of Goods Act 1972 (NT), s 23; Sale of Goods Act 1896 (Qld), s 21; Sale of Goods Act 1895 (SA), s 18; Sale of Goods Act 1896 (Tas), s 23; Sale of Goods Act 1895 (WA), s 18; Goods Act 1958 (Vic), s 23). The rules can be summarised as follows: • Rule 1 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, are postponed.
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Chapter 9 Property and Securities Law: Concepts of Ownership
• Rule 2 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 is done and the buyer has notice thereof. • Rule 3 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 perform some other act or thing for the purpose of ascertaining the price, the property does not pass until such act or thing is done and the buyer has notice thereof. • Rule 4 Where goods are delivered to the buyer on approval or on “sale or return” or other similar terms, the property therein passes to the buyer: (a) when the buyer signifies approval or acceptance to the seller, or does any other act adopting the transaction;
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(b) if the buyer does not signify approval or acceptance to the seller, but retains the goods without giving notice of rejection, then if a time has been fixed for the return of the goods, then on the expiration of such time and, if no time has been fixed, then on the expiration of a reasonable time (what is a reasonable time is a question of fact). • Rule 5(1) 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 thereupon passes to the buyer. Such assent may be express or implied, and may be given either before or after the appropriation is made. • LegisRef: Rule 5(2) LegisTitle: Goods Act 1958 LegisJurisdiction: (Vic) Rule 5(2) Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not) for the purpose of transmission to the buyer and does not reserve the right of disposal, the seller is deemed to have unconditionally appropriated the goods to the contract.
Retention of title: Romalpa clauses [9.700] It has become commonplace for commercial sale of goods contracts to include retention of title clauses, frequently known as Romalpa clauses (after the leading case: Aluminium Industries BV v Romalpa Aluminium Ltd [1976] 2 All ER 552). The aim of these clauses is to preserve for the seller the rights in respect of the goods sold to the buyer until the seller has been paid the purchase price in full (as it is common in commercial sales that goods are delivered and payment is deferred, eg for “payment in 30 days”). Typically, an unpaid seller will be one of potentially many unsecured creditors if the buyer becomes insolvent before payment is made, and the unpaid-for goods form part of the assets of the buyer available for distribution among all the creditors. A successful Romalpa clause ensures that the seller retains all property interests in delivered goods until payment has been made in full and ensures that the seller can enter the buyer’s premises to recover the goods. Note that personal property which is the subject of a Romalpa clause can be the subject of a security interest registered in the Personal Property Securities Register (PPS Register) (see [9.1070]).
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He has left his body to science –and science is contesting the will. David Frost, Live from London (1983).
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Chattis Nominees Pty Ltd v Norman Ross Homeworks Pty Ltd (Receiver Appointed) (in liq) (1992) 28 NSWLR 338 [9.710] A furniture manufacturer’s supply contract included the following clause: Ownership in such goods is retained by [the manufacturer] until payment is made for the goods and for all other goods supplied by [the manufacturer]. If such goods are sold by the customer prior to payment and if they shall become constituents of other goods then the proceeds of sale thereof shall be the property of [the manufacturer].
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Cohen J in the NSW Supreme Court held that the clause had the effect that property in the goods did not pass until the goods were paid for. The unpaid seller was entitled to recover the goods from the liquidator appointed on the buyer’s winding-up. As illustrated at [9.700], a Romalpa clause can purport to enable the unpaid seller to recover not only the goods themselves but proceeds from sales by the buyer. The effectiveness of such clauses in this context was examined by the High Court in Associated Alloys Pty Ltd v Metropolitan Engineering & Fabrications Pty Ltd [2000] HCA 25 (11 May 2000). This case, and the many others that preceded it, demonstrate the practical problems with such clauses: if drafted incorrectly, they can operate as unregistered “charges” against the company’s property –and unregistered charges cannot be enforced against a liquidator. However, since the repealing of Ch 2K (Charges) of the Corporations Act 2001 (Cth), such issues regarding “security interests” over personal property (formerly charges) now are governed by the relevant provisions of the Personal Property Securities Act 2009 (Cth) (the PPS Act) discussed at [9.1070]. For present purposes, it is only relevant to recognise that the objective of a Romalpa clause would largely have been defeated if it operated as a charge. Consider the Associated Alloys case at [9.720] and the practical lessons that may be learned from it.
Associated Alloys Pty Ltd v Metropolitan Engineering & Fabrications Pty Ltd [2000] HCA 25
Case Study
Background
[9.720] The High Court of Australia confirmed the general validity of Romalpa clauses, but also demonstrated the key practical difficulties with them. Facts This case involved the supply of metal by Associated Alloys to Metropolitan Engineering & Fabrication for the purpose of manufacturing pressure vessels. Under the supply contract, Associated Alloys had a simple retention of title clause as well as a clause that sought to ensure that Metropolitan Engineering held part of the proceeds of the sale of the pressure vessels on trust for Associated Alloys. Metropolitan Engineering experienced financial distress and eventually went into liquidation. The liquidator argued that the proceeds of sale clause operated as a charge and, being unregistered, was unenforceable against the liquidator, which would result in making Associated Alloys an unsecured creditor in relation to its unpaid amounts. Decision The High Court upheld the proceeds of sale clause, stating that it created a valid trust over part of the proceeds of the sales by Metropolitan Engineering. This meant that Metropolitan Engineering held part 514
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Chapter 9 Property and Securities Law: Concepts of Ownership of its cash from sales for the benefit of Associated Alloys, and that this money could not be touched by the liquidator (and given to creditors generally). However, because there was no system adopted by Metropolitan Engineering to account for the part of the proceeds of sale that related to the metal sold to it by Associated Alloys, then Associated Alloys’ claim failed –basically, it could not prove that the said proceeds had been received by Metropolitan Engineering as required for the creation of the “trust over proceeds of sale” pursuant to the clause and, even if those proceeds had been received, nor could it prove how much of the cash of Metropolitan Engineering was to be held in trust for it. If such problems, and others, can be overcome, then such a “trust over proceeds of sale” clause will allow suppliers to trace proceeds from sale, securing repayment of moneys owing in priority to other creditors. Implications Many commentators considered that this decision opened up the field for more extensive use of Romalpa clauses, although it has been heavily criticised. But note that, even if one is able to draft a clause that creates a trust over sales proceeds, its effect may be defeated by the purchaser’s failure to maintain accounting records sufficient to show what property the trust was over. This will require very detailed drafting in the future to overcome such a result and, where security over personal property is concerned, will require the registration of relevant “security interests” under the provisions of the PPS Act for the protection and enforcement of such interests.
IN CONTEXT
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Key issues with Romalpa clauses [9.730] From the case law, the following key practical issues emerge with the use of Romalpa clauses: • The terms of trade between the buyer and seller must expressly include an agreement that the Romalpa clause is included for it to be effective. • A simple reservation of title clause will be ineffective if the goods are not specifically identifiable in some way. Once goods are used up by the buyer, consumed into other goods (as was the case in Associated Alloys), or on-sold, the simple clause will cease to operate with respect to those goods. • A simple clause may operate as a charge if it fails to reserve to the seller the full beneficial and legal interests in the goods supplied. • An “all monies clause” can operate effectively and not as a charge. An “all monies clause” seeks to retain title to any goods supplied, and still in existence, until any monies owed by the buyer to the seller have been repaid in full. • A “proceeds of sale clause” must be expressed to operate as a trust. It should not attempt to create a trust over book debts, but only the monies when received (otherwise it will be a charge). It should not create a charge over the entire proceeds of sale – only the proportion that reflects the value of the seller’s goods in the finished goods now being sold by the buyer. The debt owed should cease to exist once the trust comes into existence. Lastly, it should have a mechanism to calculate the amount of such proceeds held on trust, so that the trust does not fail due to an inability to account for such proportion (as happened in Associated Alloys).
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The transfer of title by a non-owner The nemo dat rule [9.740] One of the best-known Latin maxims still frequently cited today is nemo dat quod non habet –no person can pass a better title than that person possesses. This rule, often abbreviated to nemo dat, is enshrined in the Sale of Goods Acts, for example s 26(1) of the Sale of Goods Act 1923 (NSW): Subject to the provisions of this Act, where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to the goods than the seller had…
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Equivalent provisions in other jurisdictions are: Sale of Goods Act 1954 (ACT), s 26; Sale of Goods Act 1972 (NT), s 26; Sale of Goods Act 1896 (Qld), s 24; Sale of Goods Act 1895 (SA), s 21; Sale of Goods Act 1896 (Tas), s 26; Sale of Goods Act 1895 (WA), s 21; Goods Act 1958 (Vic), s 27. It is important to note, however, that the application of the nemo dat rule now has been modified in relation to security interests over personal property affected by the provisions of the PPS Act (see [9.1070]). When a person with experience meets a person with money, pretty soon the person with experience will have the money and the person with the money will have the experience. Estee Lauder, perfumer.
The classic example of the nemo dat rule concerns the “sale” of a motor vehicle by a thief. The thief has no title to the vehicle and can therefore pass no title (or ownership) to the purchaser. The nemo dat rule provides that the original owner retains title to the vehicle and can recover it from the innocent third party through “self-help” (the right of recaption) or through a tortious action for detinue (to recover the goods) or conversion (to recover their value). The nemo dat rule applies even if the vehicle has passed through a number of hands: as the thief had no title, each transferee has a defective “title” and the true owner can recover it from the person ultimately in possession. The party from whom possession of the vehicle is claimed by the true owner has an action against the vendor who was not able to pass good title (under the implied term as to title under the sale of goods legislation or the consumer guarantee as to title under s 51 of the Australian Consumer Law), but this action in practice breaks down when it is sought to be exercised against the thief who has probably long since decamped. In the interests of commercial convenience and to preserve the integrity of the marketplace, a number of exceptions to the nemo dat rule have evolved which are today enshrined in the Sale of Goods Acts. If an exception operates, a vendor without title, or with a defective title, is able to pass good title to a bona fide purchaser (ie one without notice of the defective title and acting honestly) to the exclusion of the original owner. As with other areas of the law, a balance has to be drawn, in this case as to which of two innocent parties (the original owner or the bona fide purchaser) will suffer for the unauthorised or fraudulent actions of another. Because bitter experience proves that personal actions (for breach of contract or in tort) are unlikely to be successful in practice, the availability of a real action to recover the property is of the utmost importance.
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Chapter 9 Property and Securities Law: Concepts of Ownership
The exceptions to nemo dat [9.750] In practice, some of the exceptions are more likely to apply than the rule. The primary exceptions to the nemo dat rule are sales: • where a person is acting under the owner’s authority or consent; • under special common law or statutory powers of sale; • by a person having a voidable title; • by a seller in possession after the sale; • by a buyer in possession after the sale; • made by agents. Special powers of sale [9.760] Contracts of sale under “any special common law or statutory power of sale, or under the order of a court of competent jurisdiction” (s 26 in NSW and equivalent provisions in other jurisdictions) confer good title on the buyer which prevails over the claims of the original owner. Goods confiscated in breach of customs regulations, seemingly abandoned motor vehicles, goods left in hotel rooms and on buses all can be sold in prescribed circumstances and provide examples of cases where the buyer obtains good title to the exclusion of the original owner.
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Voidable title [9.770] This exception simply enshrines in the Sale of Goods Acts the general rule that if a contract is merely voidable and not void, then the right to rescind (to set it aside) cannot be exercised if the goods have been sold to a buyer acting in good faith and without notice of the seller’s defective title. In Lewis v Averay [1972] 1 QB 198, for example, a “rogue” paid for a car using a cheque which was dishonoured after he had sold the car on to a buyer acting in good faith. The court held that the contract was voidable for fraudulent misrepresentation. However, because the rogue’s defective title had not been avoided by the time he sold the car to a purchaser who bought the car in good faith, title to the car passed to the defendant under the “voidable title” exception to nemo dat. Note that, since 2012, persons holding security interests in personal property (such as motor vehicles) are able to register such interests on the PPS Register and that such registration will provide different outcomes to the general position outlined herein (see [9.1070]).
Never catch a loose horse. You could end up holding the fucking thing all day. Lester Piggott, jockey.
Seller in possession [9.780] A buyer from a person who has continued in possession of, for example, a motor vehicle, after its earlier sale to the original purchaser, obtains a good title to that vehicle as against the original buyer (Sale of Goods Act 1954 (ACT), s 29; Sale of Goods Act 1923 (NSW), s 28(1); Sale of Goods Act 1972 (NT), s 28; Sale of Goods Act 1896 (Qld), s 27; Sale of Goods Act 1895 (SA), s 25; Sale of Goods Act 1896 (Tas), s 30; Goods Act 1958 (Vic), s 30; Sale of Goods Act 1895 (WA), s 25).
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Pacific Motor Auctions Pty Ltd v Motor Credits (Hire Finance) Ltd [1965] AC 867
Case Study
[9.790] The purchaser of a car from a dealer acquired good title to the car despite the dealer having
earlier sold it to a finance company under a “floor plan” financing arrangement, common in the motor vehicle industry. In this case, because of the dealer’s financial difficulties, the financier had revoked the authority to sell the car on the floor plan, but the “seller in possession” exception to nemo dat nevertheless conferred good title on the subsequent purchaser. The financier was limited to a personal action against the dealer for monies owed on the vehicle resold. A recent and novel but unsuccessful attempt at excluding the application of the nemo dat rule can be found in Chelliah v NSW Police [2018] NSWSC 557.
The Nemo Dat Rule
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Chelliah v NSW Police [2018] NSWSC 557
[9.800] Keith Hall, the late husband of the second defendant, Cheryl Hall, had owned a Lamborghini Espada sports car (“the Espada”) which he purchased in the 1970s. After Mr Hall’s death on 20 March 2015, the residue of his Estate passed to Mrs Hall under his Will, which was admitted to probate with Mrs Hall as the executor of the Estate. The Espada, now a collector’s item, was unregistered and garaged in a locked shed located on a property on Mitchells Island (at the mouth of the Manning River) where Mrs Hall had lived with her husband. Sometime before June 2016, the Espada was removed from the shed without authority from either the late Mr Hall or Mrs Hall. It was not until the first half of June 2016 that Mrs Hall discovered that the Espada had been stolen, whereupon she reported the matter to the Police on 14 June 2016. It transpired that, in or about February 2016, the Espada materialised on the Central Coast in the possession of one Kevin Lincoln who was advertising the sale of the vehicle among classic car enthusiasts with a price of $70,000 as at 27 February 2016. On or about 29 February 2016, after an inspection of the Espada and negotiation as to its price, the vehicle was purchased by
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the plaintiff, Mr Charles Chelliah, for $32,500 (ie less than half the price being sought only 2 days earlier). Having been contacted by the Police on 17 June 2016 and advised that the Espada was suspected of being stolen, Mr Chelliah surrendered the vehicle to the Police on 21 June 2016. The Police then commenced proceedings in the Local Court pursuant to s 219 of the Law Enforcement (Powers and Responsibilities) Act 2002 (NSW) for, among other things, an order that the Espada be delivered to the person who appears to be lawfully entitled to the property. The hearing of that matter began on 1 June 2017. On 31 May 2017 (ie the day before the hearing began and almost 12 months after surrendering the Espada to the Police), Mr Chelliah purported to register a security interest in relation to the Espada pursuant to the relevant provisions of the PPS Act (note: almost 12 months earlier, on 18 June 2016, Mr Chelliah performed a search of the PPS Register which confirmed that no security interest had been registered in relation to the Espada as at that date). At the hearing, counsel for Mr Chelliah conceded that the application of the nemo dat rule would result in an order that Mrs Hall was entitled to
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Chapter 9 Property and Securities Law: Concepts of Ownership
possession and legal ownership of the vehicle but argued that, in this case, the application of the rule was excluded on the basis of two statutory exceptions to the rule: (1) s 45 of the PPS Act and, in the alternative, (2) s 27 of the Sale of Goods Act 1923 (NSW) (“the SG Act”).
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The decision of the Local Court regarding the s 219 application was that Mrs Hall was lawfully entitled to the Espada. That decision was based on the nemo dat rule which applied because the Court found that, in this case, neither of the two statutory exceptions to the rule as argued by the Plaintiff were effective to exclude the rule’s operation. That decision was appealed to the Supreme Court where the reasons for it were upheld. First, the argument that s 45 of the PPS Act had the effect of allowing Mr Chelliah to take the car free of any other security interest (including a security interest in favour of Mrs Hall as argued by Mr Chelliah) was rejected. This was because Mr Chelliah was a buyer for value and because no other security interest was registered in priority to his. Mrs Hall’s interest in the Espada was one of outright ownership by virtue of the vehicle being gifted to her as the beneficiary of Mr Hall’s Estate by the terms of his Will. Therefore, Mrs Hall’s interest was not, and could not be, a “security interest” within the meaning of s 12(1) of the PPS Act, that is, “…an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation”. Further, it was held that the PPS Act is intended to regulate the priority and
enforcement of competing security interests, and is not designed, nor intended, to determine legal title or ownership. Those reasons also applied to Mr Chelliah’s purported security interest, thereby excluding the operation of the PPS Act in this case. Second, the argument that s 27 of the SG Act gave Mr Chelliah good title on the basis that the voidable title of the seller (Mr Lincoln) had not been avoided at the time of sale and that Mr Chelliah had bought the car in good faith without notice of any defect in Mr Lincoln’s title, was rejected. This was because the evidence did not support a finding that Mr Lincoln was acting as an agent for a disclosed principal when he sold the Espada to Mr Chelliah. Given the “obviously unconvincing” documents concerning Mr Lincoln’s title to sell the vehicle, which should have been apparent to Mr Chelliah as a “highly experienced individual in the purchasing and selling of classic cars”, Mr Chelliah did not act honestly and nor did he honestly or reasonably believe that Mr Lincoln was entitled to sell the car as an agent of the owner. Accordingly, Mr Chelliah failed to establish that Mr Lincoln had any title to the Espada at all (including any form of a voidable title which had not been avoided at the time of sale), and he failed to establish that he bought the Espada in good faith and without notice of Mr Lincoln’s defect in title. Consequently, the Court dismissed the proceedings and ordered Mr Chelliah to pay the costs incurred by the NSW Police and by Mrs Hall.
Buyer in possession [9.810] This is an “exception” that happens quite often in practice. Where a buyer has possession of goods (eg has taken delivery) but does not yet own them (eg the seller retains ownership under a retention of title clause –see the discussion at [9.700]), that buyer can give good title to a sub-purchaser who buys the goods in good faith and without notice of the rights of the original seller (Sale of Goods Act 1954 (ACT), s 29; Sale of Goods Act 1923 (NSW), s 28(2); Sale of Goods Act 1972 (NT), s 28; Sale of Goods Act 1896 (Qld), s 27; Sale of Goods Act 1895 (SA), s 25; Sale of Goods Act 1896 (Tas), s 30; Goods Act 1958 (Vic), s 31; Sale of Goods Act 1895 (WA), s 25). So, the exception operates in the case
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of a person who has simply agreed to buy, who does not own the goods at the time of a subsequent sale, but who is in possession of them. Where the buyer has property in the goods by the time of the subsequent sale, this exception is not particularly profound and simply reflects the consequences referred to earlier that when property passes to a buyer the goods are the buyer’s and can be used, enjoyed, sold or otherwise disposed of at will. Agency circumstances [9.820] So-called agency sales are not real exceptions to the nemo dat rule. A sale by an agent, with actual or apparent authority, operates in law as a sale by the owner: therefore, the buyer obtains any title that the owner had. The agent is not the seller –just the conduit for the sale; the owner is the principal in the sale. The principles of agency are discussed in Chapter 13.
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Sometimes, the actions of an owner will create the appearance that someone has authority to sell as an agent –this is called apparent authority (or ostensible authority). In such circumstances, the owner is “estopped” (precluded) from denying that there was authority to sell, and the buyer will still get good title. A statutory application of apparent authority exists in legislation in each State that regulates the activities of “factors” or “mercantile agents” (defined in the Sale of Goods Acts as an agent having, in the customary course of business as such an agent, authority either to sell goods, or to consign goods for the purpose of sale or to buy goods, or to raise money on the security of goods). Where goods are sold by a mercantile agent to a person who takes them bona fide (ie in good faith), such person obtains a good title to the goods, notwithstanding that the principal (owner) may have revoked the agent’s authority to sell. If, for example, a person gives their car to a motor vehicle dealer for the purpose only of receiving offers from interested prospective purchasers, and it is sold to such a purchaser contrary to express instructions, then the buyer nevertheless acquires good title and the seller is restricted to a personal action against the dealer to recover the price.
Remedies [9.830] The fundamental obligation under a contract of sale is for the seller to transfer property in the goods to the buyer in return for the buyer’s payment. The Sale of Goods Acts provide for a number of remedies which accommodate this reality. Buyer’s remedies [9.840] A seller’s breach of contract whether by non-delivery, or delayed delivery or for defective goods, confers a right to damages on the aggrieved purchaser. Normal principles for awarding damages apply (see Chapter 6). In practice, the most common area for dispute is the buyer’s right to reject defective goods. Although damages are available for breach both of warranties (minor terms) and of conditions (major terms), the right of repudiation (to reject the goods) is available only for breach of a condition. In each of the Sale of Goods Acts in Australia, there are implied terms of merchantability (quality) and fitness for purpose, which are expressed as conditions giving rise to the right to reject the goods for breach. These implied terms are discussed in Chapter 22. In addition, there are 520
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Chapter 9 Property and Securities Law: Concepts of Ownership
consumer guarantees contained in the Australian Consumer Law which include provisions for consumer protection in relation to title (s 51), undisturbed possession (s 52), undisclosed securities (s 53) and acceptable quality (s 54) (see Chapter 22). The right of repudiation is lost in certain circumstances where the buyer has waived the breach of condition or has elected to treat it as a breach of warranty (in other words, where the buyer has elected to be satisfied with an action for damages) and where the buyer has accepted the goods. Goods are deemed to be accepted by the buyer when the buyer intimates to the seller that they have been accepted; or when the buyer of delivered goods does an act inconsistent with the seller’s ownership, such as reselling them; or when the buyer retains the goods for a reasonable period without indicating to the seller that they have been rejected. Where goods ought to be examined or compared, the buyer is granted by the Sale of Goods Acts and the consumer is guaranteed by the Australian Consumer Law a reasonable opportunity to examine or compare them to ascertain whether they comply with the contract or agreement for the purposes of determining a remedy. Seller’s remedies [9.850] The seller’s remedies may be exercised against the goods (real actions –actions in rem) or against the defaulting buyer (personal actions –actions in personam). The seller’s personal remedies include an action for damages for non-acceptance and an action for the price.
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The seller’s real remedies include: • Lien. Under the Sale of Goods Acts, an unpaid seller has a right of lien, that is, a possessory security interest under which the goods can be retained until the price is paid. • Stoppage in transitu. If the goods have left the seller’s possession, the right to a lien cannot be exercised. However, under the legislation an unpaid seller has a right of stoppage in transitu, a right to stop the transportation of the goods to the buyer by retaking possession or by serving a notice on the carrier if the buyer becomes insolvent. On exercising this right, the seller then has a lien over them and may retain them until payment. • Right of resale. An unpaid seller has the right to resell the goods. This right arises if the goods are of a perishable nature, if the right is given by the contract or, in cases of a right of lien or stoppage in transitu, the price is not paid within a reasonable time of notice of intention to resell being given.
A bailment … is a delivery of personal chattels in trust, on a contract, express or implied, that the trust shall be duly executed, and the chattels redelivered in either their original or an altered form, as soon as the time or use for, or condition on which they were bailed, shall have elapsed or been performed. Re S Davis & Co Ltd [1945] Ch 402 at 405.
Bailment [9.860] It is almost impossible to define “bailment” in such a way as to encompass all species. Generally speaking, the relationship of bailment arises where a person (the bailee) takes possession by delivery (or finding) of the goods of another (the bailor) and the right to possess those goods is not accompanied by a transfer of ownership but of possession pursuant to an express or implied promise to deliver the goods to the bailor (or as the bailor directs) after the goods have been dealt with in accordance with the terms of the bailment: Hobbs v Petersham Transport Co Pty Ltd [1971] HCA 26. The bailor need not be the owner of the goods but merely may be a person authorised by the owner to possess the goods themselves and be able to transfer possession by delivery to the bailee.
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The significance of a bailment arising is that a bailee takes possession and care of the goods bailed and will be liable for any loss of them where the loss was the result of a deliberate or careless act. A bailment may arise in any number of circumstances. To illustrate, a bailment may arise between parties with or without an accompanying contract. It may involve a simple deposit of goods or the goods deposited may have some activities performed upon them by the bailee while they are deposited. The bailed goods may not be deposited with a bailee at all but, instead, a bailee may find the goods. The following list includes a number of examples in which a bailment may arise: … a bailment comes into being whenever one person is knowingly and willingly in possession of goods which belong to another. N Palmer, Bailment (2nd ed, Law Book Co, 1990).
• Goods are given to a repairer or cleaner and, during the time that they are being repaired or cleaned, they are bailed goods (eg cars, shoes, dry cleaning). • A warehouseman takes delivery of a writer’s documents to be stored until such time as they are required by the writer –the warehouseman may become a bailee. • A person who finds another’s goods may become a bailee of those goods. • A person leaving their car in a car park may bail their car to the car park owner, where the car park owner exercises control over the car (eg retains the keys) as opposed to simply providing a space in which to park. • A restaurant owner may be a bailee for goods left behind by a client or deposited in a cloakroom.
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Bailment and possession [9.870] In each case, the key concept is possession of the bailed goods by the bailee whereby the bailor relinquishes possession, and thereby control, of the goods in favour of the bailee. There can be no bailment without possession.
Matthew Short & Associates Pty Ltd v Riviera Marine (International) Pty Ltd [2001] NSWCA 281 [9.880] It was held that supervising the unloading and loading of a new motor cruiser using a crane and
low-loader, and actively participating in the process of securing the boat, did not amount to taking possession of the boat. The issue of possession arose upon the damaging of the motor cruiser by the negligence of the low-loader driver and for determination of liability for the damage. Accordingly, as the element of possession was not satisfied, there was no bailment of the motor cruiser and no special duty of care owed by the supervisor.
Bailment and licence [9.890] Without possession on the part of the bailee, a bailment cannot exist. Just what amounts to sufficient possession is often unclear, but it can mean the difference between
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Chapter 9 Property and Securities Law: Concepts of Ownership
finding a relationship of bailment or some other form of legal relationship that is not a bailment such as a licence. A licence is merely where one party (the licensor) grants a right to another party (the licensee) to use their property in some way. For example, it might be a licence to allow the licensee to leave goods (such as a car or a boat) on the licensor’s land. It is important to distinguish between a licence and a bailment as a bailment attracts special rights and duties while a licence does not. The act resulting in possession in bailment may appear similar to the act of use associated with a licence. Distinguishing between possession and mere use is often difficult.
Greenwood v Council of the Municipality of Waverley (1928) 28 SR (NSW) 219 [9.900] A man who hired a locker at the defendant’s bathing shed placed his clothes and belongings in the
locker, closed the door himself and was supplied with a numbered disc by the attendant. No key was issued to the man; instead, the key was kept by the attendant for production to the man upon his return of the disc. Upon opening the locker, the man found that his clothes were missing and he attempted to sue on the grounds of bailment. It was found in that case that no bailment arose. The council did not take possession of his clothes but merely provided a securely locked compartment for his use.
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Ashby v Tolhurst [1937] 2 KB 242 [9.910] A mere licence and not a bailment was also found in this case where a car was left for a small fee in an open triangular parking lot unenclosed on two sides. The car owner received a ticket upon parking which stated that cars were left at the sole risk of the car owner. He locked the car and took the key with him. Upon his return, he discovered that the car had been stolen. It was held that the relationship was one of licence and not bailment, as delivery of possession to the car park proprietor had not occurred because the owner retained the key to the car.
Walton Stores Ltd v Sydney City Council [1968] 88 WN (Pt 2) (NSW) 153 [9.920] A car was parked in the defendant’s parking station. The building was an enclosed building and
the driver was issued with a parking ticket which stated that the ticket must be presented when removing the car from the station. In the driver’s absence, a thief, having been issued a duplicate ticket by an employee of the defendant, removed the car from the building. It was found that, based on the nature of the building and the wording of the ticket, the defendant had possession of the vehicle and hence was a bailee. It was particularly significant that the car owner could not remove his car from the car park without a valid ticket – in that sense, the parking station proprietor had possession of (and thereby control over) the car as against the owner.
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Ultzyen v Nichols [1891] All ER Rep 1202 [9.930] A restaurant customer handed his coat to a waiter who hung it up for him behind his seat. During the meal, the coat was taken by another. The customer sought to establish a bailment so that he could recover damages from the restaurant owner. The question to be determined was whether the restaurant owner had simply granted him a licence to use its coat hook or whether it had become the bailee of the coat. It was held that a bailment existed. The important fact was that the restaurant owner, through its employee, had taken possession and custody of the coat.
The bailor’s rights and duties [9.940] Where a bailment is created by contract, the rights and duties of the bailor will be found in that contract. Where there is no contract (for instance, because there is no consideration) but there are specified terms of the bailment, those terms will determine the matter. Where the bailor is the owner of the goods, then ownership rights remain vested in the bailor subject to the terms of the bailment. Whether or not the bailment is gratuitous (without charge), the bailor owes a duty of care to the bailee not to deliver goods with hidden defects which may cause the bailee harm.
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The bailee’s rights and duties … duties arise under a bailment in two principal ways: by implication of law, as a result of the possessory relationship, or by virtue of an agreement between the parties. When the agreement is simultaneously a contract, there will be a contractual right of action to enforce any obligations which the parties have superadded to those owed at common law. N Palmer, Bailment (2nd ed, Law Book Co, 1990).
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[9.950] In the first instance, the position of the bailee should be determined by the terms of the contract. Again, where there is no contract but there are express terms of the bailment, those terms may determine the matter. In other cases, the bailee’s duty is fixed by law. General terms of bailment implied by law are: • that the goods must be returned upon expiration of the bailment (see Chapman Bros v Verco Bros & Co Ltd [1933] HCA 23); or • the goods be dealt with only as stipulated (eg that they have been left with the bailee to find a buyer for them) –Hobbs v Petersham Transport Co Pty Ltd [1971] HCA 26; and • during the bailment, the goods will be retained by the bailee and properly used and cared for. Where the bailee breaches the terms of a bailment, for instance, where the goods are lost, then damages follow that breach. In the absence of a contract, the bailee may still be liable for damages in negligence for failure to take care of the goods. A bailee for reward is subject to a higher standard of care than a gratuitous bailee.
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Chapter 9 Property and Securities Law: Concepts of Ownership
Westpac Banking Corporation v Royal Tongan Airlines [1996] NSWSC 409 [9.960] An example of the duties owed by a bailee for reward is the decision of the Supreme Court of New
South Wales in Westpac Banking Corporation v Royal Tongan Airlines [1996] NSWSC 409. Parcels containing currency, which had been sent by the Bank of Tonga to Westpac, went missing while in the possession of Qantas in the course of a flight to Sydney. It was alleged that the parcels had been stolen while being kept in an insecure area adjacent to the mail handling centre at Sydney Airport. Giles J summarised the relevant law in these terms (at 63,672): In general, a bailor need prove only that goods went into possession of the bailee and were not re-delivered, and it is for the bailee to prove that he exercised reasonable diligence in taking care of them … or that the loss occurred in circumstances attracting the protection of a contractual exemption …
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The court held that Qantas was liable for its duty of care in the bailment.
[9.970] Apart from the general duty to take reasonable care of the goods, there is a strict duty in special cases, breach of which leads to damages whether the bailee was at fault or not. That special liability attaches to common carriers of goods and innkeepers under the Innkeepers and Common Carriers Acts of the States and Territories. A common carrier is one who publicly offers to carry goods for any person requesting the facility. Where the carrier retains the right to refuse particular customers, it is not a common carrier. The term “innkeeper” encompasses most contemporary hotel and motel keepers. The liability of the common carrier and the innkeeper is absolute. For the carrier it extends to the goods entrusted to it for delivery; for the innkeeper it extends to goods entrusted to it by a guest for safekeeping. For these purposes, a guest is one who is accommodated in the course of a journey. A mere lodger, on the other hand, does not enjoy such protection.
Papathanasopoulos v Vacopoulos [2007] NSWSC 502 [9.980] This more recent case example shows how the law of bailment may interfere in ordinary affairs where the people involved are entirely unaware of the rights and obligations that the law seeks to impose. The case concerned the non-return of a $150 engagement ring upon the engagement being called off by the fiancée. The engagement ring was given in contemplation of marriage; this is important because it means that it was not an unconditional gift to the fiancée –the law states that she could keep it only if the marriage proceeded. When she called off the engagement, she had a duty to return the ring to her former fiancé because she was a bailee and he was still the owner. She attempted to do this when she subsequently met with him for coffee. However, he refused to accept the ring back and told her to keep it. Consequently, she argued that his conduct meant that he had made a gift of the ring to her absolutely –so it became her property and she was no longer only a bailee of it. On the facts, that argument was rejected for two reasons.
First, because she later put it in a box with other memorabilia of the relationship (such as photographs) and had her father throw them into the garbage, this meant that she had not accepted the gift. Where a recipient of an attempted gift refuses to accept it, the property does not pass to them but remains vested in the attempted
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IN CONTEXT
Self-storage: Licence or bailment? [9.990] The self-storage industry is a booming feature in the Australian business landscape. Storage facilities are springing up like mushrooms all over the map. The question facing this industry is: does this relationship constitute a bailment or merely a licence to use the space? If it is decided that this scenario is a bailment, then storage facility operators will be under a more onerous duty in relation to the storer than they would be if the relationship is found to be one of licence. To answer the question, the physical scenario of self-storage must be considered in light of the law on licence and bailment. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
The self-storage scenario The general day-to-day operations of a self-storage facility function as follows: • An agreement for storage is signed by a potential storer, stating that the relationship between storer and facility owner is not one of bailment. • The storer is allocated a locker, compartment, room or garage in which they may store their goods. • The storer places their goods into the storage space by their own means with no assistance from the facility operator. • The storer locks the storage space using either their own lock or via a computerised system; either way the storer is the only one who has a key or code to the storage space. • The only person who can access the storer’s storage space is the storer themselves, using their own key/computer code; the facility owner has no means of accessing the storage space. • The fees paid for self-storage are much lower than those for managed storage in a warehouse situation. • The fees paid for self-storage are levied on the size of the space and not the value of the goods stored therein.
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Chapter 9 Property and Securities Law: Concepts of Ownership
Points to consider • The goods are placed into the storage space by the storer and not the facility owner; this favours a licence finding: Greenwood v Council of the Municipality of Waverley (1928) 28 SR (NSW) 219. • For a bailment to arise, the bailee must take possession of the goods: Wilmers and Gladwin Pty Ltd v WAL Building Supplies Pty Ltd [1955] SR (NSW) 442; Brambles Security Services Ltd v Bi-Lo Pty Ltd [1992] Aust Tort Reports 61,260. • Merely leaving goods on another person’s property (whether for a fee or not) does not mean possession is taken by the site owner: Hinks v Fleet (The Times, 7 October 1986); Fred Chappell Ltd v National Car Parks Ltd (1987) (The Times, 22 May 1987); Ashby v Tolhurst [1937] 2 KB 242. • Overseeing and supervising the unloading of goods does not amount to taking possession: Matthew Short & Associates Pty Ltd v Riviera Marine (International) Pty Ltd [2001] NSWCA 281.
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• The fee paid for self-storage is lower than warehousing. This suggests there is no intention by the parties that the facility assumes liability by way of a bailment. See BG Transport Services v Marston Motor Co Ltd [1970] 1 Lloyd’s Rep 371 at 378, where the low cost of 24-hour parking in London was held to reflect the nature of the arrangement: for example, indicative of a licence arrangement and not a bailment. • The storer at all times remains in control of their storage space, as they retain control over the single mode of access: Ashby v Tolhurst [1937] 2 KB 242. See also commentary in relation to banking safe deposit boxes in N Palmer, Bailment (2nd ed, Law Book Co, 1990) at 410. • The value of the goods stored has no impact upon the price paid for self-storage. This would suggest that the relationship is one of licence not bailment, as an increase in liability usually is reflected in an increase in price for service when the relationship is one of bailment. See BRS (Contracts) Ltd v Colney Motor Engineering Co Ltd (The Times, 27 November 1958). On the facts presented, it would appear that the relationship of self-storage is one of licence and not bailment. To date, there is no judicial decision on this point, and hence the issue is still moot.
Liens [9.1000] At times apparently similar to a bailment, a lien is the right of a person in possession of property to maintain that possession against another, usually the owner, until that other has satisfied outstanding claims (such as payment of fees). The lien usually will arise without the intent or agreement of the parties. This typical possessory lien most frequently arises where the person holding the goods (the lienee) is owed money by the owner of the goods (the lienor).
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A particular possessory lien arises where the debt has arisen in respect of the goods themselves (eg the lien of a mechanic over a car until paid for the repairs effected), while a general possessory lien allows the lienee to retain possession until all of its claims, whether relating to the goods or otherwise, are satisfied. A right of lien may be conferred by statute (eg the unpaid seller’s lien under the sale of goods legislation). A non-possessory lien may arise in circumstances where equitable rights have arisen, usually out of a contract, so that the lienee is entitled to a charge on the property of the lienor until a debt has been discharged. Such an equitable right may exist irrespective of possession and the lienee is ultimately entitled to enforce a sale of the property to satisfy the claim. Many liens arise by way of statute. For example, warehousemen have a lien over goods stored with them pursuant to legislation.
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Sale of personal property – shares [The Statute of Monopolies 1624] declared … grants by monopolies … illegal. But it contained a significant proviso by which an exception was made of letter patent for fourteen years or less granted to the inventors of “any manner of new manufacturer”. This is the origin of our present system of … patent[s]for invention. Sir Victor Windeyer, Legal History (1957).
[9.1010] Arguably, shares in companies are the most common type of chose in action and are readily and regularly transferred by members of public companies listed on the Australian Securities Exchange (ASX) (the transfer of shares held in proprietary limited companies usually are subject to transfer restrictions and pre-emptive rights). Note that the issue of a share by a company is not a transfer: a transfer occurs when ownership of an existing share passes from one person (the transferor) to another person (the transferee). The Corporations Act 2001 (Cth) specifically provides that shares are personal property and are transferable (or “transmissible” –which relates to a transfer because of death, bankruptcy or incapacity): s 1070A. However, as alluded to above, this is subject to any applicable restrictions on transfer or transmission contained in the company’s constitution (particularly in proprietary limited companies). Generally, the laws applicable to personal property apply to shares, including ownership and dealing with them as well as the creation of legal and equitable interests in or over them. [9.1020] What is a “share”? Generally, a share may be described as a “bundle of rights and obligations” –the rights (eg voting rights) and obligations (eg to pay calls on partly paid shares) being specified in the company’s constitution or otherwise by law (eg under the Corporations Act 2001 (Cth)). The holder of a share is a “member” of the company, usually referred to as a “shareholder” in companies with share capital (as distinct from companies limited by guarantee). Shareholders have no direct interest in the property of the company –as a separate legal entity, the company is the legal and beneficial owner of its own property; the share itself is the personal property of the shareholder and represents the shareholder’s interest in the company. All transfers of shares must be in writing; otherwise, the company is not permitted to register them: Corporations Act 2001 (Cth), s 1071B(2). Thus, there must be a document involved (which can be electronic) and it requires the signatures of both the seller and the purchaser. The form of the transfer may be specified in the company’s constitution; otherwise, there are common forms of transfer that can be used and transfers can be effected via a CS (clearing and settlement) facility.
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Chapter 9 Property and Securities Law: Concepts of Ownership
9.5 INTELLECTUAL PROPERTY [9.1030] The growth in this century of what is called intellectual property has been extraordinary. The concepts involved in the ownership of ideas have developed rapidly to accommodate the rapidly growing value to business of this form of intangible property. The term “intellectual property” encompasses a variety of rights conferred by the law for the protection of creative effort and the economic investment which underlies it. The intellectual property regime is primarily legislative and is dominated by four federal statutes of general application, dealing with inventions (Patents Act 1990 (Cth)), designs (Designs Act 2003 (Cth)), trademarks (Trade Marks Act 1995 (Cth)) and copyright (Copyright Act 1968 (Cth)). Figure 9.3 describes the scope of each Act. Also, the subjects of concern to business are the confidentiality of trade secrets and other information and the exclusivity of the right to exploit one’s own name or image. Intellectual property and associated areas are discussed in Chapter 24. [9.1040]
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Figure 9.3: Intellectual property
Patents
Monopolise
Product functions, mechanisms, processes, chemicals, micro-organisms, life forms, methods, software
Registered designs
Prevent copying of new
Visual appearances of products
Registered trademarks
Prevent use of
Deceptively similar brands of the some or similar goods or services
Copyright
Prevents copying of original
Artistic works, literary works, software codes, advertising brochures, manuals, drawings, videos, music
Source: D Mischlewski, Sustaining Competitive Advantage (Pitman Publishing, 1995) p 3
9.6 PROPERTY AS SECURITY [9.1050] Transactions which involve one party financing the activities of another party are an everyday feature of modern commercial and domestic life. They range from loans involving millions of dollars to the shopper’s use of a credit card. Where the amount of credit involved is large, it is usual for the lender to seek security for its loan. A valuable incident of property ownership is the ability to use it as security for the raising of capital.
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Many forms of such security are available and have been the subject of increased scrutiny and regulation after problems arising under older law and the malpractice of some lenders.
The nature of security [9.1060] As stated by EI Sykes in The Law of Securities (Law Book Company, 1962): The general concept of security involves a transaction whereby a person to whom an obligation is owed by another person called the “debtor” is afforded, in addition to the personal promise of the debtor to discharge the obligation, rights exercisable against some property of the debtor in order to enforce discharge of the obligation. Frequently, when a person lends money or money’s worth to another, he or she is disinclined to accept nothing more than the often flimsy word of the debtor, and demands that certain property be placed in such a position that it can be made available to him or her on default by the debtor.
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The “rights exercisable against some property” distinguish the unsecured lender from the secured lender. The unsecured lender has rights to have the loan repaid which are enforceable. However, the manner of their enforcement is against the assets of the debtor generally, after successful proceedings against the debtor, with a successful outcome depending on the debtor having assets sufficient to cover the debt claimed. The secured lender normally will have similar rights against the debtor personally but, in addition, has rights available against specific property which is the subject of the security. Those rights usually will enable the creditor to sell that property and so recover the debt on which some default has occurred. An important characteristic of the creditor’s rights against a security is that they survive a change in its ownership –subject to certain exceptions, a purchaser of the secured property will take it subject to the interest of the creditor. A system of security law has been developed that operates not only to protect the interests of the borrower and the lender in any particular transaction, but also to protect the society in which they operate. In its essential nature, the pledging of property as security is different from its sale. In particular, the borrower will, in most cases, remain in possession of the property charged. Accordingly, there arises the need to prevent that borrower from seeking to use the same property as security for a further loan –at least unless the existing lender consents and the new lender is aware of the existing loan. The systems of registration of both real and personal securities by which it is sought to achieve this result are examined in this chapter.
9.7 SECURITIES OVER PERSONAL PROPERTY Property is theft. Pierre-Joseph Proudhon, What Is Property?
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[9.1070] Although personal property may be less attractive as security than real property, in many cases it may be all that can be offered and may be required in addition to security over real property. In some situations, a purchaser of personal property may have to use that property as security for any unpaid purchase price. The owner of personal property has the right to mortgage it. Generally speaking, a mortgage operates as an assignment of the property to the lender, subject to the right of the borrower to regain title upon paying out the loan. Whereas the Torrens system provides a public register of ownership and other interests in land, the title to personal property is not so clearly delineated. In most cases, possession indicates ownership. There is, for example, no register of
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Chapter 9 Property and Securities Law: Concepts of Ownership
clothing, watches, pianos or art works. Further, when credit is obtained on such goods, the possession may still remain with the borrower. The various States and Territories legislated to establish systems of registration of such interests. This legislation had been separately enacted over many decades, had areas of overlap, and varied from State to State –consulting it and complying with it was cumbersome. It has therefore been necessary for a unified and uniform system of security interests registration to be established for personalty and this now has been provided by the establishment of the PPS Register under the PPS Act.
Types of security
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[9.1080] A useful summary of the securities that can be taken over personal property by a lender appears in Australian Law Reform Commission (ALRC), Personal Property Securities, Report No 64 (1993). Some of these already have been discussed either conceptually or in detail in this chapter. The following extracts are taken from the ALRC report: Introduction. The common feature shared by ordinary securities is the transfer of a proprietary interest in the property from the debtor to the creditor or the creation of a new proprietary interest in the property in the creditor’s favour. The main types of ordinary security, the mortgage, the charge, the possessory lien, the non-possessory lien and the pledge are discussed in the following paragraphs. The mortgage. A mortgage gives the creditor rights over the mortgaged property, although the debtor will normally keep possession of the property. In a legal mortgage, the creditor becomes the legal owner of the property (subject to an equity of redemption … a right to compel the creditor to give the ownership of the property back when the debtor has performed all its obligations under the arrangement). In an equitable mortgage the creditor does not obtain legal title to the mortgaged property. Equitable mortgages arise in a number of ways. For example, if the debtor keeps the legal title to the property or has already created a legal mortgage, the creditor will obtain an equitable right to the property if the debtor defaults. The charge. A debtor who charges its property gives neither legal nor equitable title to the property. The debtor usually keeps possession on it. The debtor contracts with the creditor that it will not deal with the property in a way which is inconsistent with the creditor’s rights. Although title is not transferred, the contract qualifies the debtor’s title and creates a proprietary interest in the property. Unlike the mortgage (where title is transferred), a creditor in whose favour a charge has been given must generally take legal action to enforce its rights … The possessory lien. A lien is a security interest that may arise by operation of the common law, by statute or in equity. It depends on the existence of a contract between parties. At common law, a person who has done work for another may retain the other person’s goods in his or her possession until charges for the work have been paid. A possessory lien depends upon continuous possession of the property in question. A possessory lien may be particular or general in nature:
Property is not theft, but a good deal of theft becomes property. RH Tawney, The Acquisitive Society (1921).
– P articular. A particular possessory lien is the right of a creditor to retain goods until a debt associated with those goods is paid. For example, a shoe repairer may retain the shoes that have been repaired until paid for repairing them. – G eneral. A general possessory lien is the right of a creditor to retain the goods of a debtor until the creditor is paid all debts owed by the debtor. A general lien can only be exercised if the contract between the creditor and debtor, custom, usage or statute so provides …
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Business and the Law The non-possessory lien. Liens can also arise where the lien holder does not have possession of the secured property. [These non-possessory liens include]: – E quitable liens. Equitable liens do not depend upon contract or upon possession. They do not confer rights to possession, they only give the lien holder a right to have a specific claim satisfied out of specific property. The right can only be enforced by a judicial sale. For example, a trustee has an equitable lien for its expenses over the personal property in its care. – P artners’ liens. A partner has a lien over the property of the partnership. This allows him or her to have the property applied to the payment of the debts of the partnership. – S tatutory liens. In some situations liens are created by legislation. For example, the Sale of Goods Act 1923 (NSW) provides [in s 43] that, where the buyer becomes insolvent, the unpaid vendor who has parted with possession of the goods has the right to stop them in transit and resume possession until payment of the price. – T he pledge. The most common example of a pledge is the pawn. Pawns are characterised by a transfer of possession from the borrower to the lender. The borrower retains full ownership of the pledged goods. If he or she does not redeem the pawn within a specified time then, at common law, the pawnbroker can sell the goods and pass good title To this extent, the common law right to dispose of uncollected goods has been enshrined in [Pawnbrokers’ Acts in most States].
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Registration of “security interests” No-one, I am sure, by the light of nature ever understood an English mortgage. Samuel v Jarrah Timber & Wood Paving Corp Ltd [1904] AC 323 at 326 per Lord MacNaghten.
[9.1090] As mentioned above, the situation until recently with respect to the use of personal property as security was that legislation passed by the various States and Territories provided protection where the borrower was not a corporation. Where the borrower was a corporation, the Corporations Act 2001 (Cth) provided for a registration system regarding the granting security interests (“charges”) in the property of a corporation (repealed Ch 2K –Charges). This former legislative regime arose out of the need to correct the old system under which a borrower (mortgagor) would assign absolutely the ownership of personal property to the lender (mortgagee), but would remain in possession of it, in most cases as its apparent owner. The creation of that impression of ownership facilitated the borrower’s ability to borrow further on the asset and to purport to assign it yet again – absent the consent of the existing lender and without the new lender’s knowledge of the existence of the prior interest. At least in the case of real property, the existence of the registers of interests in land gave publicity to the matter of ownership, disclosing the interest of the lender, notwithstanding the fact that the borrower was in possession. In the case of personal property, registers of interests in such property did exist but were numerous and distinct –searches to determine interests in personal property would need to be made of the relevant register according to the category of personal property involved. A new national personal property securities regime now has been established by virtue of the enactment of the PPS Act.
Personal Property Securities Act 2009 (Cth) [9.1100] The PPS Act commenced on 30 January 2012 and, as its title implies and from previous discussion, deals with security interests in personal property. By the registration of a personal property security interest under this new regime, or by possession (of tangible personal property as well as certain chattel paper and investment instruments) or by 532
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Chapter 9 Property and Securities Law: Concepts of Ownership
control (of intangible personal property), the security interest becomes “perfected” and the holder of such an interest becomes a secured creditor. Importantly, the perfection of a security interest within the required timeframes as specified in accordance with the type of personal property involved will ensure that the security interest survives the bankruptcy or insolvency of the grantor. By this regime, the secured party retains the benefit of the security interest in accordance with its priority. Under the PPS Act, a single national authoritative register of personal property securities, the PPS Register, commenced operation from 30 January 2012. In this new regime, a security interest over the personal property of a person or company is able to be registered –“perfected” –on the PPS Register by lodging a “Financing Statement” which can be lodged online via the PPSR website. Indeed, ease of lodgement and of searching the PPS Register are some of the many benefits of the new regime with most activities in relation to the Register being able to be performed online at any time.
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With the introduction of the PPS Act and the establishment of the PPS Register came the replacement of all Commonwealth as well as State and Territory registers of personal property security interests, including the Register of Encumbered Vehicles (REVS) and the ASIC Register of Company Charges. Upon the commencement of the PPS Act, the replacement of the former registers was effected by the repealing of the legislation, or of relevant parts thereof, that established them (eg the Security Interests in Goods Act 2005 (NSW) and Ch 2K –Charges of the Corporations Act 2001 (Cth)).
Make sure you get bankers to come to your office. And always keep ’em waiting. Hit ’em around the head a bit. Let ’em know who’s boss. Kerry Packer.
[9.1110] Apart from providing a public register of personal property security interests by which such interests can be registered and searched, another important function of the Personal Property Securities regime is the conferral of priority (see [9.1170]) to aid in the resolution of disputes between any competing security interests (over the same property or class of property). The statutory scheme of priority now provided by the Personal Property Securities regime overrides the common law priority regime for a security interest over personal property, including the nemo dat rule, making it imperative even for the true owner of personal property who has an unregistered interest in it to register a security interest so as to protect their ownership against third parties who otherwise may acquire a security interest in that property and thereby gain priority over the true owner’s unregistered interest. While the use of the PPS Register is voluntary, it is vital to understand the importance of the prompt registration of a security interest on the PPS Register for the protection of that interest and of searching the Register for information on existing security interests in contexts such as: • finance companies having a security interest in an item of personal property for protection against default and disposal by the borrower; • business entities supplying goods on credit, consignment, or under a retention of title agreement; • consumers intending to purchase valuable used goods (such as cars, furniture, electrical appliances, jewellery, boats, trailers, machinery and art works); • third parties dealing with persons in possession of property in relation to whether other interests exist in it (eg interests of a lessor if the person in possession is a lessee)
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[9.1120] Under the PPS Act, “personal property” is broadly defined and, in relation to companies, includes all assets, both tangible and intangible, including goodwill, licences and intellectual property, but excludes real property (land), a lien and any right of set-off, as well as any statutory licences that may be specifically excluded under the PPS Act (eg water rights and mining tenements). Tangible property that can be registered includes crops and business inventory or “circulating assets”). Security interests in intangible property can include those over intellectual property, shares in an unlisted company, bank account deposits and goodwill. [9.1130] Under the PPS Act, a “security interest” is “an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation” and includes a fixed or floating charge, or both, as well as a pledge, over the “personal property” of a company: s 12. A security interest is created by a “security agreement” which, to be enforceable, generally must be in writing and be signed by the grantor.
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[9.1140] The person who grants a security interest over personal property is known as the “grantor” and the person who takes the security interest is known as the “secured party”. A security interest is enforceable by a secured party against a grantor only if the interest has “attached” to the collateral, that is, the grantor has rights in the collateral (or the power to transfer rights in the collateral to the secured party) and either value is given for the security interest (eg advance) or the grantor performs an act by which the security interest arises (eg delivers the personal property to the secured party whereby the security interest is perfected by possession or control).
One of the things investors have learned about emerging markets recently is that they are hard to emerge from in an emergency. Robert Hormats Goldman Sachs.
[9.1150] Once an item of personal property becomes the subject of a security interest, it is referred to as “collateral”. A security interest is enforceable by a secured party against a grantor only if the security interest “attaches” to the collateral (s 19), that is: • the grantor has rights in the collateral (or the power to transfer rights in the collateral to the secured party), and either: • value is given for the security interest (eg advance of funds), or • the grantor performs an act by which the security interest arises, such as: • signing a security agreement on the property (the security interest becomes perfected by control), or • delivering the property to the secured party (the security interest becomes perfected by possession) A security interest is enforceable by a secured party against a third party (ie other claimant, eg purchaser or lessee) only if the security interest “attaches” to the collateral (s 20), and one of the following applies: • the secured party possesses the collateral, • the secured party has perfected the security interest by control, or • a security agreement that provides for the security interest covers the collateral. Once a security interest has attached to the collateral, the security interest is “perfected” (s 21) and enforceable by: • registration of the interest in the collateral on the PPSR (ie by lodging a financing statement), or
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Chapter 9 Property and Securities Law: Concepts of Ownership
• taking possession of the collateral (eg by physical possession other than by way of seizure or repossession), or • taking control of the collateral (eg control over bank accounts)
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[9.1160] A “purchase money security interest” (“PMSI”), mentioned above, is a distinct type of security interest typically used in commercial transactions (as opposed to consumer transactions) where, for example, a secured party (lender) advances funds to a grantor (borrower) to finance the acquisition of personal property such as cars and machinery at the time of purchase by the grantor or such as tangible inventory prior to possession by the grantor (of similar effect to a retention of title clause or Romalpa clause). Once registered in accordance with the required timeframe, a PMSI can constitute a “super-priority” because it can postpone an earlier registered security interest such as a floating charge over all the assets of the grantor in favour of a lender (eg a bank). Such an outcome is justified on the basis that, without the super-priority interest that can be provided by a PMSI, finance is unlikely to be provided, thereby precluding the subsequent acquisition of assets and thus future commercial growth of the grantor. Further, that such finance has been provided thereby facilitating the subsequent acquisition of assets that otherwise would not have been acquired, the secured party holding the earlier registered security interest is not entitled to have recourse to those assets acquired after the registration of that earlier registered security interest and whose acquisition was made possible only by virtue of the later registered PMSI. [9.1170] The rules establishing priority between competing security interests under the PPS Act are provided in Pt 2.6 and, generally, are to the following effect as provided by the “default priority rules” under s 55: • if there are two or more unperfected security interests in the same collateral, then priority is determined by the order of attachment to the collateral of the security interests: s 55(2) • a perfected security interest has priority over an unperfected security interest in the same collateral: s 55(3) • if there are two or more security interests perfected by registration, then priority is determined by the order of registration time of the security interest (ie the earlier registered interest has priority over a later registered interest –subject to exceptions such as a PMSI): s 55(4) and (5) Note that, under s 57(1) and (3), a security interest perfected by control has priority over a: • security interest perfected by registration (including a PMSI), and • security interest perfected by possession. The rules provided by the “default priority rules” under s 55 are default rules because: • other rules apply to specific circumstances (eg PMSI as a “super priority”), and • the parties to a security agreement can agree to replace or modify the default rules. It is important to note that, when registering a security interest on the PPS Register, the interest must be registered in accordance with the relevant provisions and, when
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performing searches of the Register, separate searches of all relevant classes of collateral, and using the authorised modes of searching the Register, should be performed. In relation to corporate grantors, s 153 of the PPS Act and Sch 1 of the PPS Regulations require a secured party to register its security interest against a corporate grantor using the grantor company’s Australian Company Number (ACN) and not the grantor company’s Australian Business Number (ABN). Because a company may have both an ACN and an ABN, the rationale for these provisions is to establish an authorised mode of search for security interests granted by a company based only on the grantor company’s ACN. Accordingly, and for certainty when searching the PPS Register, a search of the Register based on the grantor company’s ACN will reveal any properly registered security interest (ie a security interest registered against the grantor’s ACN as required by the provisions). If a secured party registers a security interest granted by a company against the grantor company’s ABN, then the registration is defective and can result in the security interest vesting in the grantor company, under s 588FL of the Corporations Act or s 267 of the PPS Act, whereby the secured party will lose the benefit of the security interest and will thus become an unsecured creditor.
Re Production Printing (Aust) Pty Ltd (in liq) [2017] NSWSC 505 Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
[9.1180] On 4 December 2014, Hewlett Packard Financial Services (Australia) Pty Ltd (“HPFS”) entered
into an Equipment Finance Agreement, described as a “Master Rental and Financing Agreement”, with Production Printing (Aust) Pty Ltd (“PPA”). On that same date, HPFS registered a security interest on the PPS Register in respect of printing equipment to be leased under the Equipment Finance Agreement. Between 5 December 2014 and 19 October 2015, HP entered into four leases with PPA pursuant to the Equipment Finance Agreement in relation to printing equipment worth over $4 million. However, while promptly attending to the registration of its security interest (as it should), HP registered that interest against PPA’s ABN (rather than against its ACN as is required by the relevant provisions). On 22 July 2016, PPA was placed into voluntary administration and subsequently went into liquidation on 26 August 2016. While in voluntary administration, the administrators of PPA notified HPFS that the registration of its security interest was considered defective because it had been registered by reference to PPA’s ABN rather than to its ACN. In considering this issue, the Court referred to Re OneSteel Manufacturing Pty Ltd (admin apptd) [2017] NSWSC 21 and observed that s 153 of the PPS Act and Sch 1 of the PPS Regulations set out specific requirements for registration including that, where the grantor is a company, the security interest must be registered against the grantor company’s ACN. In Re OneSteel, the Court held that registering against a company’s ABN (as opposed to the ACN) made the registration defective. In Production Printing, it was agreed between the parties that the Master Rental and Financing Agreement was a “security interest” for the purposes of s 12(2)(i) of the PPS Act, that each of the four leases between HPFS and PPA was a “PPS lease” for the purposes of s 13 of the PPS Act, and that each such PPS lease was a “PMSI” within the meaning of s 14 of the PPS Act.
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Chapter 9 Property and Securities Law: Concepts of Ownership In an attempt to protect its position, HPFS advanced an argument (which was not proffered in Re OneSteel) that s 166 of the PPS Act temporarily preserved its security interest. However, the Court rejected that argument and held that the exception under s 166 in relation to defective registrations only applies to allow a secured party to correct registrations where events beyond the secured party’s control have led to a registration becoming defective (eg when there is a change in the serial number under which collateral is required to be described in the register). Consequently, the Court affirmed the Re OneSteel decision and the inability of secured parties to attempt to recover their security interest once the grantor suffers an insolvency event if the registration is defective. The lesson from Production Printing is that, to preserve a security interest and its priority, it is crucial for the secured party to register the security interest (unless it is perfected by control or possession) and to register it within time (both of which HPFS purported to do), but also to register it correctly (which HPFS did not do) –as a result, HPFS’s security interest vested in PPA (under s 267 of the PPS Act) and HPFS became an unsecured creditor. Consequently, the proceedings were dismissed and HPFS was ordered to pay the costs of PPA – HPFS lost its security and lost the case.
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9.8 SECURITIES OVER LAND [9.1190] When land is used as security for indebtedness, it is called a “mortgage”. The landowner (borrower) who mortgages her or his property as security is called the “mortgagor” and the creditor (lender) who has taken the security over the land is called the “mortgagee”. Land has been used in this way for centuries: for the same reasons as the monarch in medieval times accepted when ensnaring nobles into military service, land is still probably the most acceptable form of security –it is fixed, it is permanent, and it is tangible –it does not travel in containers to London as personalty might, nor does it suddenly disappear into secret bank accounts. Until the advent of the Torrens system of title to property (see [9.450]), a mortgage of real estate operated to transfer the legal title to the mortgagee and reserve to the mortgagor the right to a reconveyance upon payment of the debt. This common law effect was described by Lord Lindley MR as follows (at 474): A mortgage is a conveyance of land or an assignment of chattels as security for the payment of a debt or the discharge of some other obligation for which it is given.
Until the advent of legislation governing the use of both real property and personal property as security, both a land mortgage and a chattel (personal property) mortgage operated as an absolute assignment of ownership to the lender (the mortgagee). Upon discharge of the debt the ownership was re-assigned to the borrower. The effect of the Real Property Acts of the States and Territories is that a mortgage, on registration, operates only as a charge on the land and not as a transfer. The importance of registration is discussed at [9.460]. A great deal of the efficacy of Real Property Act documents depends upon the fact of registration. One consequence of the operation of the Torrens system is that, until such time as the mortgage is registered, the mortgagee has an equitable security –it becomes a legal charge interest upon registration.
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IN CONTEXT
Mortgage documentation [9.1200] Essential elements of the form of a Real Property Act mortgage are prescribed
in regulations. Beyond those elements, however, there exists a vast range of mortgage provisions from time to time availed of by lenders to strengthen their position. To simplify documentation, it is possible to have registered a memorandum of mortgage provisions so that they may subsequently be incorporated in mortgage documents by reference to that memorandum without the necessity to repeat them in each new mortgage document. Whether this facility is used or not, those who prepare mortgages should heed the words of Fox J in Richards v The Commercial Bank of Australia (1971) 18 FLR 95 at 99-100:
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It is now over 60 years since Lord Macnaghten, in Samuel v Jarrah Timber and Wood Paving Corp Ltd [1904] AC 323 (at 326), commented, “No-one, I am sure, by the light of nature ever understood an English mortgage of real estate”. Professor Maitland, having regard in particular to the influence of the rules of equity, many years ago observed of the mortgage deed of his time that “it is one long suppressio veri and suggestio falsi”. As to the current position, Holden in Securities for Bankers’ Advances, 4th edn (1964), p 41, says: “Probably the most striking feature about the mortgage forms used by the banks is that they are remarkably long and, at first sight, complicated documents. The main reason for this is that they have been drafted by the banks’ legal advisers in such a way as to confer every possible advantage upon the banks and to deprive the customers (so far as it is legally possible to do so) of every conceivable benefit which would otherwise be secured to them at common law or by statute.” It is not for me to comment on the wisdom or propriety of the banks taking every advantage which the law allows, but it does seem regrettable that little or no notice has been taken of the words of impeachment of Lord Macnaghten and Professor Maitland in the half century or more since they were spoken. It surely is a sad commentary on the operation of our legal system that a borrower should be expected to execute a document which only a person of extraordinary application and persistence would read, which, if read, is virtually incomprehensible and which, in any event, has a legal effect not disclosed by its language. The present dispute, in which the parties have genuinely entertained different views on an important matter, is a product of the complexity of the mortgage deed.
9.9 CORPORATE SECURITIES [9.1210] When a company gives its property (other than real property, which must be dealt with under the Torrens system as discussed at [9.450]) as security for a debt, it is known as a “security interest” and is capable of registration on the PPS Register under the PPS Act. The purpose of registration is to protect those dealing with the company –anyone proposing to extend credit to a company can easily peruse the PPS Register and will thus be in a better position to judge the creditworthiness of the company and the risks
538
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Chapter 9 Property and Securities Law: Concepts of Ownership
associated with extending credit to it. Further, the fact of non-registration takes away the effectiveness of the security interest. In particular, an unregistered security interest is void against a company administrator, which is the main circumstance for having obtained the security interest in the first place. Registration also determines priorities between competing security interests over the same assets.
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QUESTIONS 1.
Compare and contrast the elements of joint tenancy and of tenancy in common. Do they apply to real property and to personal property and under what circumstances can each of these forms of property ownership arise?
2.
Outline the elements of the various classifications of trusts. Advise on the circumstances in which each type of trust would be an appropriate device for the holding and distribution of particular property.
3.
Distinguish between the various types of interests that can be held in real property and by whom. Discuss the effect of registration of such interests under the Torrens system legislation.
4.
Detail the default priority rules contained in s 55 of the Personal Property Securities Act 2009 (Cth) and define the terms contained therein. List the general types of items that can constitute personal property under the PPS Act, noting those items that do not constitute such personal property. Prior to a person acquiring a security interest over certain of an entity’s personal property, what important advice should you promptly provide to that person in relation to becoming a secured party and why?
WEB REFERENCES Australian Securities and Investments Commission http://www.asic.gov.au Personal Properties Securities Register http://www.ppsr.gov.au
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10
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Crime: Concepts of Control Andrew Terry THE BUSINESS CONTEXT The criminal law impacts on virtually all aspects of contemporary society including business. Governments are increasingly using the instrument of the criminal law to ensure compliance with their agendas. While the vast majority of offenders are individuals engaged in the commission of crimes with a single or small number of victim(s), corporations operate at an entirely different level. As such, offences committed by corporations and those operating within corporations tend to impact on a large scale. This is why corporate crime is an important topic. This chapter provides a general outline of the nature of crime, the main features of the criminal justice system and the issues involved in attributing criminal liability to corporations.
10.1 THE CONCEPT OF CRIME ..................................................................................................................................... 542 10.2 THE HISTORY AND CLASSIFICATION OF CRIMINAL LAW ....................................................................... 543 [10.30]
Sources of criminal law .............................................................................................................................. 543
[10.80]
Crime typology ............................................................................................................................................ 544
10.3 GENERAL PRINCIPLES OF CRIMINAL LIABILITY ......................................................................................... 545 [10.120]
The basic elements of an offence ............................................................................................................. 545
[10.160]
Burden and standard of proof ................................................................................................................... 546
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10.4 GENERAL CHARACTERISTICS OF CRIMINAL LIABILITY .......................................................................... 551 [10.250]
The criminal process ................................................................................................................................... 551
[10.380]
Parties to a crime ......................................................................................................................................... 555
[10.400]
Antecedent crimes ...................................................................................................................................... 556
[10.450]
General defences ......................................................................................................................................... 558
10.5 CORPORATE CRIME ................................................................................................................................................ 558 [10.470]
Corporate criminal liability ....................................................................................................................... 558
[10.490]
Statutory modifications .............................................................................................................................. 561
[10.510]
Problems of punishment ........................................................................................................................... 562
[10.540]
Civil penalty regimes .................................................................................................................................. 563
10.6
WHITE-COLLAR CRIME ........................................................................................................................................ 564
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10.7 CYBERCRIME ............................................................................................................................................................. 565
Crime is about life, death and the liberty of the subject; civil law is entirely concerned with that most tedious of all topics, money. Criminal law requires an expert knowledge of bloodstains, policemen’s notebooks and the dark flow of human passion, as well as the argot currently in use round the Elephant and Castle. Civil law calls for a close study of such yawn-producing matters as bills of exchange, negotiable instruments and charter parties … Give me, however, a sympathetic jury, a blurred thumbprint and a dodgy confession, and you can keep Mega-Chemical Ltd v the Sunshine Bank of Florida with all its fifty days of mammoth refreshers for the well-heeled barristers involved. John Mortimer, Rumpole and the Bubble Reputation.
542
10.1 THE CONCEPT OF CRIME [10.10] The criminal law is the most visible area of the law. The life and liberty of the citizen is frequently stuff of high drama and holds a peculiar fascination. Murder trials in particular continue to place the criminal law at the forefront of the public consciousness. The criminal law defines what conduct amounts to crime and then provides for State- sanctioned punishment, including fines and imprisonment. The question “What is a crime?” can be answered from a variety of perspectives; there is no universally accepted answer. Professor Glanville Williams (Textbook of Criminal Law) states that “A crime (or offence) is a legal wrong that can be followed by criminal proceedings which may result in punishment”. Philosophers, instead, focus upon those acts that are harmful to individuals or contrary to the continued orderly existence of society, while sociologists view crime in the context of deviance from social norms. A more conservative perspective would be that any transgression of a community’s moral code constitutes a crime. [10.20] Regardless of how a crime is best defined, it is today the responsibility of the legislature to determine those categories of acts or omissions that should be prosecuted. That is, it is necessary for the State to determine the “legal wrongs” to which Glanville Williams referred. While some behaviour might universally be regarded as worthy of punishment –for instance, paedophilia –community attitudes may change in relation to what should be considered criminal behaviour. In 2005 New South Wales Magistrate Pat O’Shane threw out of court a charge of offensive language against a 27-year-old drunk who stuck his middle finger up at police officers patrolling Sydney’s Rocks area at midnight and shouted “Youse are fucked”. She said that he should not have been arrested as that type of language was “to be expected on George Street at that time of night”. That decision caused much public comment throughout Australia and raised the issue of the boundaries of community-sanctioned behaviour and the role of the criminal law. Rex Jory in the The Advertiser (Adelaide) (20 October 2005) wrote:
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Chapter 10 Crime: Concepts of Control I can vaguely sympathise with Ms O’Shane. Standards of society behaviour have slipped to frighteningly low levels. Outrageous and offensive language is as commonplace in Hindley St after midnight as the revving of car engines. But that doesn’t mean it has to be accepted in law.
This case is a demonstration of the ongoing debate about what behaviour should be sanctioned by the criminal law. A recurring theme of that debate concerns the moral dimension of crime. Is it possible to prescribe the content of the criminal law by examining the moral code of our society so that the essence of criminality is immorality? Alternatively do the constituent parts of the criminal law have their source in the simple declaration by the State that certain acts are forbidden so that the essence of criminality is the reflection of the concerns of the society by a pragmatic legislature? Common sense suggests that a successful body of criminal law will blend those two concepts. However, legal commentators and the judiciary tend to reject that blend and take sides, opting either for the sweetness of immorality or the acidity of societal concern.
10.2 THE HISTORY AND CLASSIFICATION OF CRIMINAL LAW
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Sources of criminal law [10.30] The Commonwealth’s criminal legislation comprises the Crimes Act 1914 (Cth), the Criminal Code Act 1995 (Cth) –which contains the Criminal Code (Cth) –and various other specific statutes which contain offence provisions such as the Corporations Act 2001 (Cth), the Competition and Consumer Act 2010 (Cth) and the Taxation Administration Act 1953 (Cth). [10.40] Despite these Commonwealth legislative instruments, the criminal law is primarily a matter for the individual States and Territories. Among those States and Territories there have developed two distinct approaches. First, New South Wales, South Australia and Victoria have enacted legislation which restates in a statutory form the common law of crime, as well as creating new offences and providing for punishment – Crimes Act 1900 (NSW), Criminal Law Consolidation Act 1935 (SA) and Crimes Act 1958 (Vic) (the “common law jurisdictions”). Second, Queensland, Tasmania, Western Australia, the ACT and the Northern Territory have enacted codes which replace the common law – Criminal Code Act 1899 (Qld), Criminal Code Act 1924 (Tas), Criminal Code Act 1913 (WA) and the Criminal Code Act 1983 (NT) (the “Code jurisdictions”). The Australian Capital Territory (Criminal Code 2002 (ACT)) is based on the Model Criminal Code (see [10.50]). [10.50] While the common law is the bedrock of the criminal laws, the courts have now held that they cannot create new criminal offences. Rather, the courts have left the field of offence creation to the legislature, and restricted their role to statutory interpretation. Most judgments concerning the construction of offences simply give meaning to the statutory provisions, particularly when the legislative intention is not clear. Of course, the legislature can easily override any judicial interpretation which it considers contrary to its original intention (or unpopular by community standards) by amending the legislation.
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To permit two-up on Anzac Day would really take away the innocent fun of actually breaking the strict letter of the law. P J Clauson, Queensland Minister for Police The Australian (21 April 1989). We must recognise a range of actions, the badness of which is not inherent in themselves, but in the circumstances in which they are performed, and which stretches in a continuous scale from wilful murder at one end to failure to observe a no-parking rule or to return on time a library book … at the other. B Wootton, Crime and the Criminal Law (Stevens & Sons, 1963).
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[10.60] Criminal law codification is appealing because it provides for uniformity throughout Australia as to the basic principles, the range of offences, the legal tests to be applied and the maximum penalties. However, despite the arguments in favour of codification, uniformity has not yet been achieved. With a view to forming a uniform criminal code, the Standing Committee of the Attorneys-General established the Criminal Law Officers Committee, which subsequently became the Model Criminal Code Officers Committee (MCCOC). The recommendations of MCCOC were substantially enacted in the Criminal Code Act 1995 (Cth), which now applies to all Commonwealth offences, and in the Australian Capital Territory enacted in the Criminal Code 2002 (ACT). It was envisaged that all of the other States and Territories would implement complementary legislation but this did not occur. Rather, it seems that, as an expression of States’ and Territories’ rights, the Model Criminal Code is only being implemented on a piecemeal basis. Indeed, there appears little hope for uniform criminal laws into the foreseeable future.
IN CONTEXT
Codifying Criminal Law [10.70] It is hoped that the 1994 Bill will not only be the beginning of a new era for Commonwealth criminal law … but for the criminal law of Australia generally. It is the beginning of one of the most ambitious legal simplification programs ever attempted in Australia.
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Counsel: Have you ever been married?
Explanatory Memorandum, Criminal Code Bill 1994 (Cth)
Witness: Yes, sir.
Counsel: And whom did you marry?
Crime typology
Witness: A woman, sir.
[10.80] Although the law does not specifically categorise the types of crimes, it is sometimes helpful to analyse crime based on the following convenient groupings:
Counsel: Yes, well, I assumed that. I never heard of anyone marrying a man.
Felonies and misdemeanours
Witness: My sister did. E Phillips, The World’s Best Lawyer Jokes (Fontana Press, 1993). (Since the amendment of the Marriage Act 1961 (Cth) in 2017 to legalise same-sex marriage in Australia such an exchange is unlikely to take place in an Australian courtroom)
[10.90] This method of classification is founded in the early history of criminal law and is no longer useful. In essence the distinction ascribes a more serious nature to those crimes classified as felonies, usually evidenced by the consequences. Conviction for felony frequently led to the death penalty and forfeiture of property. Misdemeanours usually attracted only imprisonment, flogging and fines. Although the distinction is still drawn in some Australian Codes, it is not helpful in that crimes of a serious nature do not always technically constitute felonies.
Indictable and summary offences [10.100] This distinction is based on the seriousness of the offence. Less serious offences are usually dealt with summarily; that is, before a magistrate. More serious offences proceed on indictment and are dealt with by a judge and often a jury. This distinction is not always clear, for there exists a wide range of offences which, at the election of the prosecution and/or the defence, may be dealt with either way. 544
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Chapter 10 Crime: Concepts of Control
10.3 GENERAL PRINCIPLES OF CRIMINAL LIABILITY [10.110] An important objective of the justice system is to ensure that innocent people are not wrongfully convicted. To this end, important procedural safeguards are imposed, mostly by way of evidential rules that afford fairness to an accused. Moreover, the prosecution bears the onus of proof, and offences must be proved beyond a reasonable doubt. Increasingly, where the burden of proof introduces inefficiencies into the administration of justice, the law is dispensing with the usual requirement to prove the mental element through introducing offences of strict and absolute liability.
The basic elements of an offence [10.120] It is fundamental that each and every offence comprise a wrongful act or omission (actus reus) by a person with a guilty mind (mens rea). That requirement has found expression in the legal maxim actus non facit reum, nisi mens sit rea (an act does not make a person guilty, unless her or his mind was guilty). Significantly, a person cannot be punished for a guilty mind alone; there must be a wrongful act. In this way, the criminal law can be distinguished from a moral code. In practice, however, this distinction between the mental and physical dimensions to a crime is somewhat blurred because an intention can be inferred from the conduct.
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Actus reus [10.130] An essential element of a completed crime, the actus reus is the activity (or culpable omission) which constitutes the physical part of criminality. What constitutes the actus reus will vary according to the components of the particular offence in question. The actus reus may also take place over an extended period of time. For example, if a person violently attacks another, then an assault has been committed, but if the victim subsequently dies due to the injuries occasioned, then a homicide has been committed. The temporal aspect of actus reus can be extended to capture all outcomes that are causally related to the initial act or omission. In some cases, however, very little may be required to constitute the actus reus for example a defendant’s legal status as a licensee of hotel premises where under-age drinkers are served.
Mens rea [10.140] Mens rea describes the other necessary component of criminal behaviour. However, what is simply “naughty, depraved or wicked” is not, for that reason alone, criminal. The requisite mental element depends upon or must be construed from the terms of the specific criminal offence. In many instances, as a matter of construction, the mens rea will be an intention to commit the activity constituting the actus reus or recklessness as to whether or not the activity occurred. By ensuring that criminal liability only attaches if both the actus reus and the mens rea are present, the law is concerned to ensure that crimes are not committed simply by mistake. Negligence is not sufficient for a person to be found guilty of a criminal offence. However, there are exceptions to this proposition for example manslaughter and some specific provisions such as negligent driving. This is because the complexity of modern life necessarily involves risk, and sometimes tragic consequences may follow when that risk is not
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His Honour (to counsel): Your submission is totally irresponsible, in fact, asinine. I find it incomprehensible that you come before me with a submission so utterly spurious, unfounded, and without any case law at all to support it. What you put to me is quite without point, and I find your submission –well, moronic, in fact. Barrister: Am I to infer that Your Honour is not entirely with me at this point? B Tait, Court in the Act: Humorous Moments from Australian Courts, (Federation Press, 1992).
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properly assessed. A person who arranges for another to undertake a bungee jump using a faulty harness does not usually demonstrate criminality. But where that person is the enraged husband of the jumper’s mistress one may take the view that not only a motive but also a guilty intent exists.
IN CONTEXT
The Criminal Code (Cth) and the Model Criminal Code [10.150] The Model Criminal Code has been adopted by the Commonwealth and in the Australian Capital Territory. Under the Model Criminal Code the concepts of actus reus and mens rea have been replaced, respectively, with physical elements and fault elements.
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This Code specifies that for every offence there must be a physical element or elements and for each physical element there must be a fault element. A physical element may be conduct, a circumstance in which conduct occurs or a result of conduct. The conduct must also be voluntary. Examples of involuntary actions given by the Code are spasm, convulsion or other unwilled bodily movement. An omission to perform an act is only voluntary if the act omitted is one which the person is capable of performing. Fault elements under the Code can be intention, knowledge, recklessness or negligence. The offence provision may specify the fault element for each of the physical elements. However if the particular offence provision does not identify the fault element the Code specifies that, if the physical element is conduct, the fault element is intention. If there is no fault element specified for the particular offence provision and the physical element is a circumstance in which conduct occurs, or a result of conduct, the fault element is intention, knowledge or recklessness.
Burden and standard of proof Presumption of innocence Barrister: Just answer me yes or no. Child: Yes or no. M Brennan and R E Brennan Strange Language (RMIHE, 1988). It is better that ten guilty persons escape, than one innocent suffer. W Blackstone, Commentaries on the Laws of England (1809).
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[10.160] As a starting point, when a person is charged with an offence, that person is presumed to be innocent. It is the task of the prosecution to establish guilt. It must do this by proving each of the elements of the offence which make up the actus reus (or physical elements) of the particular offence and each of the elements which make up the mens rea (or fault elements) of the particular offence. It follows then that it is not for the accused to satisfy the court as to her or his innocence. Rather, the prosecution is put to proof. It has been said that (Woolmington v DPP [1935] AC 462 at 481 per Viscount Sankey LC): [t]hroughout the web of the English criminal law one golden thread is always to be seen, that it is the duty of the prosecution to prove the prisoner’s guilt.
Despite the significance of the “golden thread” there exist today numerous examples of onus reversal; that is, where the accused bears the onus to disprove elements of the offence. Such provisions are regularly found within the taxation statutes. There are also numerous provisions in statutes which allow the government and its agencies to make
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Chapter 10 Crime: Concepts of Control
allegations in court which are then to be taken as prima facie evidence of the facts alleged, so that the person charged has to bring evidence to counter the allegation. While in some cases this approach may be inevitable, simply because in those cases the accused is the best placed to give evidence, the growth of these exceptions to this fundamental common law principle needs to be carefully monitored.
Proof beyond reasonable doubt [10.170] The term burden of proof is used in two distinct senses:
The acquittal of a guilty person constitutes a miscarriage of justice just as much as the conviction of the innocent. M Thatcher, The Observer (21 July 1985).
• the legal (or persuasive) burden, which refers to the obligation upon a party to adduce evidence to demonstrate the existence of a fact in issue; • the evidential burden, which refers to the necessity for a party to adduce evidence to raise an issue.
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The persuasive burden has been described as the risk of non-persuasion, meaning that the party on whom it rests will lose the issue in question unless the judge or jury is satisfied by the evidence raised. The evidential burden requires that the party on whom it rests should introduce evidence of sufficient cogency to raise that issue in the proceedings. In criminal proceedings, the onus of the legal (or persuasive) burden of proof rests upon the prosecution. The standard of proof is beyond a reasonable doubt. This can be contrasted with civil proceedings, where the standard of proof is on the balance of probabilities. The distinction between the civil and criminal standards of proof is highlighted by the infamous OJ Simpson cases in the US in the 1990s. The criminal trial resulted in acquittals because the prosecution failed to convince the jury beyond a reasonable doubt that Simpson committed the murders. It was not for Simpson to prove his innocence, and it was not enough that the jury might have thought it likely that he committed the murders. Simpson then faced civil action for damages brought by the victims’ families in which they only had to establish his liability on the balance of probabilities. The civil trial, and the lower standard of proof, resulted in a different outcome. Similarly, the South Australian case of Utans v Consolidated Insurances of Australia Ltd (unreported, Supreme Court of South Australia (Full Court), 17 February 1988) illustrates that distinction.
Utans v Consolidated Insurances of Australia Ltd (unreported, Supreme Court of South Australia (Full Court), 17 February 1988) [10.180] Mr Utans had been tried for the murder of his wife and acquitted. He subsequently commenced a
civil action after his insurer, Consolidated Insurances of Australia Ltd, refused to pay a claim for fire damage to his house, in the sum of $25,000. In the civil trial, Bollen J found, on the balance of probabilities, that Utans had spread petrol in his wife’s bedroom after her death and had set fire to it. His Honour said that: If it be asked why the plaintiff set fire to the room, the answer is that he knew his wife’s dead body was there and he hoped it would be consumed or burnt so much that the true cause of death could not be found … The plaintiff bore his wife ill will. He and she were in dispute about “settlement of property”. They had separated. The plaintiff had treated her roughly. He spoke … of getting rid of her. Of course “getting rid” is equivocal. But when soon after that speaking she is found dead from strangulation with her corpse in a fire lit by the accused the comment assumes a sinister connotation.
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Business and the Law On appeal the trial judge’s findings were upheld. King CJ, with whom Cox J agreed, reviewed the evidence. His Honour summarised his view of the case –the deceased died by strangulation some hours before the fire; Mr Utans had motive, in the context of the acrimonious property settlement proceeding and opportunity, by way of access to the house –and said that “the cumulative weight of the factors which I have enumerated, produced in my mind a strong conviction that the appellant set fire to the house for the purpose of destroying evidence that he was responsible for the death of the deceased”. In dissent, Johnson J said: In my opinion, the substance and quality of the evidence is such that applying the standard of proof on the balance of probability but bearing in mind the gravity of the allegations, giving some scope to the operation of the presumption of innocence, it is not possible to come to an actual persuasion of the mind that it has been proved that this plaintiff killed his wife and set fire to his house to cover the killing This case clearly illustrates the distinction between the criminal and civil standards of proof.
[10.190] The well-established common law rule that the prosecution must prove guilt beyond a reasonable doubt is reinforced in the judgment of Viscount Sankey LC in Woolmington referred to above, in which the rule was described as the “golden thread” throughout the “web of the English criminal law”. Woolmington’s wife had left him and he went to see her in an unsuccessful attempt to persuade her to return. She died when a gun he had brought with him, and with which he threatened to shoot himself, accidentally discharged. He appealed from his conviction for murder to the House of Lords on the basis of the trial judge’s direction to the jury that was in the following terms (at 472-473):
In England, justice is open to all –like the Ritz Hotel. Mathew LJ.
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Once it is shown to a jury that somebody has died through the act of another, then it is presumed to be murder, unless the person who has been guilty of the act which causes the death can satisfy a jury that what happened was something less, something which might be alleviated, something which might be reduced to a charge of manslaughter, or was something which was accidental, or was something which could be justified.
The appeal was allowed. It was held that the legal burden to prove the accused’s guilt (beyond a reasonable doubt) must be distinguished from the evidential burden. In Woolmington, the accused claimed an accidental discharge of the gun. In circumstances where there is evidence of a domestic dispute, a gun in the hands of a disgruntled husband and a fatal gunshot wound to the wife, the accused’s claim that it was an accident is usually unlikely to be accepted. The evidential burden on the accused in such a case does not displace the legal burden on the prosecution that ultimately it must establish guilt beyond a reasonable doubt in the minds of the jury. However, as a practical matter, the prosecution is likely to have little trouble in reaching that standard where the accused does nothing beyond claiming an accident. It should be noted that there is no acceptable way of explaining the expression “beyond a reasonable doubt”. The courts have consistently said that the expression means what it says, and that trial judges should refrain from attempting to clarify this expression for a jury.
Strict liability The nature of strict liability [10.200] The expression “strict liability” refers to a crime committed simply by the act (actus reus or physical element). There is no need to establish a particular mental state. 548
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Chapter 10 Crime: Concepts of Control
There has been an enormous growth in the range of strict liability offences in recent times. For example, with the offence of exceeding the speed limit the prosecution is merely required to prove that the driver was exceeding a speed limit, not that the driver intentionally drove at an excessive speed. Defence of honest and reasonable mistake [10.210] The expansion of strict liability offences is nevertheless of some concern because persons are being punished for crime which they mistakenly committed. In this situation, the courts have acknowledged the defence of an honest and reasonable mistake. That is, where an individual holds an honest and reasonable belief in a set of facts which, if true, would have made the acts innocent, then the offence is not made out. This common law defence was recognised by the High Court of Australia in Proudman v Dayman [1941] HCA 28.
Barrister: Do you know how he was when he was alone? Witness: I cannot remember ever being with him when he was alone. B Tait, Court in the Act: Humorous Moments from Australian Courts (Federation Press, 1992).
Proudman v Dayman [1941] HCA 28 [10.220] This case concerned a charge of permitting an unlicensed person to drive a motor vehicle. The
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relevant legislation did not require the prosecution to prove that the defendant knew that the driver was unlicensed. The vehicle owner asserted a mistaken belief that the driver had been licensed and that she therefore had a defence to the charge. In the course of his judgment, Dixon J made the following statement of principle: It is one thing to deny that a necessary ingredient of the offence is positive knowledge of the fact that the driver holds no subsisting licence. It is another to say that an honest belief founded on reasonable grounds that he is licensed cannot exculpate a person who permits him to drive. As a general rule an honest and reasonable belief in a state of facts that, if they existed, would make the defendant’s act innocent affords an excuse for doing what would otherwise be an offence. However, the court found that the offence was established as the defendant did not hold that belief on reasonable grounds. In fact, it appeared that the defendant merely did not make any enquiries. Dixon J observed that: The strength of the presumption that the rule applies to a statutory offence newly created varies with the nature of the offence and the scope of the statute. If the purpose of the statute is to add a new crime to the general criminal law, it is natural to suppose that it is to be read subject to the general principles according to which that law is administered. But other considerations arise wherein matters of police, of health, of safety or the like the legislature adopts penal measures in order to cast on the individual the responsibility of so conducting his affairs that the general welfare will not be prejudiced. In such cases there is less ground, either in reason or in actual probability, for presuming an intention that the general rule should apply making honest and reasonable mistake a ground of exoneration, and the presumption is but a weak one. Indeed, there has been a marked and growing tendency to treat the prima facie rule as excluded or rebutted in the case of summary offences created by modern statutes, particularly those dealing with social and industrial regulation. But, although it has been said that in constructing a modern statute a presumption as to mens rea does not exist (per Kennedy LJ, Hobbs v Winchester Corporation (1910) 2 KB 471 at 483), it is probably still true that, unless from the words, context, subject matter, or general nature of the enactment some reason to the contrary appears, you are to treat an honest and reasonable mistake as a ground of exculpation, even from a summary offence
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As a result of Proudman v Dayman, in a “strict liability” offence the prosecution need not prove the mens rea or fault element, unless the accused raises an honest and reasonable mistake of fact. In that event the onus then switches to the prosecution to disprove that such a belief was honestly and reasonably held. It is important to note, however, that a mistake of law will not be sufficient to make out the defence.
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Absolute liability A real patriot is the fellow who gets a parking ticket and rejoices that the system works. Bill Vaughan (1958).
[10.230] The comments of Dixon J in Proudman v Dayman cited above indicate that as long ago as 1941 the availability of the defence of honest and reasonable mistake was restricted so that in some cases liability was absolute regardless of the accused’s mental state. Offences where the prosecution does not have to prove mens rea (or a fault element) and the defendant cannot raise a defence of honest and reasonable mistake of fact are absolute liability offences. As to whether an offence is one of strict or absolute liability is a matter for statutory interpretation. As Barwick CJ, the former Chief Judge of the High Court of Australia, said in Cameron v Holt [1980] HCA 5 at [12]:
Senior Constable Nolan has no explanation for the crime spree and puts it down to a lot of people happening to commit crime at the same time. Hauraki Herald (New Zealand) (30 December 1995).
There is a presumption, in my opinion a strong presumption, that in creating a criminal offence the legislature intends a guilty intent appropriate to the nature of the offence to be an ingredient of the offence.
The legislature may make its intent to the contrary clear if it so chooses. It may state directly or by implication that liability is strict or absolute. The legislation may state that the offence is established and the defendant is guilty simply upon proof of the commission of the actus reus or physical elements, it being intended that no defence is available. These instances of absolute liability are distinguished from the more common cases of strict liability in that for absolute liability offences the statute excludes the defence of honest and reasonable belief.
He Kaw Teh v The Queen [1985] HCA 43 [10.240] The most significant decision in this area is that of the High Court of Australia in He Kaw Teh. It clearly demonstrates the judiciary’s disapproval of strict liability offences, and, of course, absolute liability. The case involved charges under both s 233B(1)(b) and 233B(1)(c) of the Customs Act 1901 (Cth), which provided that: Any person who: (b) imports, or attempts to import, into Australia any prohibited imports to which this section applies, or exports or attempts to export, from Australia any prohibited exports to which this section applies; or (c) without reasonable excuse (proof whereof shall lie upon him) has in his possession, or attempts to obtain possession of, any prohibited imports to which this section applies which have been imported into Australia in contravention of this Act; shall be guilty of an offence. On arrival in Melbourne, the accused was discovered to be in possession of a large quantity of heroin concealed in a compartment of his bag. With respect to the charge under s 233B(1)(b), Gibbs CJ stated (at [17]): [T]he offence created by s 233B(1)(b) is treated by the Parliament in some circumstances as being one of the most serious in the criminal calendar. It seems improbable that the Parliament would have 550
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Chapter 10 Crime: Concepts of Control intended that it might be committed as a result of mere carelessness, although that would be the case if guilty knowledge was not an element, and an unreasonable although honest mistake would not be sufficient to exculpate the accused … The gravity of the offence suggests that guilty knowledge was intended to bean element of it … I accordingly conclude that the presumption mens rea is required before a person can be held guilty of a grave criminal offence is not displaced in relation to s 233B(1) (b) of the Customs Act and that the prosecution on a charge under that provision bears the onus of proving that the accused knew that he was importing a narcotic substance. In relation to the charge under s 233B(1)(c), the Chief Justice said (at [22]) that: [W]here a statute makes it an offence to have possession of particular goods, knowledge by the accused that those goods are in his custody will, in the absence of a sufficient indication of a contrary intention, be a necessary ingredient of the offence because the words describing the offence (“in his possession”) themselves necessarily import a mental element. In such a case it is unnecessary to rely on the common law presumption that mens rea is required. In response to the argument that the words of s 233B(1)(c) “without reasonable excuse (proof whereof shall lie upon him)” demonstrated the intent of Parliament that strict liability be imposed, Gibbs CJ said that the basic presumption that mens rea must be established had not been displaced. The decision provides a clear indication that the courts will seek to construe offence provisions to include mens rea as an essential element of an offence and that, even where it is agreed that the offence is one of strict liability, the defence of honest and reasonable belief should be available.
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10.4 GENERAL CHARACTERISTICS OF CRIMINAL LIABILITY The criminal process Investigation [10.250] The criminal process formally begins when an initiating process is laid against a person at court and finishes when the offender has been acquitted or sentenced, subject to any rights of appeal the person may have. However, often critical to the eventual outcome is what occurs before the formal criminal process commences during the investigation as this determines the strength or weakness of the case the State can bring against the alleged offender. [10.260] The police are responsible for determining what matters will be investigated and for conducting the investigation. In conducting such an investigation the police can draw on a number of investigation methods in building a case against the person. The mainstay of police investigations remains the taking of statements from witnesses who can provide relevant evidence. In addition the common law, augmented by legislation, allows the police, in certain circumstances, to enter and search a person’s premises. The police also have access to more modern investigation techniques. The police can access a number of internal and other government databases containing financial and other information. There is legislation in each jurisdiction allowing police to intercept communications, insert listening devices in premises or conduct medical examinations of suspects provided certain preconditions are met. These preconditions are usually designed to ensure that the rights of citizens are protected to some degree from improper use by
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A North Queensland Police Constable was in the witness box: Constable: I went into the Sergeant’s office and told him there was a report of a dead horse lying in Dalrymple Street. Question: What did he say? Constable: He said to go and drag it round the corner into Poole Street. Question: Why did he tell you to do that? Constable: I think it was because the Sarge couldn’t spell “Dalrymple”. B Tait, Court in the Act: Humorous Moments from Australian Courts (Federation Press, 1992).
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police of their powers. It must be noted, however, that all investigation techniques trample, to some extent, upon the rights of citizens. This has to be balanced against the public interest in ensuring that there is proper law enforcement. [10.270] In addition to the police there are a number of other bodies whose role is or includes the investigation of crime. Most states and territories have an Independent Commission Against Corruption (as in New South Wales), or a Crime and Misconduct Commission (as in Queensland) or a similarly named and constituted body. At the national level the Australian Securities and Investments Commission (ASIC) is responsible for investigating corporate crime. While such bodies can conduct investigations using the powers available to police, because of the complexity of the crimes that they investigate, parliaments have granted them greater investigation powers. ASIC for example has the power to compel persons to produce documents and attend examinations. At such examinations the persons must answer the questions put to them under oath, although they may claim the privilege against self-incrimination so that answers cannot later be used against them in court.
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Prosecution [10.280] Prosecutions for summary offences will normally be initiated by a police officer by either arresting and then charging the alleged offender or by issuing them with a summons or notice to attend court. Many summary proceedings are finalised on a guilty plea, increasingly so in circumstances involving some negotiation with police. Where the summary offence proceeds to hearing it will be determined by a magistrate in the lower court. In New South Wales this court is known as the Local Court, in Tasmania as the Court of Petty Sessions and in the Northern Territory as the Court of Summary Jurisdiction. In all other States and in the Australian Capital Territory this court is known as the Magistrates Court. The court: The charge here is theft of frozen chickens. Are you the defendant, sir? Defendant. No sir, I’m the guy who stole the chickens. R Jones, M Sevilla and G F Uelmen, Disorderly Conduct: Verbatim Excerpts from Actual Cases (WW Norton, 1989).
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[10.290] Prosecutions for indictable offences are conducted by the Director of Public Prosecutions (DPP), who will take over the matter initiated by the police or from one of the investigation bodies referred to above. The DPP is an independent officer who seeks to ensure that the prosecution decision-making process is free from improper political or other influences. Indictable offences are more serious than summary offences and will be tried before a judge, usually with a jury, in a District or County Court, or Supreme Court. [10.300] It should be noted that there is no bar to private prosecutions. However, in relation to indictable offences, the DPP will usually take over the proceedings, and if there is insufficient evidence to proceed, terminate the prosecution. This occurred in the matter of R v Gilham (unreported, NSW Supreme Court, April 1995). Mr Gilham had been tried for the murder of his brother and convicted of manslaughter by reason of provocation. It was the defence case that Mr Gilham lost control when he arrived home to find that his brother had killed his parents. However, following the trial, the uncle of Mr Gilham accused him of murdering the parents –that Mr Gilham was responsible for all the deaths. The uncle commenced two private prosecutions of Mr Gilham. However, the DPP took over the prosecutions of Mr Gilham and then declined to proceed any further (see Sydney Morning Herald, 7 June 2001).
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Chapter 10 Crime: Concepts of Control
Bail [10.310] If a person is arrested and charged, the police may release the person on bail, with or without conditions, on the undertaking that they will turn up to court to answer the charge. This is known as police bail. If the police do not grant bail, at common law there is a requirement that the person be brought before a magistrate as soon as practicable so the magistrate can determine this issue and decide whether or not the person should be at liberty until their case can be heard. Whether the police or a magistrate will grant a person bail depends upon the likelihood that the person will turn up at court and this, in turn, depends upon factors such as the severity of the offence, the strength of the case against them, the severity of the sentence and that person’s ties to the jurisdiction. Unless the offence is serious there is generally a presumption that the person should be granted bail.
Are you going to come quietly or do I have to use ear plugs? S Milligan, The Goon Show, BBC.
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Committal [10.320] Unless the accused consents to dispensing with them, committal proceedings are conducted by a magistrate in respect of offences not to be tried summarily. The committal procedure requires the magistrate to be satisfied there is sufficient evidence to support a conviction. Often this only involves the magistrate reviewing the documents and statements which comprise the evidence against the defendant. This is called a “paper committal”. On some occasions witnesses may be required to give their evidence orally before the magistrate. There is a trend in many States for Parliament to pass legislation with a view to reducing the opportunities for defendants to conduct this longer type of committal hearing. If the magistrate decides that there is sufficient evidence against a defendant he or she is committed to the District or County Court, or Supreme Court to stand trial. Trial [10.330] Prior to the commencement of a trial, the defendant (now called “the accused”) is again charged, this time before the higher court, and required to enter a plea –usually guilty or not guilty, this is called an arraignment. Where there is a plea of guilty, it then falls to a judge to impose sentence after being informed of the objective facts and hearing any evidence brought on behalf of the accused in mitigation for example mental health issues or character testimonials. Where there is a plea of not guilty, the matter proceeds to trial. The accused is then presented on an indictment and trial commences. The prosecution presents its case first and, where the accused then has a case to answer, the defence has an opportunity to lead evidence.
“Do you have a criminal lawyer in town?” “Well, we’re pretty sure we do but we haven’t been able to prove it yet.” E Phillips, The World’s Best Lawyer Jokes (Fontana Press, 1993).
Jury [10.340] Where the trial involves a jury, that jury is responsible to find whether the facts alleged against the accused are proved and, if so, whether the accused is guilty as charged. It is the function of the judge to direct the jury as to the appropriate law and its meaning. The jury applies the law to the facts that they find proved, deliberates and then returns a verdict –guilty or not guilty. In some cases the jury finds that after lengthy deliberation it cannot reach a verdict. In such cases, the judge may make a further direction to assist them to reach a verdict, and if that is unsuccessful, the jury will then be discharged.
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As a consequence, a further trial becomes necessary. That process is not only expensive but also imposes hardship on both the accused and the victim. The definition of a verdict varies across the jurisdictions but legislation across Australia today generally allows for majority rather than unanimous verdicts –11:1 or 10:2.
IN CONTEXT
The jury system [10.350] Arguments have, of course, been raised against the continuance of the jury sys-
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tem. There is no doubt that modern trials –especially in areas such as elaborate corporate fraud –are long, technical and complex. It is said that juries have difficulty in understanding some of the issues involved and in retaining a cohesive view of evidence and argument presented over a period of some days, or even weeks. There is substance in the argument. Before arguments for the abandonment of juries in complex commercial trials are addressed, it would seem appropriate to take steps to improve the selection process of such juries and the facilities available to them in support of their function. It may even be thought that jurors should be allowed some limited rights of participation in the trial itself in an effort to avoid confusion and misunderstanding. The importance of the effort to assist a juror in understanding both the procedure and the evidence was highlighted by Deane J of the High Court of Australia when, in Kingswell v The Queen [1985] HCA 72 at [51], he said that: A system of criminal law cannot be attuned to the needs of the people whom it exists to serve unless its administration, proceedings and judgments are comprehensible by both the accused and the general public and have the appearance, as well as the substance, of being impartial and just. In a legal system where the question of criminal guilt is determined by a jury of ordinary citizens, the participating lawyers are constrained to present the evidence and issues in a manner that can be understood by laymen. The result is that the accused and the public can follow and understand the proceedings. Equally important, the presence and function of a jury in a criminal trial and the well-known tendency of jurors to identify and side with a fellow citizen who is, in their view, being denied a “fair go” tend to ensure observance of the consideration and respect to which ordinary notions of fair play entitle an accused or a witness. Few lawyers with practical experience in criminal matters would deny the importance of the institution of the jury to the maintenance of the appearance, as well as the substance, of impartial justice in criminal cases.
The defendant, charged with arson, missed a court appearance. The court: Where were you?
Defendant: In the hospital. The court: Why? Defendant: Smoke inhalation. R Jones, M Sevilla and G F Uelmen, Disorderly Conduct: Verbatim Excerpts from Actual Cases (WW Norton, 1989).
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Sentence [10.360] If an accused pleads guilty, or is found guilty by a jury, the trial judge must impose an appropriate sentence for the crime. For summary offences this task falls upon the magistrate. The aims of sentencing include: • Retribution: an “eye for an eye” to mete out the punishment expected by society and the victim.
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Chapter 10 Crime: Concepts of Control
• Deterrence: to deter the offender from committing similar crimes (called “personal deterrence”) and to deter others from committing crime (called “general deterrence”). • Rehabilitation: to reform the offender in order that they do not wish to commit further crimes.
A jury consists of twelve persons chosen to decide who has the better lawyer. Robert Frost.
• Incapacitation: to put the offender away so that they cannot commit further crimes. The problem with these aims is that they can conflict and in particular circumstances each would often justify quite different sentences to be imposed. A lengthy prison sentence may satisfy society and the victim’s need for retribution but usually does not assist an offender’s rehabilitation. The High Court described the difficulties in Veen (No 2) v The Queen [1988] HCA 14: The purposes of criminal punishment are various: protection of society, deterrence of the offender and others who might be tempted to offend, retribution and reform. The purposes overlap and none of them can be considered in isolation from the others when determining what is an appropriate sentence in a particular case. They are guideposts to the appropriate sentence but sometimes they point in different directions.
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Efforts by judges and magistrates to balance these disparate aims often has the result that they become the subject of criticism by victims’ groups, politicians and the media for imposing unjust sentences. Often the basis for the attack is that too much emphasis has been placed on a sentence which has been structured to assist the rehabilitation of the offender. [10.370] While most offences simply state that the maximum penalty is a fine and/or imprisonment a number of alternatives have been developed which can be used when a fine or fulltime imprisonment is not seen appropriate in the particular circumstances. These include periodic detention, where the offender is only imprisoned two days per week (enabling her or him to work or attend to family responsibilities at other times), community service orders (where the offender is required to undertake a certain number of hours of community work) and home detention (where the offender is allowed to remain at her or his residence and only leave with the consent of a supervising government department). If a suspended sentence or good behaviour bond is imposed, punishment is deferred unless the offender commits further offences. At the lower end, if the offence is seen as minor, trivial or there are strong mitigating circumstances the punishment may simply be the recording of a conviction against the offender. Sometimes even this can be dispensed with.
Parties to a crime
“How long will you be staying this time, Rumpole?”, Uncle Tom asked, and as I felt an old legal anecdote coming over me, I gave him his answer. “How long?”, I said. “Who knows how long? I well remember that terrible old lord Chief when I was first of the Bar. He gave an 86- year-old man 15 years for persistent theft. At Bodmin Assizes. ‘But my Lord’, the old man quavered, ‘I shall never do 15 years’. ‘Well then, my man’, the Lord Chief encouraged him, ‘you must do as much of it as you can’ ”. John Mortimer, Rumpole’s Return.
Principals [10.380] The principal to a crime, sometimes called the principal in the first degree or the perpetrator, is the person who performs the most significant and direct causal act. It is not necessary that the principal being charged should have completed the whole of the actus reus (or physical element). It is enough to perform part of it. Those who perform the remainder will also be principals to the crime. Further, those persons who embark on a joint criminal enterprise with the principal to commit a particular offence, or a lesser offence where the commission of the actus reus (or physical element) of the particular
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offence was reasonably foreseeable, will also be held jointly responsible. The concept of a joint criminal enterprise depends upon the common law doctrine of common purpose which has the effect of holding all parties to joint criminal enterprise responsible for any acts which fall within the scope of the common purpose. For example, if a group of persons undertake a bashing upon a single victim, and one of the participants uses a knife to lethally stab the victim, then all parties will be held equally responsible.
Accessories
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[10.390] Those who take some part in the commission of a crime by the principal, by assisting or encouraging in some way which falls short of performing part of the actus reus (or physical element), will also be parties to the crime. They are not principals as described above (although they are sometimes referred to as principals in the second degree) but they are accessories. One of the fundamental common law concepts in crime is that such persons are guilty of the crime committed by the principal and subject to the same punishment. Mere presence, however, is not sufficient to give rise to liability. In some way an accessory must assist the principal commit the crime. After an incident in Croydon involving a prison van and a concrete mixer, police are looking for eighteen hardened criminals. The Two Ronnies, BBC TV.
Additionally, there is also an offence of being an accessory after the fact. Here the offender is not an accessory as described above, but is someone who gives assistance to the principal criminal after the event, with a view to avoiding arrest.
Antecedent crimes [10.400] The common law has traditionally recognised three offences that would otherwise be regarded as preliminary to the completed criminal act. These offences are incitement, attempt and conspiracy. They are frequently described as inchoate offences.
Incitement [10.410] A person who incites a crime is said to have acted in a way that “involves the suggestion, proposal, persuasion or inducement to commit the offence” (Invicta Plastic Ltd v Clare [1976] Crim LR 131). In R v Howe (1987) 2 WLR 568, the House of Lords held that a person who incites another to kill is guilty of incitement to commit murder, even though an earlier trial had found the killer guilty not of murder but of manslaughter. Indeed, for the offence of incitement to be committed it is not necessary that the other person should proceed to commit the crime being encouraged. It is enough that the incitement had potential to lead to that criminal act.
Attempt A great majority of burglaries would be prevented if people helped themselves, said Detective Sergeant Rei Paki of the Wairoa police. Wairoa Star (New Zealand) (2 July 1993).
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[10.420] There is a distinction to be drawn between an attempt to commit a crime and mere preparation in relation thereto. The attempt is an offence, but the preparation is not. It is said that to constitute an attempt the conduct must be “more than merely preparatory to the commission of the offence” and “immediately and not remotely connected with the commission of the offence”. It is difficult in some cases to establish whether an “attempt” has taken place. A leading but widely criticised English decision is R v Smith [1975] AC 476, in which police had stopped an overloaded vehicle and then discovered that it was in fact loaded with stolen beef.
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Chapter 10 Crime: Concepts of Control
The police took the van, the driver and the beef into custody, and then sent the van to its destination so that they might catch those who were to deal with the stolen goods: Smith was one of those people. The fact that the police had taken possession of the goods meant that they were no longer stolen so he was charged with the offence of attempting to handle stolen goods, rather than with the offence of actually handling stolen goods. The House of Lords determined that no offence had been committed. Lord Hailsham LC analysed various “attempt” situations and held that there is no attempt to commit crime where the crime proposed is impossible (one cannot steal from an empty pocket) and that Smith’s situation fell within this rule. This decision has been approved by some Australian courts but is generally not followed.
Conspiracy [10.430] Central to the concept of a conspiracy is an agreement between persons to commit a crime, whether or not the crime eventually is carried out. The Model Criminal Code, which has been adopted by the Commonwealth and in the Australian Capital Territory, provides that for a person to be guilty of conspiracy (at [11.5]): (a) the person must have entered into an agreement with one or more other persons; and (b) the person and at least one other party to the agreement must have intended that an offence would be committed pursuant to the agreement; and
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(c) the person or at least one other party to the agreement must have committed an overt act pursuant to the agreement.
[10.440] The question of whether an attempt to commit a crime has occurred when the crime proposed is no longer possible was discussed above. A similar difficulty arises in relation to conspiracy. Commonwealth, Australian Capital Territory and Victorian legislation specifically limit the defence of impossibility. In the other states the limits of impossibility as a defence are not as clear. In R v Barbouttis (1995) 37 NSWLR 256, the accused was charged with conspiring with others to receive goods they believed to be stolen. The goods involved were cigarettes lent to the police by a cigarette company to be offered for sale at a small fraction of their real value. The price was such that the cigarettes were likely to have been stolen and the police alleged that in their undercover sale negotiations they had told the buyers that they were stolen. Again, it was a case of entrapment so basic that it was summed up by the trial judge as “Here, we’ve got some goods which are stolen. Let’s agree to you receiving them”. As the cigarettes were never stolen it was impossible for the accused to have committed the substantial offence of receiving. As Smart J put it (at 268), the question then was: The present case involves a situation where the accused agreed to commit a substantive offence in circumstances where they could not commit that offence. Does “impossibility” preclude liability arising for the crime of conspiracy?
The majority decision of the court was that the offence could not be established. Dunford J observed (at 278): The conspiracy alleged in this case was not an agreement to do an unlawful act because the act agreed to be done, that is receive the cigarettes, was not an unlawful act … and so it was not, in my view, a criminal conspiracy.
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Justice Harold H Burton once gave one of the shortest oral opinions on record. A defendant who had been convicted of murder was before the court for sentencing. As usual, the judge asked if he had anything to say before the sentence was pronounced. The defendant said: “As God is my judge, I didn’t do it. I’m not guilty”. To which the judge replied: “He isn’t, I am. You did. You are”. M Gilbert (ed), The Oxford Book of Legal Anecdotes (Oxford University Press, 1986).
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Often it will depend upon what is the alleged agreement. In R v El Azzi [2001] NSWCCA 397 Mr El Azzi was charged, along with three others, with a conspiracy to manufacture a prohibited drug, namely methylamphetamine. However, the chemicals found when the police searched a number of premises could not have been used to manufacture that drug. El Azzi challenged the prosecution on the basis of impossibility. He was unsuccessful as the prosecution alleged that, at an earlier point of time, there had been an agreement to manufacture the drug. The New South Wales Court of Criminal Appeal held that at that point of time (that is at a point of time before the police raid) such an agreement was not impossible.
General defences
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[10.450] Any person charged with committing a crime may seek refuge first in the principle that the prosecution must prove the accusation beyond a reasonable doubt. The accused simply pleads not guilty. There is also a range of defences which, although not involving a denial by the accused that the act in question took place, do involve an assertion that one or more of the necessary elements of criminality were missing. Examples of such defences to be examined are insanity and diminished responsibility, necessity, duress and self-defence. Special defences of intoxication and automatism are also available in limited circumstances as is the defence of insanity. It is not unusual for strict liability statutory offences to incorporate a specific defence, examples of which in the context of consumer protection offences are under the Australian Consumer Law.
10.5 CORPORATE CRIME It was … part of what oxymoronically is called “police culture”. Commissioner of Police v Anderson (unreported 1996) per Meagher JA.
[10.460] With the continued growth of commercial activity, and the recent development of, and increasing reliance upon, the internet and associated technologies, there has been a marked change in the manner and form of criminal behaviour. In general, it may be said that crime has evolved from what previously comprised simple wrongdoings, which were often impulsive and frequently senseless, to the well-planned and executed corporate fraud schemes of today. Although this account is not all-encompassing it should be recognised that crime is evolving but, more importantly, the process of evolution is being facilitated by the expansion of commercial and internet activity. Corporate crime is crime committed by agents of the company for the benefit of its shareholders.
Corporate criminal liability [10.470] It is the acts and omissions of individuals which are the link by which a company may be held criminally liable. A fundamental issue that arises in relation to corporate crime is obviously that of the company’s liability for crimes incorporating a mens rea element (Of course many offences today are strict liability for which the question of the corporation’s state of mind is not an issue). Corporations, although having separate legal personality with all the powers of a natural person, have no physical existence. It was initially assumed that a corporation, lacking a mind, could not form the requisite intent, and so the mens rea could not be established. However, in 1915 the House of Lords held that a company did have a mind, in an organic sense, being that of its managing director. 558
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Chapter 10 Crime: Concepts of Control
In Lennard’s Carrying Co Ltd v Asiatic Petroleum Ltd [1915] AC 705 Lord Haldane said (at 713-714): My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting that person may be the board of directors itself … For if Mr Lennard was the directing mind of the company, then his action must, unless a corporation is not to be liable at all, have been an action which was the action of the company itself.
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This concept of corporate liability for crime has been expanded since Lennard’s case and it is clear that if a criminal act is performed, in the course of the company’s business, by a person of sufficient seniority to form part of the “directing mind and will” of the company, then the company is criminally liable. The meaning of “sufficient seniority” was considered in HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159. Lord Denning said that the meaning will vary from company to company, but it will include those “directors and managers who represent the directing mind and will of the company, and control what [the company’s mere servants and agents] do” at [172].
They honestly believe if they impose a commercial penalty then that by itself will act as a major deterrent to corporate crime. It won’t. What a corporate criminal is really afraid of is going to prison. M Rozenes (Director of Public Prosecutions), Business Review Weekly (18 September 1992).
Yet this test gives rise to significant policy issues as to whether a corporation should be allowed to escape criminal liability merely because the person or persons within the corporation who held the requisite mens rea did not hold a position of sufficient seniority or control? Clearly corporations can cause great harm and it can be questioned whether the law should protect corporations by the use of what are, in effect two legal fictions, first that the corporation is a legal person and second that it is only liable for the knowledge held by its “artificial” brain, that is, the board or senior management.
IN CONTEXT
Corporate criminal liability [10.480] The judgment of Ipp JA in Presidential Security Services of Australia Pty Ltd v Clinton Joseph Brilley [2008] NSWCA 204 at [145]-[153] contains a useful statement of the operation of corporate criminal liability: Generally speaking, once a company is capable of committing a particular offence, it may be found guilty of that offence on one of two bases, namely, on the grounds of vicarious responsibility or on the basis that the person who committed the actus reus and had the requisite mens rea was the directing mind and embodiment of the company … Whether the company may be found guilty on one or other of these bases depends on the legislation applicable, the nature of the offence in question, and the status and position within the company of the person who performs the acts said to constitute the offence. Generally, a company will not be found guilty, on the basis of vicarious liability, for a criminal offence having mens rea as an element. This is traceable to at least the eighteenth century. In Huggins (1730) 2 Stra 883, Raymond CJ stated at 885:
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It is a point not to be disputed but that in a criminal case the principal is not answerable for the act of his deputy, as he is in civil cases; they must each answer for their own acts, and stand or fall by their own behaviour. As Lord Morris and Lord Diplock explained in Tesco Supermarkets Ltd v Nattrass [1971] UK HL 1, the rejection of vicarious liability in the criminal context is based upon a refusal to attach criminal liability to a person absent a guilty mind. Lord Morris said (at 179): In general, criminal liability only results from personal fault. We do not punish people in criminal courts for the misdeeds of others. The principle of respondeat superior is applicable in our civil courts but not generally in our criminal courts. Lord Diplock said (at 199): To constitute a criminal offence, a physical act done by any person must generally be done by him in some reprehensible state of mind. Save in cases of strict liability where a criminal statute, exceptionally, makes the doing of an act a crime irrespective of the state of mind in which it is done, criminal law regards a person as responsible for his own crimes only. It does not recognise the liability of a principal for the criminal acts of his agent: because it does not ascribed to him his agent’s state of mind … I reiterate that, absent a statutory provision to the contrary, vicarious liability has been rejected as a means of establishing mens rea in crimes requiring proof of that element (as otherwise criminal guilt could be found without the offender possessing the necessary intent). The situation is different, however, where mens rea does not form part of the offence. Parliament may create offences of strict or absolute liability, and it has long been accepted that, in such a case, the application of vicarious liability principles is not inhibited. The following statement of Atkin J in Mousell Brothers Ltd v London and North- Western Railway Co (1917) 2 KB 836 at 845 is usually referred to as the leading authority in this area: I think that the authorities cited by my Lord make it plain that while prima facie a principal is not to be made criminally responsible for the acts of his servants, yet the legislature may prohibit an act or enforce a duty in such words as to make the prohibition or the duty absolute; in which case the principal is liable if the act is in fact done by his servants. To ascertain whether a particular Act of Parliament has that effect or not regard must be had to the object of the statute, the words used, the nature of the duty laid down, the person upon whom it is imposed, the person by whom it would in ordinary circumstances be performed, and the person upon whom the penalty is imposed. Mousell Brothers Ltd v London and North-Western Railway Co was applied by the High Court of Australia in The King and The Minister for Customs v Australasian Films and Another [1921] HCA 11. The Court said at 215: We proceed to consider, by applying the tests suggested by Atkin J [in Mousell Brothers Ltd v London and North-Western Railway Co], whether sec 241 of the Customs Act has the effect of making the principal, if a company, liable for the act of its servant or agent when the person doing the act or some servant or agent of the company from whom he takes his instructions has the intention of defrauding the revenue. 560
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Chapter 10 Crime: Concepts of Control
And at 217: Adopting the language of Atkin J quoted above, we think that the principal is liable in any case in which his servant or agent in the course of his employment “commits the default provided for in the statute in the state of mind provided for by the statute. Once it is decided that this is one of those cases where a principal may be held liable criminally for the act of his servant, there is no difficulty in holding that a corporation may be the principal. No mens rea being necessary to make the principal liable, a corporation is in exactly the same position as a principal who is not a corporation”. If the principal is liable for the fraud of the agent actually committing the offence, he is no less liable for the fraud of some superior servant or agent by whose direction the offence is committed, but we see no reason for extending the responsibility of the principal to a case in which it is sought to make the principal responsible for the state of mind or the state of knowledge of some other servant or agent not concerned in the doing of the act. See also Tiger Nominees Pty Ltd v State Pollution Control Commission (1992) 25 NSWLR 715 where Gleeson CJ (with whom Mahoney JA and Campbell J agreed) said, at 718-719: As a rule the common law refused to impose criminal responsibility on a person, as a principal, for the misdeeds of others. The development and extension of principles imposing vicarious liability in the nineteenth and twentieth centuries reflect, to some extent, difficulties encountered in law enforcement. Principles were abstracted from developments in the law of tort, and this was done most readily when the offences could be characterised as regulatory in substance although criminal in form. Such offences were sometimes characterised as “public welfare offences”. Laws relating to fair-trading, consumer protection, and safeguarding the environment provide examples. Questions of statutory construction commonly require consideration in this context. The ultimate issue in the present case is whether or not the legislature has, expressly or by necessary implication, created a criminal offence for which one can be found vicariously responsible. Whatever may be the outer limits of the principles attracting the imposition of vicarious liability it is necessary that the relevant statutory offence be of such a nature that it is capable of commission vicariously.
Statutory modifications [10.490] To resolve the problem of attributing liability to a company it is increasingly common to legislate to expressly address this issue. For the purposes of the Competition and Consumer Act 2010 (Cth), for example, s 84 overcomes the difficulty of establishing the state of mind of a company in cartel cases and of proving that conduct engaged in by an employee of the corporation was engaged in by the corporation itself. Of course many offences today are strict liability for which the question of the corporation’s state of mind is not an issue.
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IN CONTEXT
Statutory recognition of corporate culture under the Model Criminal Code [10.500] Section 12.3 of the Criminal Code Act 1995 (Cth) provides that: (1)
If intention, knowledge or recklessness is a fault element in relation to a physical element of an offence, that fault element must be attributed to a body corporate that expressly, tacitly or impliedly authorised or permitted the commission of the offence.
(2)
The means by which such an authorisation or permission may be established include:
(a) proving that the body corporate’s board of directors intentionally, knowingly or recklessly carried out the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence; or
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(b) proving that a high managerial agent of the body corporate intentionally, knowingly or recklessly engaged in the relevant conduct, or expressly, tacitly or impliedly authorised or permitted the commission of the offence; or [Sir John] Latham was driving in St Kilda Road, Melbourne, when he offended against a traffic law. A young Irish constable stopped him and said, “What would be your name?” Sir John said “John Latham”. The constable said, “You wouldn’t be after being that same John Latham who is a barrister, now would you?” Sir John said “Yes. I am that same man.” “And you wouldn’t be after being that same John Latham who is the Commonwealth Attorney-General?” Sir John, whose hopes had begun to rise, said “Yes, I am he.” The constable said, “Well you won’t be able to plead ignorance of the law, now will you?” M Gilbert (ed), The Oxford Book of Legal Anecdotes (Oxford University Press, 1986).
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(c) proving that a corporate culture existed within the body corporate that directed, encouraged, tolerated or led to non-compliance with the relevant provision; or (d) proving that the body corporate failed to create and maintain a corporate culture that required compliance with the relevant provision. (3)
Paragraph (2)(b) does not apply if the body corporate proves that it exercised due diligence to prevent the conduct, or the authorisation or permission.
(4)
Factors relevant to the application of paragraph (2)(c) or (d) include:
(a) whether authority to commit an offence of the same or a similar character had been given by a high managerial agent of the body corporate; and (b) whether the employee, agent or officer of the body corporate who committed the offence believed on reasonable grounds, or entertained a reasonable expectation, that a high managerial agent of the body corporate would have authorised or permitted the commission of the offence. (5)
If recklessness is not a fault element in relation to a physical element of an offence, subsection (2) does not enable the fault element to be proved by proving that the board of directors, or a high managerial agent, of the body corporate recklessly engaged in the conduct or recklessly authorised or permitted the commission of the offence.
Problems of punishment [10.510] The difficulties of making companies criminally liable also extend to appropriately punishing bodies corporate. Obviously a company cannot be imprisoned. This means that prosecutions for offences that are only punishable by imprisonment cannot be brought. As such, a company is probably incapable of committing murder in Australia. Although fines can be imposed upon corporations, there are a number of problems. First,
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Chapter 10 Crime: Concepts of Control
the corporation may have the capacity to pay the fine and then continue business operations without regard to the harm caused. In these circumstances, the purposes of punishment may not be realised. Second, any punishment imposed for corporate crime may be borne not by management who was responsible, but rather by the innocent shareholders. Third a company may be able to pass on the cost of any fine to its customers.
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[10.520] Nevertheless, some progress is being made to appropriately punish corporations by introducing alternatives to fines. For example, under the Competition and Consumer Act 2010 (Cth) (CCA) a court may make an adverse publicity order, that is an order requiring the corporation to publish, at its expense, details of the offence (s 86D). Alternatively, the court may order a corporation undertake community service (s 86C). The Protection of the Environment Operations Act 1997 (NSW) is another Act which prescribes alternatives to fines and allows a court to order that the corporation, as well as make good any environmental damage, ensure that employees undertake training, pay an amount into an environmental trust, and/or carry out a specific environmental project in a public place. [10.530] Finally it must always be remembered in the context of corporate criminal responsibility that a company has to act through natural persons. Given the difficulties outlined above, one option for prosecuting authorities is to prosecute the individuals responsible in addition to or as an alternative to prosecuting the corporation. (In this context it should be noted that under the CCA individuals guilty of cartel conduct face criminal penalties including up to 10 years imprisonment and or fines up to $420,000 for cartel offence (see [22.790]). Just because a person was acting in their capacity as a director or employee is never a defence, although not obtaining any personal benefit may ultimately reduce any penalty imposed on that person.
Civil penalty regimes [10.540] Over recent years there has been increasing reliance on civil pecuniary penalties which require the civil “balance of probability” rather than the criminal “beyond a reasonable doubt” standard of proof. Increasingly the civil pecuniary penalty is the same as the criminal fine for contravention. This is already in place in relation to our competition and consumer law and similar reforms are expected to be in place by the end of 2018 in relation to ASIC penalties. In its submission to the “2016 Senate inquiry into penalties for white-collar crime”, ASIC strongly supported extending civil penalties: We support this position. The prospect of a substantial civil pecuniary penalty provides an effective deterrent against conduct that may not necessarily be criminal, but nevertheless has the potential to cause significant detriment to financial markets and consumers, possibly to the benefit of the wrongdoer. The availability of a civil penalty is a significant addition to ASIC’s enforcement capability, as part of a broad spectrum of potential enforcement responses, which also includes negotiated outcomes or infringement notices for less serious contraventions and administrative action, such as licence cancellation, disqualification or banning, and criminal prosecution for the most serious misconduct. As such, in ASIC’s submission civil penalties should be available across a broad range of contraventions of the legislation it administers. This would facilitate a more calibrated and proportionate response to the specific circumstances of the contravening conduct in each case.
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Eric: I’ll never forget my mother’s words to me when I first went to jail. Ernie: What did she say? Eric: Hello, son. E Morecambe and E Wise, The Morecambe and Wise Joke Book (1979).
The day we feel compelled to produce popular results by way of sentence is the day we cease to be effective as judges. O’Reilly J, defending a decision not to jail a 75-year- old Sydney sex offender, Business Review Weekly (12 March 1993).
His Honour (to man convicted of embezzling): How on earth could you steal like that from people who trust you? Embezzler: Well, Your Honour, it’s a great deal easier than stealing from people who do not trust you. B Tait, Court in the Act: Humorous Moments from Australian Courts (Federation Press, 1992).
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Business and the Law The fact that there is nothing in the Ten Commandments about the iniquity of driving a motor vehicle under the influence of drink cannot be read as evidence that the ancient authorities regarded this offence more leniently than the contemporary British. B Wootton, Crime and the Criminal Law (Stevens & Sons, 1963) p 42.
Judge: You are accused of stealing a chicken. Anything to say?
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Prisoner: Just took it for a lark, sir. Judge: No resemblance whatever. Ten days. R Fountain, The Wit of the Wig (Frewin, 1968).
10.6 WHITE-COLLAR CRIME [10.550] The term “white-collar crime” initially was coined in the mid twentieth century to refer to crimes committed by those in positions of power as distinct from “street level” crimes committed by those of a lower socioeconomic background. Today it is used more loosely to cover not only crime committed by those within corporations by directors or employees, but also any type of crime committed by those of a higher social status or privilege, such as taxation fraud. Typically such crimes are committed not to fulfil basic needs, such as a drug addict stealing to feed his or her addiction, but are largely motivated by greed. Whereas corporate crime is perpetrated to benefit the corporation and its shareholders, white-collar crime is committed by an individual, or a group of individuals, for personal benefit. Spectacular corporate collapses such as that of Enron and WorldCom in the United States and HIH Limited in Australia, and the reverberations that such collapses had on the wider community, have put governments under increasing pressure to increase the number of criminal offences that apply to company directors and officers, the level of penalties prescribed for such offences and the number of prosecutions. Furthermore the complexity of modern-day business practices has given rise to an increase in opportunities for those working within corporations to steal from their employer. In response many of the large accounting firms have units specialising in forensic accounting whose role includes the detection and investigation of fraud. While at a fundamental level white-collar crime is often analogous with the street crime of theft it creates a number of its own challenges for government and the criminal justice system. Sentencing is one such challenge. What sort of sentences are appropriate for white-collar offences? If sentences are perceived as being too severe this may add to the problems associated with people in business not being willing to take appropriate risks for fear of personal exposure to criminal liability. If sentences are too low they may not be sufficient to deter criminal behaviour. Recently in Australia sentences for white-collar offences have been increasing as courts place a greater emphasis on the need for the sentence to act as a deterrent. However, due to limitations in the maximum penalties prescribed for white-collar offences in Australia, it is unlikely that we will see such sentences raised to the level of the United States where Jeffery Skilling, the former CEO of Enron, was sent to prison for 24 years.
Australia “Paradise” for White-Collar Criminals, Says ASIC Chairman Greg Medcraft S Mitchell, Sydney Morning Herald (22 October 2014)
[10.560] Australia is a “paradise” for white- Mr Medcraft said the only realistic response was collar criminals because of its soft punishment of corporate offences, the Australian Securities and Investments Commission chairman, Greg Medcraft, says.
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harsher jail terms and bigger penalties for white- collar crime … “This is a bit of a paradise, Australia, for white collar crime.”
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Chapter 10 Crime: Concepts of Control
“The thing that scares white-collar criminals is going to jail and that’s what scares them everywhere in the world.” “The penalties, particularly civil penalties, in Australia for white-collar offences are basically
not strong enough, not tough enough. All you’re doing is giving them a slap on the wrist [and] that is not deterring people.”
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10.7 CYBERCRIME [10.570] Although the development of computer and online technologies has added a new and exciting dimension to social and commercial activity, it has also widened the scope for criminal opportunity. Unfortunately, law enforcers have been slow to keep up with this expansion of criminal activity into cyberspace. This is primarily due to the difficulties of investigation associated with the new media and cooperation of the various law enforcement agencies in the global environment. Some examples of cybercrime include the dishonest acquisition of electronic funds, notably in relation to the exploitation of electronic payment systems; online fraud via misrepresentations as to investments and manipulation of financial markets; electronic theft of intellectual property; identity theft; telecommunications fraud, including the stealing of telephone and internet services; damaging data; interfering with electronic communications; the posting of unsuitable material online, including child pornography; and digital extortion and sabotage. It is worth noting that many criminal acts in cyberspace are not new in their form, rather they are merely new in their manner of application. This is plainly illustrated in the context of dishonest acquisitions. Dishonest acquisitions, such as stealing larceny and fraud, have long been recognised at common law and in the various criminal law statutes as a distinct category of crime. In cyberspace, however, a new manifestation of this category of crime appears –the dishonest acquisition of electronic funds. In this way, there is a tendency to refer to new forms of old crimes as cybercrime simply because a computer is the subject of, or facilitates, a criminal attack, or because a computer is being used to store information relating to a crime. Nevertheless, this new communication medium has provided new criminal opportunities for example spamming, hacking, virus propagation, denial-of-service attacks and website vandalism. Recent legislative acts have been directed towards the prohibition of undesirable computer-related behaviour that cannot adequately be dealt with under existing criminal laws. At the Commonwealth level the Cybercrime Act 2001 (Cth) introduced into the Criminal Code (Cth) a number of new computer crimes and the state and territory criminal laws have, to an uneven extent, introduced provisions directed towards computer offences in their criminal laws.
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Enforced conformity to a moral code merely for the sake of such conformity would not generally be thought in these days to be in itself of any value. P J Fitzgerald, Criminal Law and Punishment, (Oxford, 1962).
In our opinion, so called “white collar” crimes are more susceptible to the application of general deterrent. A custodial sentence sends a salutary signal to all persons, no matter how unblemished their records, that depredation of trust moneys as a trustee in significant sums warrants jail. It is likely that many persons in the general community will be deterred from the commission of these offences if it is greatly known that prison follows. Crockett, Beach and Nathan JJ, Australian Financial Review (14 December 1992).
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QUESTIONS 1.
Discuss some of the difficulties with society’s morals forming the basis of what types of activities should be made crimes.
2.
Outline the role of, and ingredients of liability under, the criminal law. Is it appropriate that criminal liability is imposed for strict liability offences? To what extent should a reasonable mistake of fact be a defence?
3.
Prosecuting corporations is difficult. List and explain some of the challenges for the criminal law in making corporations accountable for crimes they commit.
4.
Today’s criminal justice system is ill-equipped to cope with the enforcement of white- collar crime. Why is this so?
WEB REFERENCES Australasian Centre For Policing Research: e-crime research and coordination http://www. anzpaa.org.au Australian High Tech Crime Centre http://www.afp.gov.au Australian Institute of Criminology http://www.aic.gov.au Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Criminal Law Survival Kit http://www.criminallawsurvivalkit.com.au
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Part 3 BUSINESS ORGANISATION AND OPERATION
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Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved. Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:04:50.
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Alternative Business Structures Juliette Overland THE BUSINESS CONTEXT When seeking to establish a business in Australia, the prospective business owner must identify the most appropriate business structure, with the vast majority of businesses in Australia being conducted through one of the business structures discussed in this chapter –sole traders, partnerships, joint ventures, trusts and corporations. The choice of business structure will impact on many aspects of the future operation and success of the particular business venture and there are a number of factors which must be taken into consideration. The differences which exist between the various business structures can be classified into four primary points of distinction –formation; liability; succession and dissolution; and taxation. This chapter outlines the various types of business structure which may be used in Australia and analyses the various advantages, disadvantages and uses for each of those structures.
11.1 SOLE TRADERS ......................................................................................................................................................... 570 [11.20] Formation ...................................................................................................................................................... 570 [11.30] Liability ......................................................................................................................................................... 571 [11.40]
Succession and dissolution ....................................................................................................................... 571
[11.50] Taxation ......................................................................................................................................................... 571
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11.2 PARTNERSHIPS ......................................................................................................................................................... 571 [11.70] Formation ...................................................................................................................................................... 572 [11.140] Liability ......................................................................................................................................................... 575 [11.150]
Succession and dissolution ....................................................................................................................... 576
[11.170] Taxation ......................................................................................................................................................... 577 [11.180]
Limited partnerships .................................................................................................................................. 577
[11.190]
Incorporated limited partnerships .......................................................................................................... 577
11.3 JOINT VENTURES ..................................................................................................................................................... 577 [11.210] Formation ...................................................................................................................................................... 578 [11.220] Liability ......................................................................................................................................................... 578 [11.230]
Succession and dissolution ....................................................................................................................... 578
[11.240] Taxation ......................................................................................................................................................... 579 11.4 TRUSTS ........................................................................................................................................................................ 579 [11.260] Formation ...................................................................................................................................................... 579 [11.270] Liability ......................................................................................................................................................... 580 [11.280]
Succession and dissolution ....................................................................................................................... 580
[11.290] Taxation ......................................................................................................................................................... 580 11.5 CORPORATIONS ...................................................................................................................................................... 581 [11.320] Formation ...................................................................................................................................................... 581 [11.340] Liability ......................................................................................................................................................... 583 [11.350]
Succession and dissolution ....................................................................................................................... 583
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[11.360] Taxation ......................................................................................................................................................... 583 11.6 ASSOCIATIONS ........................................................................................................................................................ 583 11.7 COMPARISON OF BUSINESS STRUCTURES ................................................................................................... 583
11.1 SOLE TRADERS [11.10] A person involved in any commercial business may, of course, act simply on their own behalf. There is no need for the intervention of a more complex legal vehicle than the individual alone. An advantage of acting as a sole trader is that the owner is the owner of the business. There are no intervening structures or competing interests. Thus, the sole trader enjoys all the fruits of her or his labour, but also incurs sole exposure to and responsibility for any losses. As it is now possible to form a corporation with only one shareholder and director, who may be the same person, many people who might otherwise operate a business as a sole trader now choose to incorporate a “one person” corporation, under ss 114 and 201A of the Corporations Act 2001 (Cth), in order to obtain the benefit of limited liability and to take advantage of a corporate rate of tax, which is lower than the top individual marginal tax rate.
Formation [11.20] Where an individual does carry on business alone, the legal formalities are reduced to a minimum. If a business name other than the name of the individual is to 570
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Chapter 11 Alternative Business Structures
be used, then registration of that name with the Australian Securities and Investments Commission (ASIC) under the Business Names Registration Act 2011 (Cth) will be necessary. The purpose of registration is to make public the identity of the person or persons trading under the name. It does not confer an exclusive right to the use of the name for trading purposes, nor does it prevent the registration of other businesses with similar names. In other respects, the law generally applies to sole traders as it would to any other individual. No separate legal entity is formed, but formalities and compliance requirements are low.
Liability [11.30] A sole trader is liable, without limit, to meet all the debts of the business, together with any claims made against it (eg, for injury caused by the sole trader’s negligence or breach of contract). This means that the owner of the business has unlimited liability for the debts and obligations of the business when run as a sole trader.
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Succession and dissolution [11.40] A business which is run as a sole trader lasts as long as the owner wants it to. When the sole trader retires or dies, the business as previously constituted comes to an end. It may, however, then be carried on by a purchaser or successor of the original owner. By its nature, this structure is simple to dismantle, usually only requiring notice to ASIC under the Business Names Registration Act. If it is to be re-established by another, then notice of trading under the business name must be given by the new owner.
Taxation [11.50] For tax purposes, a sole trader who generates an income incurs a tax liability for herself or himself directly, as there is no intervening entity either to be taxed or to complicate the assessment procedure. That is, the sole trader will pay income tax at the relevant individual marginal tax rate on any profits made and corporate rates of tax do not apply. A sole trader operating a business will be required to obtain an Australian Business Number (ABN) for the collection and remission of Goods and Services Tax (GST). A sole trader can obtain an ABN from the Australian Taxation Office and may be required to make annual or quarterly payments to the government based on their Business Activity Statement (BAS).
11.2 PARTNERSHIPS [11.60] Partnership is “the relationship which subsists between persons carrying on a business in common with a view of profit”. This definition is contained in statutory form in the Partnership Acts of the various States and Territories (see, eg, Partnership Act 1892 (NSW), s 1 and Partnership Act 1958 (Vic), s 5).
You can’t do business sitting on your arse. Lord MacLaurin, Former chairman of Tesco.
A partnership structure is a business structure commonly used by certain professional practices, such as firms of lawyers, architects, accountants and medical practitioners. Section 115 of the Corporations Act 2001 (Cth) actually prohibits partnerships of 20 or Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-20 04:22:26.
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One of the most fruitful sources of ruin to men of the world is the recklessness or want of principle of partners, and it is one of the perils to which every man exposes himself who enters into partnership with another. Mackay v Douglas (1872) LR 14 Eq 106 per Malins VC.
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more persons, but exceptions to that rule have been established for certain professions, including accountants, lawyers and medical practitioners. These exceptions are contained within reg 2A.1.01 of the Corporations Regulations 2001 (Cth), and allow, for example, for legal partnerships to have up to 400 partners and accounting firms to have up to 1000 partners. An essential characteristic of a partnership is that it has no independent legal status and it is not a “separate legal entity”. It exists only through its members, the partners. The lack of separate legal status for a partnership also means that what is frequently called partnership property is, in fact, owned by the partners themselves, although the right of any partner to claim partnership property is in fact only a right to share, in the appropriate proportion, in the surplus after partnership assets have been sold and partnership debts paid. In a partnership, the partners will be owners and managers of the business at the same time. The various State and Territory Partnership Acts (Partnership Act 1963 (ACT); Partnership Act 1892 (NSW); Partnership Act 1997 (NT); Partnership Act 1891 (Qld); Partnership Act 1891 (SA); Partnership Act 1891 (Tas); Partnership Act 1958 (Vic); and Partnership Act 1895 (WA)) provide that every partner may take part in the management of the partnership affairs, although the terms of the partnership agreement may override the statute in that respect. It is common for large partnerships to appoint a “managing partner” who looks after the day-to-day running of the partnership business. The liability of partners is a personal liability, which means that a partner’s personal assets may be drawn upon to satisfy outstanding debts of the partnership. That liability underlines the importance of each partner either taking part in management or at least being sufficiently familiar with the business to be able to assess the risk of personal liability as it exists from time to time. Any property initially contributed to a partnership by its partners and any property subsequently acquired by or on behalf of the partnership constitutes partnership property. Partnership property is jointly owned by the partners in the proportions they have agreed or, if there is no such agreement, in the proportions in which profits are divisible or otherwise equally. Ultimately, the interest of a partner consists of the right to be paid a proportion of the surplus of assets, after debts have been satisfied, on dissolution of the partnership. The profits (or losses) of a partnership are shared among the partners as agreed and, where there is no formal agreement, in equal proportions.
Formation [11.70] Generally, no formalities are necessary to set up a partnership and a partnership will be deemed to exist automatically where the three necessary elements are present: (i)
two or more people are carrying on business;
(ii)
the business is carried on “in common”; and
(iii)
the business is carried on with a view to making a profit.
If two or more people carry on business within this definition, they are partners whether they know it or not and, indeed, whether they wish it or not (even if they have expressly declared that their relationship is not to constitute a partnership).
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If the partners wish to formalise their relationship, they may choose to adopt a partnership agreement. Otherwise, the relevant provisions of the applicable Partnership Act will apply. Any business name used by the partnership must be registered with ASIC under the Business Names Registration Act. No separate legal entity is formed, but formalities and compliance requirements are generally low. A partnership is usually based on a contract between the partners known as the partnership agreement. It is not necessary that the agreement be in writing –a partnership can be created orally and may also arise by implication of law. The law may deem that an implied partnership exists regardless of whether the parties had put their minds to the question, whether their conduct suggested they were entering into partnership, and even where the parties have declared that their agreement is not to constitute a partnership. On the other hand, the simple fact that the parties declare that they are entering into partnership does not of itself determine the issue. Many cases have arisen, particularly in the sphere of taxation, where what the parties allege is a partnership has been found on analysis to constitute some other relationship.
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While those components will be examined separately, it should be remembered that the purpose of the following discussion is to identify the actual contractual intent of the parties from the facts disclosed by the particular situation. The various Partnership Acts also provide some assistance in this enquiry in that they provide that the receipt by a person of a share of the profits of a business is prima facie evidence of partnership, but that the joint ownership of property or the sharing of gross returns of a business are not, of themselves, sufficient evidence of the existence of a partnership.
Carrying on a business [11.80] To establish that this element exists, it is necessary to demonstrate that the relevant activities are commercial in nature. While the courts traditionally looked for repetition or continuity of acts, or the intention of such repetition, to satisfy this test (see, eg, Smith v Anderson (1880) 15 Ch D 247) the High Court has recognised that a partnership can exist in relation to a single transaction: United Dominions Corp Ltd v Brian Pty Ltd [1985] HCA 49. In this case, the parties to a joint venture agreement for the construction of a shopping centre were found to be in partnership despite both the construction being a single non-repetitious act and the absence of any reference in their agreement to partnership. Dawson J stated at 14: Whilst the phrase “carrying on business” contains an element of continuity or repetition in contrast with an isolated transaction which is not to be repeated, the decision of this court in Canny Gabriel Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] HCA 22 suggests that the emphasis which will be placed upon continuity may not be heavy.
The plaintiff had no “share of the profits” … and so there is no prima facie evidence that he is a partner in the business under the head; but the absence of one possible head of prima facie evidence does not negative the other evidence of partnership. Stekel v Elice [1973] 1 All ER 465 per Megarry J.
This position is now mirrored in the provisions of the relevant Partnership Acts. For example, s 32(b) of the Partnership Act 1892 (NSW) provides that a partnership may be entered into “for a single adventure or undertaking”. Indeed, the size and nature of many contemporary commercial relationships are such that a commercial or business character may be established without the need for continuity of operations.
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The business is to be carried on in common [11.90] It is an essential feature of any partnership that each partner is both a principal in the partnership and an agent of the other partners for the purposes of conducting the partnership business. This concept of mutual agency is contained in the Partnership Acts. For example, s 5 of the Partnership Act 1892 (NSW) provides that: Every partner is an agent of the firm and his other partners for the purpose of the business of the partnership; and the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he is a member, binds the firm and his partners …
Checker Taxicab Co Ltd v Stone [1930] NZLR 169 [11.100] It was held that the would-be partners must be carrying on the same business. Two persons car-
rying on complementary but separate businesses do not constitute a partnership. In this case, the question before the court was whether the relationship between the owner and the driver of a taxi constituted a partnership. The court held that there was no business being carried on in common, but rather two businesses being conducted side by side, one the business of owning and operating a taxi, the other of driving it in return for payment by passengers.
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With a view to a profit [11.110] Where an activity is carried on without an intention to make a profit, the necessary commercial element to give rise to a partnership is likely to be lacking. In the context of establishing the existence of a partnership under the Partnership Acts, this requirement is not merely the pursuit of profit but also the right to share in that profit. The Partnership Acts treat any receipt of a share of profits from a venture as being prima facie evidence of partnership.
Canny Gabriel Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd [1974] HCA 22 [11.120] In this case, the parties to an agreement sought to avoid the creation of a partnership by describing their arrangement as a joint venture. A lender, Volume Sales, agreed to finance certain concerts and entered into an agreement with the concert promoter, Fourth Media, under which a loan would be repaid from the proceeds taken at the box office before the profits were distributed evenly between the parties. In a joint judgment, McTiernan, Menzies and Mason JJ, of the High Court held, that: the joint venture was a partnership, from which the parties anticipated profits and provided that the advance by Volume Sales to the “joint venture” should be a first charge upon profits and that upon the repayment of such sum the profits should be divided equally … In short, it seems to us that the contract exhibited all the indicia of a partnership except that it did not describe the parties as partners and did not provide expressly for the sharing of losses, although we venture to think that it did so impliedly. While the court in Canny Gabriel was influenced by a variety of factors, the significance of the view to profit of the commercial undertaking and of the fact that such profit was to be shared was substantial.
The requirement that the business be carried on with a view of profit operates to exclude sporting and social arrangements. However, the fact that losses may result from trading 574
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operations does not preclude the existence of a partnership as the essential issue is the intention to seek profit, rather than the ultimate success of such an intention. The conclusion that a partnership exists is strengthened where the agreement between the partners, or their actual practice, requires a sharing of losses as well as profits.
IN CONTEXT
Taxation Office tests for the existence of partnership [11.130] Some very practical tests have been put forward by the Australian Taxation
Office to determine the existence of partnership. If a small business is operated as a partnership between a husband and wife rather than under the sole proprietorship of the husband or wife, there are obvious income-splitting benefits which result in tax advantages. The Australian Taxation Office therefore requires the existence of such partnerships to be established and has outlined the factors it will take into account in deciding whether a business is carried on in partnership for income tax purposes. These factors are contained in an income tax ruling, TR 94/8, which provides a non-exhaustive list as shown below:
The [husband and wife] have run their dairy farm as equal partners for 10 years, with Jan in charge of grass management, Lindsay looking after fertiliser and both working in the milking shed. “We used to have our staff meetings in bed. That got more difficult when we employed staff.” Nelson Mail (New Zealand) (22 August 1995).
• the mutual assent and intention of the parties; • joint ownership of business assets; • registration of a business name;
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• a joint business account and the power to operate it; • the extent to which the parties are involved in the conduct of the business; • the extent of capital contributions; • entitlements to a share of net profits; • business records; and • trading in joint names and public recognition of the partnership. The tax ruling expressly states that no one of these factors is decisive, nor is this list of factors exhaustive. Furthermore, it reiterates that the entitlement to a share of net profits is an essential factor. The tax ruling can be accessed on the ATO website at: http://www.ato. gov.au.
Liability [11.140] A partnership is not a separate legal entity from its partners and therefore they are not protected by any notion of limited liability. This means that each partner has unlimited liability for the debts and obligations of the partnership. While each partner is a principal in the partnership business, each partner is also an agent of the firm and has the power to bind the partnership in contract, provided that the contract is entered into in the course of the partnership business. All partners are therefore bound by that contract and become liable to perform it. This liability extends beyond the partnership so that the personal assets of partners are at risk. This means that under the both criminal and tort law, liability is joint and several. Under the law of contract, the partners are all
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jointly liable in respect of any liability arising from the contract. In practical terms this means that a partnership creditor can sue any one or more of the partners for any amount outstanding. That one partner (or more) will then be able seek to recover the appropriate contribution from the other partners (subject to them having sufficient assets to make such a contribution).
Succession and dissolution I wasn’t affected by the crash of ‘29. I went broke in ‘28. G E Lieberman, (1923-1986), American author.
[11.150] The partnership agreement may set out the events which will terminate the partnership. The partnership agreement may also provide for the termination of the partnership at a fixed time or upon the completion of a particular business undertaking. If the matter is left open, a partnership may be dissolved (terminated) by one partner giving notice, or by mutual agreement. Subject to the terms of the agreement, the Partnership Acts of each State (see, eg, Partnership Act 1892 (NSW), s 32) provide that a partnership is dissolved: (a)
if entered into for a fixed term, by the expiration of that term;
(b)
if entered into for a single adventure or undertaking by the termination of that adventure or undertaking; or
(c)
if entered into for an undefined time, by any partner giving notice to the other or others of his intention to dissolve the partnership.
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The dissolution of a partnership will also take place on the death or bankruptcy of any partner (see, eg, Partnership Act 1892 (NSW), s 33) or upon an order by a court dissolving the partnership (see, eg, Partnership Act 1892 (NSW), s 35). In addition to its powers to dissolve a partnership for specific reasons, the court is given the discretion to order a dissolution whenever circumstances have arisen which, in the opinion of the court, render it just and equitable that the partnership be dissolved (see, eg, Partnership Act 1892 (NSW), s 35(f)). Dissolution triggers the process of winding up the affairs of the partnership or the creation of a new partnership to continue from the earlier one where for example one member has died. Where the dissolution proceeds to a winding up, the Partnership Acts (see, eg, Partnership Act 1892 (NSW), s 39) provide that: On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm; and for that purpose any partner or his representatives may, on the termination of the partnership, apply to the court to wind up the business and affairs of the firm.
[11.160] Dissolution of a partnership by itself does not have to mean the end of the business. It simply means the end of the partnership. If one member withdraws, the remaining partners may agree to create a new partnership and continue to carry on business, or they may admit an outsider as a new partner to reconstitute a new partnership. Appropriate compensation for the outgoing partner can be agreed. If agreement cannot be reached and there are no special provisions in the partnership agreement dealing with division of partnership property on dissolution, then the assets are sold, debts are paid, each partner’s capital is refunded, and the surplus is divided in the appropriate proportions. 576
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Chapter 11 Alternative Business Structures
The admission of new partners to a partnership will generally require the unanimous agreement of all existing partners.
Taxation [11.170] As a partnership is not a separate legal entity from its partners, there is no separate taxable entity. This means that tax is payable on the partnership profits by each partner according to the proportion of those profits which that partner is entitled to receive. The rate of taxation which applies will depend on the individual marginal tax rate payable by each particular partner. Although a partnership taxation return must generally be filed with the Australian Taxation Office, there is no tax payable by the partnership itself.
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Limited partnerships [11.180] Legislation providing for the creation of limited partnerships has been enacted in a number of states. A limited partnership has both general partners and limited partners. Limited partners are those who simply wish to contribute capital to a partnership and receive their proportion of the profits, but with no further liability. Limited partners cannot participate in the conduct of the partnership business and their liability is limited to their capital contribution to the partnership and their share of the partnership property and assets. General partners have the rights and obligations of an ordinary partner in a partnership, including unlimited liability for partnership debts and obligations. Every limited partnership must have at least one limited partner and at least one general partner. Unlike an ordinary partnership, a limited partnership must be registered with the relevant State authority (eg, in New South Wales, limited partnerships must be registered with the Department of Fair Trading).
The two partners have demonstrated that they are nowhere near even agreeing on what they are disagreeing about. Bauer J, NSW Industrial Commission.
Incorporated limited partnerships [11.190] It is now possible to form an incorporated limited partnership in most States, but this requires registration. For example, Pt 3 of the Partnership Act 1892 (NSW) permits the registration of incorporated limited partnerships in New South Wales with the Department of Fair Trading. Like an ordinary limited partnership, an incorporated limited partnership must have at least one general partner and at least one limited partner. The limited partner has no liability for the debts and obligations of the partnership but cannot take part in the management or running of the partnership business. Unlike an ordinary partnership, upon the registration of an incorporated limited partnership, a separate legal entity is created.
11.3 JOINT VENTURES [11.200] In general terms, a joint venture is a contractual association of two or more persons or entities in a commercial operation for the purpose of gain, but not for the purpose of sharing profit. It is the absence of profit-sharing which distinguishes a joint venture from a partnership. Joint venture participants usually come together to undertake a specific business project, but do not wish to have liability for the acts or omissions of the other party to the joint venture, or for the other party to the joint venture to be their agent
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in contract, as occurs with a partnership. Each joint venture participant bears their own risk in terms of claims against them in contract law and torts, unlike a partnership where each partner has liability for the debts and obligations of the partnership.
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Joint adventurers, like co-partners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Meinhard v Salmon 249 NY 458 (1928) per Cardozo CJ.
Since a joint venture arises out of an agreement reached between the participants, and the nature of the relationship is not regulated by statute, matters of control are determined by that joint venture agreement. Typically, a joint venture may involve participation by people with different roles to play. For example, there are many joint ventures in the mining industry and, for their efficient operation, particular areas of responsibility are assigned to the party or parties most capable of dealing with them. In such a case, one party to the joint venture may prepare a site for mining operations, another may conduct the mining, while another arranges refinement and marketing of the product. In joint ventures of significant scope, the parties frequently set up a management corporation to administer the conduct of the joint venture.
Formation [11.210] A joint venture will typically be created for one transaction, or for a limited series of transactions, unlike a partnership which may frequently continue indefinitely until the parties decide to terminate. Joint ventures range in scope and complexity from the long-standing share-farming agreement, whereby a farm owner and a grain grower agree to pool their resources, to large multinational mining arrangements. It is essential in preparing the joint-venture contract to avoid the sharing of profits. Where that takes place, the courts are likely to infer the existence of a partnership irrespective of the title the parties may have given to their relationship. Any business name to be used in connection with the joint venture must be registered under the Business Names Registration Act.
Liability [11.220] The individual liability of each party to the joint venture will normally be restricted, by the agreement and by the conduct of the parties, to debts incurred in carrying out the particular responsibilities of each party. The agreement will generally constrain any joint venture participants from binding another. It is often for the very purpose of avoiding joint liability that parties have recourse to a joint venture arrangement. The parties to the joint venture must take care that their relationship is not characterised as a partnership due to profit sharing –this position was confirmed by the High Court in Canny Gabriel Castle Jackson Advertising v Volume Sales (Finance Pty Ltd) [1974] HCA 22, when it decided that an arrangement described as a joint venture in the documents signed by the parties was nevertheless, in legal terms, a partnership.
Succession and dissolution [11.230] While it is a matter for the terms of the joint venture agreement between the relevant parties, typically joint ventures will expire upon the completion of the project for which it was created. Aspects of dismantling will tend to be straightforward because of the individual ownership of most assets and the separateness of accounting procedures. 578
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Chapter 11 Alternative Business Structures
Taxation [11.240] Like a partnership, a joint venture does not present a separate legal structure subject to taxation in its own right. The individual parties to the joint venture each bear individual liability for taxation of their individual profits. Unlike the partnership, however, there is no requirement for a special return of income on behalf of the joint venture. Accounts are prepared on an individual basis and each participant may make its own choices as to accounting and taxation compliance. For example, one party may continue to hold its share of the product either as stock-in-trade or, where appropriate, as capital, while another party may immediately sell and realise its profits.
11.4 TRUSTS
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[11.250] The complexity of trusts and the laws regulating them mean that, in the absence of special reasons to utilise a trust, other business structures are generally preferred. The special reasons which might lead to adopting a trust, in a private situation, include flexibility for planning within families, potential tax advantages, and the prospect of retaining some control over the disposition of assets while allowing the beneficial ownership of those assets to be enjoyed by others. More publicly, fixed unit trusts have been employed for many decades as a vehicle to accommodate large numbers of individual investors and to provide a mechanism for facilitating their investments without the need for formal stock exchange listing.
To say that a man is a fiduciary only begins analysis; it gives direction to further enquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? SEC v Chenery Corp 318 US 80 (1943) at 86 per Frankfurter J.
The essential nature of a trust is that the creator of the trust (the “settlor”) settles the trust property on the trustee, who has legal ownership of the trust property, but then controls the trust property and holds it for the benefit of the beneficiaries of the trust, who are entitled to the beneficial ownership of the trust property. It is possible for the same person to be both the beneficiary and the trustee in a trust relationship where there are multiple beneficiaries. However, it is not possible for a trust to be created where one person is the sole trustee and sole beneficiary as enforceability of the trust is fundamental to its creation. Thus, the legal and equitable (or beneficial) ownership of the trust property is held separately by the trustee and the beneficiaries of the trust. The interest of a beneficiary is an equitable “chose in action”, enforceable in equity by the willingness of the court to ensure that the trustee complies with its obligations and duties arising under the deed and imposed by law. The trust itself is not a separate legal entity.
Formation [11.260] Whilst there are multiple different ways by which trust relationships can be described and characterised, one helpful distinction can be drawn by comparing fixed trusts and discretionary trusts. In a fixed trust, the trustee holds the trust property for specified beneficiaries in amounts determined by the settlor upon creation of the trust. In a discretionary trust, the beneficiaries do not have a specified interest in the trust property, rather the trustee is at liberty to decide how and when interest in the trust property will be allocated.
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A trust is the most complex business structure to establish. The settler of the trust must give money or other property to a trustee, to be held on behalf of indicated beneficiaries and to be dealt with in accordance with the directions and powers contained in the trust deed pursuant to which the trust is created. The settlor and the trustee may be the same person, although this is unusual, as it may have adverse tax consequences. As the trust deed is usually a complex legal document, any matters which are not satisfactorily dealt with, within the deed itself, will be subject to the equitable law of trusts and the provisions of the Trustee Act of the relevant State (see, for example the Trustee Act 1925 (NSW)).
Liability [11.270] The general rule is that, as the trustee is the legal owner of the trust property and the legal representative of the trust, it is the trustee who is liable for payment of debts incurred and the performance of contracts entered into in connection with any trust business. The trustee is entitled to be indemnified out of the trust assets for the performance of such obligations but, nevertheless, the office of trustee carries a significant risk of liability. This may arise if: • the assets of the trust are insufficient; or
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• in incurring the relevant liability, the trustee acted in breach of the trust. Given the complexity of many trust deeds, limited liability corporations are often used to act as trustees to seek to avoid unlimited personal liability. However, s 197 of the Corporations Act 2001 (Cth) renders the directors of a corporate trustee personally liable where the trustee acts in breach of trust or acts outside the scope of its powers as trustee.
Succession and dissolution The great use of a trustee is to commit judicious breaches of trust. National Trustees Executors Agency Co of Australasia Ltd v General Finance Co of Australasia Ltd [1905] AC 373 per Lord Lindley.
[11.280] The effective “life” of a trust is normally fixed by the relevant trust deed. In any event, when all beneficiaries in a fixed trust are of full legal capacity, they can call on the trustee to bring the trust to an end and distribute the funds in accordance with their predetermined entitlements. The cost and complexity involved in dismantling a trust depend largely upon the nature of the assets. If all that is required is a distribution of money, it is simple to dismantle the trust. However, if properties have to be transferred and businesses reorganised or sold, the process becomes more complicated.
Taxation [11.290] Part III, Div 6 of the Income Tax Assessment Act 1936 (Cth) contains several complex provisions dealing with the taxation of trusts. The overall effect is that the income of the trust may be assessed either as income of the trustee or of a beneficiary, but not both. Where a beneficiary is regarded as being “presently entitled” to trust income then, generally, that income will be considered to form part of the income of the beneficiary (along with any income the beneficiary has from other sources) and income tax is payable by the beneficiary at the applicable individual marginal tax rates. Where there is income to which no beneficiary can be said to be presently entitled, the trust is assessed, and the trustee pays the relevant tax. A trust, if properly constituted, should not lead to
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Chapter 11 Alternative Business Structures
unfavourable tax consequences and may well allow tax benefits, particularly if beneficiaries have little, or no, income from other sources.
11.5 CORPORATIONS
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[11.300] It is probably no exaggeration to suggest that the world as we know it today would not exist had it not been the development of a business structure that allowed business investment without unlimited liability for the failure of the business. The predecessor of today’s corporation was the joint stock company that developed in 16th century England which recognised that a company could have separate legal personality to that of its owners, directors and officers. In combination with the concept of limited liability – that a company’s debts were not the debts of its shareholders –the commercial progress of society was assured. For the first time, individuals could invest in a business venture without the need to manage that venture and without incurring the risk of liability for the debts of the venture if it failed. The development of the joint stock company enabled businesses to evolve beyond local initiatives essentially controlled by individual entrepreneurs to substantial commercial projects. The capacity for large numbers of individuals to invest in companies which were initially established to exploit the riches of the then “new world” were soon applied to other endeavours. Life as we know it –our airlines, our shopping malls, our technology companies, our manufacturers –could not exist if it was not for some mechanism to harness collective investment without the burden of management and the risk of liability. A corporation is the only business structure which is considered to be an independent, separate legal person, separate from its directors, officers and shareholders. The corporation is the most popular business structure in Australia, with more businesses being conducted through a corporation than through any other structure. Australia has over 2.2 million trading businesses –the vast majority small business –over 1.8 million of which are corporations. [11.310] Under s 124 of the Corporations Act 2001 (Cth), a corporation is given the legal capacity and powers of an individual, but the first case to truly recognise a corporation’s status as a separate legal person was Salomon v Salomon & Co Ltd [1897] AC 22. In that case (discussed at [11.330]) the House of Lords resolved that a corporation was a separate legal person, distinct from its shareholders, creditors, directors and employees. This concept, often referred to as “the corporate veil”, is an important and distinguishing feature of a corporation.
Formation [11.320] The process of registration of a corporation is fairly quick and straightforward. The relevant paperwork must be completed and lodged with ASIC along with the applicable fees. If the corporation will not be trading under its own name, its business name must be registered under the Business Names Registration Act. Upon the registration of the corporation, a new legal person comes into existence. ASIC will issue a “certificate of registration” evidencing the creation of a new corporation as a new legal entity, and will allot an Australian Company Number (ACN) to the corporation, which is an individual
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A corporation has no material body, or physical existence. It does not necessarily follow, however, that the corporation has no actual existence at all. As Professor Winfield tersely observes in discussing this point, a wooden leg is artificial. It is not however a fiction. G W Keeton, The Elementary Principles of Jurisprudence (2nd ed, Sir Isaac Pitman & Sons Ltd, 1949). Corporation, n. An ingenious device for obtaining individual profit without individual responsibility. Ambrose Bierce, The Devil’s Dictionary (1911).
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nine digit number which relates to that corporation alone, enabling it to be identified by reference to that number, in accordance with s 118 of the Corporations Act 2001 (Cth). [The Corporations Law is like the Jenolan Caves] … They are both ancient, massive, astonishing, curiously irrelevant, dank, pitch black, and created over a long period by a glacial drip. B Beerworth, Australian Financial Review (23 April 1993).
There is a separation of management from ownership in a corporation. This separation arises because those who manage the corporation (the directors and senior executives) do not also have to be the shareholders or members –the people who “own” the corporation and are ultimately entitled to the corporation’s net worth. However, in many corporations, a director will also be shareholder. In this context, the concept of incorporation is particularly useful. People may invest in a corporation and may have some continuing rights (for instance, the right to vote) while others look after the control of the investment and the conduct of the business. As discussed at [11.340], shareholders of a corporation also have the benefit of limited liability. The business of a corporation is managed by the board of directors (as set out in s 198A of the Corporations Act 2001 (Cth)) in accordance with the applicable legislative provisions, and also the terms of the corporation’s constitution. The members have the power to appoint and remove the directors from the board, which ordinarily requires only a majority vote.
Salomon v A Salomon & Co Ltd [1897] AC 22
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[11.330] Mr Salomon was a cobbler, operating as a sole trader, who wished to convert his business struc-
ture into a corporation. A company, A Salomon & Co Ltd, was created under the Companies Act 1862 (UK) with three directors (Mr Salomon and his two eldest sons) and seven shareholders (Mr Salomon, his wife, and their five eldest children). Seven shareholders were the minimum number required by the legislation at the relevant time. Of the 20,007 issued shares, Mr Salomon held 20,001 shares and each of the six other shareholders held one share. Mr Salomon sold his cobbling business to the corporation for £39,000. As the corporation did not have sufficient funds to pay the purchase price, Mr Salomon lent the purchase price to the corporation, secured by £10,000 in debentures. Mr Salomon also sought a loan of £5,000 for the business from a lender, Mr Brodrib, secured by half the debentures. The cobbling business ultimately failed, and a liquidator was appointed to wind-up the corporation. Mr Brodrib successfully relied on the debentures to be repaid the £5,000 loan. Mr Salomon claimed that he was entitled to the remaining assets of the corporation, relying on the balance of the debentures and the outstanding loan for the purchase price. The liquidator argued that the business structure was a sham and Mr Salomon was not entitled to any funds, and that the remaining assets of the corporation should be used to repay the unsecured creditors of the business (who would have received nothing if Mr Salomon was entitled to be repaid). Although Mr Salomon was unsuccessful at first instance, and on appeal to the Court of Appeal, the House of Lords found for Mr Salomon. They held that, because A Salomon & Co Ltd had been incorporated in accordance with the relevant provisions of the Companies Act 1862 (UK), it was a validly incorporated corporation, and the fact that the only shareholders and directors were Mr Salomon and members of his immediate family was irrelevant. There was no requirement that shareholders and directors be independent. Thus, Mr Salomon was entitled to be treated as an ordinary secured creditor of the corporation and to rely on the balance of the debentures.
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Chapter 11 Alternative Business Structures
Liability [11.340] One of the great benefits arising out of a corporate structure is limited liability. A shareholder of a corporation is liable to pay the issue price of the share, but beyond that has no further liability. The corporation, as a distinct legal entity, is responsible for its own debts and obligations. The directors and shareholders, in the absence of wrongdoing, do not carry any liability for those debts or obligations. Directors may become personally liable for debts of the corporation in certain limited circumstances –for example, if they allow the corporation to trade while it is insolvent (in accordance with s 588G of the Corporations Act 2001 (Cth)).
Succession and dissolution [11.350] A corporation has perpetual succession, which means that it can continue in existence long after the original shareholders and directors have ceased to have any connection with the corporation. A corporation will only come to the end of its “life” if active steps are taken deliberately to wind it up. This may occur on the application of creditors if the corporation is insolvent, or by the shareholders if the purposes for which the corporation was established have come to an end and the shareholders wish the assets to be realised and distributed.
Corporations have neither bodies to be kicked nor souls to be damned. Edward Thurlow, 1st Baron Thurlow, quoted in John Poynder, Literary Extracts (1844) .
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Taxation [11.360] Since a corporation, unlike a partnership, is a separate legal entity, it pays income tax on its earnings, at the flat corporate tax rate, rather than at individual marginal rates. If a corporation pays dividends to its shareholders as a distribution of profit, shareholders can claim a tax credit (known as a franking credit) for tax paid on the income the subject of the dividend, in order to avoid double taxation of those profits. Where a corporation retains its profits rather than distributing them by way of dividend, there may in fact be a tax saving because the rate of corporate tax is lower than the highest individual marginal tax rate.
11.6 ASSOCIATIONS [11.440] It is also possible to operate as an association, which may be an unincorporated association or an incorporated association. However, associations can only be used for non-profit activities (and are often used by sporting, educational, cultural and charitable groups). Due to this requirement, associations are not suitable as a structure for a business run for profit and therefore will not be examined in any detail in this chapter.
A criminal is a person with predatory instincts who has not sufficient capital to form a corporation. Howard Scott.
11.7 COMPARISON OF BUSINESS STRUCTURES [11.450]
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Sole trader The simplest structure. There are no specific legal requirements to create this structure
There are few formalities or costs involved. If a business name is used (other than the name of the sole trader) that business name must be registered
Aspect Complexity of structure
Ease and cost of establishment
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It is usually inexpensive and quick to establish a partnership. If a partnership agreement is to be prepared (which is recommended), legal expenses will increase the relevant costs. If a business name is used (other than the name of the partners) that business name must be registered
Partnership A partnership is not a complex structure and it is governed by the provisions of the Partnership Act of the relevant State or Territory. There are no specific legal requirements to create this structure. If there is a partnership agreement, it may make the arrangements more complex
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Joint venture The complexity of the structure will depend upon the nature of the venture and the responsibilities of each party to the joint venture. There are no specific legal requirements to create this structure, but a joint venture agreement is generally required to provide for the obligations of each party and the relationship between them The ease of establishing a joint venture and the associated costs will depend on its complexity It is generally advisable that legal advice is sought and for a trust deed to be drawn up in order to establish a trust. This makes the establishment of a trust comparatively complex and expensive
Trust A trust is a complex structure, with a separation of legal and equitable interests in the relevant trust property
It is reasonably easy to establish a corporation, particularly a proprietary corporation. The relevant forms must be completed and lodged, along with the applicable fee, with the ASIC. If a business name is used (other than the name of the corporation) that business name must be registered
Corporation A corporation is a more complex structure than a partnership, sole trader or joint venture, but less complex than a trust. The Corporations Act 2001 (Cth) regulates the registration and affairs of the corporation
Business and the Law
Sole trader If the business is to be sold, it will be simply the sale of the business and the associated assets
It is not possible for a new participant to enter the business, as then it will no longer be a sole trader. It would be necessary to change to another structure, such as a partnership
Aspect Sale/transfer of interests
Entry of new participants
New partners can be admitted, with the consent of the existing partners. New partners will need to agree to be bound by the existing partnership agreement
Partnership Partners may sell individual interests either to outsiders or existing partners, but the consent of the other partners will generally be required
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Trust While it is relatively simple for the trustee to dispose of trust assets, or for a new trustee to be appointed in the place of an existing trustee, the interest of a beneficiary is not readily transferable
The ease of adding new beneficiaries to a trust will depend upon the terms of the trust deed
Joint venture The ability of a party to the joint venture to sell or transfer their interest will depend upon the terms of the joint venture agreement
The entry of new participants is generally not difficult but it will depend upon the terms of the joint venture agreement
Corporation Shares in a corporation are usually readily transferable, although it can be difficult to find a buyer for only a partial interest in a private corporation. The business of the corporation can be transferred by selling all to the purchaser of the business New shareholders can buy existing shares from current shareholders or may be issued new shares by the corporation. Existing directors can resign or be removed by new shareholders and new directors appointed, once the new shareholders hold a sufficient majority of shares
Chapter 11 Alternative Business Structures
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Sole trader It is generally simple and inexpensive to wind up the business of a sole trader
The sole trader owns and controls the business
Aspect Complexity of winding up
Aspects of control
Joint venture A joint venture will usually be dissolved upon completion of the venture. Otherwise, it will depend upon the terms of the joint venture agreement
It will depend upon the terms of the joint venture agreement, but generally each venture partner will have control over their own area of responsibility
Partnership The extent of the complexity of winding up a partnership will depend upon the number of partners and the nature of the partnership business
Each partner is entitled to take part in the management of the partnership
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Corporation A corporation may be wound up by the court, members or creditors of the corporation. Generally, a liquidator will be appointed to realise the corporation’s assets and distribute them to creditors in accordance with the Corporations Act 2001 (Cth) The trust propThe business of erty, and any the corporation is business of the managed by the trust, is under board of directors, the control of the who may appoint trustee, who has a managing legal ownership director to look of those assets, after day-to-day although they management of must be managed the corporation, in accordance if they wish. with the terms of If this occurs, the trust deed the managing director reports to the board. Shareholders do not participate in management, but
Trust Winding up of a trust is complex – the terms of the trust deed must be followed, as well as the applicable trust laws
Business and the Law
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Sole trader
The sole trader has unlimited personal liability
Aspect
Liability of participants
Joint venture
Trust
Corporation as the “owners” of the corporation have the power to appoint and remove the board. The affairs of the corporation are regulated by its constitution The shareholders Each partner has As the parties to the The trustee has enjoy the benefits primary liability unlimited liability for joint venture are for the debts and of limited liability the partnership debts not partners, their and obligations liability is generally obligations of the and cannot be limited to their own trust, but is gener- obliged to conarea of responsibil- ally entitled to be tribute more than indemnified out of the agreed subity, for which they scription price for will have unlimited trust property shares issued to liability. The joint them by the corventure agreement poration. Directors will generally proare not generally vide for the parties personally liable to the joint venture for the debts and to be liable to each obligations of the other corporation, but such liability may arise where the directors allow the corporation to trade while insolvent
Partnership
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Chapter 11 Alternative Business Structures
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Aspect Taxation issues
Sole trader The sole trader is the sole taxpayer and must pay income tax on the income of the business at their individual marginal tax rate
Partnership Income will be divided among the partners in equal shares or otherwise in accordance with the taxation agreement. Each partner must pay income tax on their share of the partnership income
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Joint venture Income will be divided among the parties to the joint venture in accordance with their joint venture agreement. Each party to the joint venture will be liable to taxation of their share of profits from the venture
Trust Beneficiaries will pay tax on trust income if “presently entitled” to the income in accordance with the trust deed. Otherwise, the trust pays tax on the trust income and is entitled to be indemnified in respect of those tax payments from trust property
Corporation As a separate legal entity, a corporation pays tax on its own income at the flat corporate tax rate. Where dividends are paid to shareholders, a credit for tax already paid on the corporation’s income is available to the shareholder (in the form of a franking credit)
Business and the Law
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QUESTIONS 1.
What factors of a business and its operation will be affected by the choice of business structure?
2.
What features differentiate a corporation from other business structures and why are they influential in the corporation being the dominant vehicle for business operation in Australia?
3.
What is the meaning, and what are the implications, of joint and several liability, and to what extent can partners protect themselves from its consequences?
4.
What are the differences, legal and commercial, between a partnership and a joint venture?
WEB REFERENCES Australian Securities Exchange http://www.asx.com.au Australian Securities & Investments Commission http://www.asic.gov.au Australian Taxation Office http://www.ato.gov.au/businesses Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Business Council of Australia http://www.bca.com.au Business Entry Point http://www.business.gov.au Entrepreneur.com –US-based guide to business structure choice http://www.entrepreneur. com SME Excellence site http://www.excellentsme.com
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12
12
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The Modern Corporation Cary Di Lernia THE BUSINESS CONTEXT This chapter explores the fundamental legal theories, beliefs and practices upon which all Australian corporations are founded, and introduces the major actors involved in a company’s existence. While there exist a range of structures through which to operate a business, the most common is the company limited by shares. Companies can be established very easily, relatively cheaply, and suit a variety of different purposes, from one-person businesses through to multinational corporations listed on securities exchanges around the world. Importantly, from a legal perspective the same structuring considerations apply to both small and large companies (which must be managed by a board of directors) registered in Australia, with the same set of basic laws applicable to all.
12.1 CORPORATE REGULATION IN AUSTRALIA ................................................................................................... 593 [12.10]
A short history of Australian corporate regulation .............................................................................. 593
12.2 TYPES OF COMPANIES .......................................................................................................................................... 594 [12.30]
Companies limited by shares .................................................................................................................... 595
[12.40]
Companies limited by guarantee ............................................................................................................. 595
[12.50]
Unlimited companies ................................................................................................................................. 595
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[12.60]
No-liability companies ............................................................................................................................... 595
[12.70]
Proprietary companies ............................................................................................................................... 595
[12.80]
Public companies ........................................................................................................................................ 596
12.3 THE SIGNIFICANCE OF CORPORATE STATUS ............................................................................................... 596 [12.90]
The corporate veil ........................................................................................................................................ 596
[12.100]
Lifting the corporate veil ........................................................................................................................... 597
[12.110]
The organic theory ...................................................................................................................................... 597
12.4 MANAGEMENT AND OWNERSHIP OF COMPANIES ................................................................................... 599 [12.130]
Separation of investment from management ........................................................................................ 599
12.5 DIRECTORS, OFFICERS AND THEIR DUTIES .................................................................................................. 600 [12.150] Definitions .................................................................................................................................................... 600 [12.160] Duties ............................................................................................................................................................. 602 [12.200]
Officers failing their duties ........................................................................................................................ 606
I find I have these very complex relationships with corporations and their products. They clothe me, feed me, entertain me, inform me, transport me and medicate me. I try to make responsible consumption choices. But the fact remains that I use their products from the minute I wake up to the minute I fall asleep … I feel inescapably surrounded by this institution. At times grateful to it, yet at the same time resentful and often overwhelmed by its ubiquity. Has the corporation become the dominant institution of our time? Mark Achbar, Director, The Corporation Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Of the top 100 economic entities of the world, 69 are corporations (http://www.globaljustice.org.uk/news/2016/sep/12/10-biggest-corporations-make-more-money-most-countries-world-combined). While the ubiquity of the corporation may surprise some –try living one day of your life without the involvement of a corporation –its intrusion into modern existence was already well underway by 1882 in the United States, when Justice Field noted in awe: As a matter of fact, nearly all enterprises in this state, requiring for their execution an expenditure of large capital, are undertaken by corporations. They engage in commerce; they build and sail ships; they cover our navigable streams with steamers; they construct houses; they bring the products of earth and sea to market; they light our streets and buildings; they open and work mines; they carry water into our cities; they build railroads, and cross mountains and deserts with them; they erect churches, colleges, lyceums, and theaters; they set up manufactories, and keep the spindle and shuttle in motion; they establish banks for savings; they insure against accidents on land and sea; they give policies on life; they make money exchanges with all parts of the world; they publish newspapers and books, and send news by lightning across the continent and under the ocean. Indeed, there is nothing which is lawful to be done to feed and clothe our people, to beautify and adorn their dwellings, to relieve the sick, to help the needy, and to enrich and ennoble humanity, which is not to a great extent done through the instrumentalities of corporations. San Mateo County v Southern Pacific RC (RR Tax Cases) 13 Fed. 722 at 743
The key benefits afforded by corporate existence –limited liability and separate legal entity status –have led to its exponential growth and current popularity as a means 592
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for structuring group activity generally, and business affairs more specifically, amongst entrepreneurs and businesspeople.
12.1 CORPORATE REGULATION IN AUSTRALIA A short history of Australian corporate regulation
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[12.10] Let’s start at the end with one of the most important considerations in this area of the law, and indeed, in corporate practice: Corporations are treated by the law as separate legal persons. A distinction is drawn between the company, conceptualised as a separate legal entity, and the various stakeholders (including shareholders, directors and other corporate officers, employees, the local community, the environment) associated with it. This is referred to as corporate personhood, and is made possible by what is referred to as the corporate veil, introduced in Chapter 11, and discussed further below. Initially, corporations of the kind we know today (dating from the fourteenth century) were created by the Crown by way of a Royal Charter (chartered corporations). Other companies were created by Acts of Parliament and these became known as statutory corporations. Perceiving the benefits of separate legal entity status, entrepreneurs who were unable to secure the creation of either of the above types of corporation sought to create their own (referred to as joint stock companies) with the assistance of legal practitioners. The unregulated growth in the use of such devices purporting to create separate legal entities (and also limit the liability of participants) fuelled a financial market bubble (which eventually burst), leading to the passing of the Bubble Act 1720 (UK) which banned the establishment of any such corporations. Widespread defiance of this rule and a lack of enforcement, as well as the proliferation of a new structure dreamt up by creative legal minds known as “deed of settlement companies”, led to the repeal of the Bubble Act in 1825. Following reviews of the use of corporations, the UK Parliament passed the Joint Stock Companies Act 1844 (UK) which made separate legal entity status available as a matter of right, and imposed basic disclosure obligations on companies thereby created. Eleven years later in 1855 limited liability was afforded to such entities by the passage of the Limited Liability Act 1855 (UK). This statute required the addition of the word “Limited” to the end of a company’s name and required auditors to be appointed to protect shareholders. This is a distinction from companies created in the United States, which use the word “Inc” to mean incorporated under US State legislation. The 1844 and 1855 Acts were combined in the 1862 Companies Act 1862 (UK), which might be considered the grandparent of the Corporations Act 2001 (Cth), the major instrument of legal regulation governing the functioning of Australian companies today. On 15 July 2001, the Federal Government was able to finally address decades of debate as to whether Australia could have a Federal corporate law, and interaction over the preceding half-century of conflicting State law regulating corporations. Prior to 1991, each State of Australia had its own Companies Act. Each State also had a Corporate Affairs Commission, which cooperated with the National Companies and Securities Commission and Ministerial Council to regulate corporations. The Commonwealth’s attempt to seize control of corporate law was frustrated by the High Court in New South Wales v
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[The Corporations Law is like the Jenolan Caves] … They are both ancient, massive, astonishing, curiously irrelevant, dank, pitch black, and created over a long period by a glacial drip. Bill Beerworth, Australian Financial Review (23 April 1993).
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The Commonwealth [1990] HCA 2 which held that under the Constitution the Federal Parliament did not have legislative powers that extended to the establishment of companies. Following protracted legal disputation around the power of the Commonwealth to legislate for corporations nationally, the States agreed to refer their powers to the Commonwealth for a period of five years, which has been renewed since (see [1.1010]). The Corporations Act (CA) is currently divided into 10 chapters with multiple parts, divisions, subdivisions, sections and subsections, but it is not set in stone; the Act continues to develop and adapt through reform, as for example with recent amendments to allow for modern methods of raising capital in the Corporations Amendment (Crowd-sourced Funding) Act 2017. The Act contains thousands of sections. Nevertheless there are certain sections which are of more interest and importance than others, for example, those dealing with directors’ and officers’ duties, shareholder remedies, reporting requirements including periodic and continuous disclosure, and practices such as insolvent trading and insider trading. Annotated editions of the CA offer detailed discussion of such, and other important sections, as well as the interaction between the Act, the Corporations Regulations and the Australian Securities and Investments Commission Act 2001 (Cth) which establishes ASIC as the primary regulator of the CA.
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12.2 TYPES OF COMPANIES Corporation, n. An ingenious device for obtaining individual profit without individual responsibility. Ambrose Bierce, The Devil’s Dictionary (1911).
Corporations, which should be the carefully restrained creatures of the law and the servants of the people, are fast becoming the people’s masters. Grover Cleveland (1888).
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[12.20] Section 112 of the CA provides for the creation of different types of companies, classified by their public or private “proprietary” status, and the method employed for the limitation of their liability. Companies registered under the CA may be registered either as a public company or a proprietary company, with various options relating to the limitation of liability available depending on the kind chosen. The limitation of liability is facilitated through the issuance of shares in the organisation. Volumes could be written about the legal nature of a share in a company, the types of shares that exist and the variety of rights attaching to them, but it is important before we go further to take a quick moment to appreciate their basic features. While often referred to as constituting “ownership of the company”, the holding of shares actually represents a more nuanced set of proprietary interests. A share is a type of personal property classified by the law as a “chose in action”, by which is meant a right in property ultimately capable of enjoyment or enforcement through the courts. This is in contrast to a “chose in possession”, which signifies ownership of tangible property, and indicates that as a “chose in action” a share is more accurately considered a “bundle of rights” in relation to the corporation which issues them. The rights that flow to a shareholder by virtue of share ownership are rights which arise under the company’s internal governance rules (its constitution, or if it does not have one, the replaceable rules located in s 141), through statute and common law. Examples of such rights include the right to vote at shareholder meetings (including, significantly, the ability to elect directors), to participate in dividend distributions, to receive information, to amend the company’s internal governance rules, and to determine the allocation of administrative responsibility between the shareholders in a general meeting on the one hand and the board in its oversight of the management of the business of the company on the other, as well as a right to share in any surplus assets remaining in the company should it be
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Chapter 12 The Modern Corporation
wound up. The internal governance rules function as what is referred to as the “statutory contract” between the participants in the company’s life (s 140) –between directors and the company, the company and its shareholders and between shareholders and other shareholders. This is important to remember when we consider the rights and obligations of corporate actors, as well as potential remedies available to them if things go wrong in a corporate context.
Companies limited by shares [12.30] Most Australian companies are companies limited by shares. This means that the liability of shareholders (also sometimes referred to as members) to contribute to the assets of the company is restricted to the issue price of the shares held. Thus, a person to whom the company issues 100, $1 shares, is liable to pay to the company $100. After payment of that amount the shareholder has no further liability for the debts of the company in their capacity as a shareholder.
Companies limited by guarantee
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[12.40] These companies are used for social, sporting and charitable purposes. Instead of members undertaking a liability to pay for shares, they agree to contribute a fixed amount, which may be nominal, on winding up if there are insufficient funds available for creditors. Lacking a share capital, and being forbidden from paying dividends to members (s 254SA), they are not suited to commercial activity and must be registered as public companies.
Unlimited companies [12.50] These companies lack one of the distinctive benefits that registration otherwise offers –the limitation of members’ liability. Nevertheless unlimited companies are able to be registered by those who seek the benefits flowing from separate legal entity status in the management of their affairs. There are very few registered in Australia. Members of such companies are fully liable for the debts of the company where there are insufficient assets on a winding up. A reason for creating such a company could be the requirements of a professional body that may allow a corporate body to be registered but requires the professionals running it to have unlimited liability for public policy reasons.
[Corporations] cannot commit treason, nor be outlawed, nor be excommunicated, for they have no souls. Sir Edward Coke, Re: Sutton’s Hospital Case (1612) 10 Co Rep 23a at 32b.
No-liability companies [12.60] These companies represent the particular contribution of Australia to the development of company law. Only mining companies may be registered as no-liability public companies. They were introduced to encourage investors to contribute funds to speculative mining ventures, on the assurance that they could not be compelled to pay any moneys still owing on their shares in the event of a winding up and a shortfall of assets.
Proprietary companies [12.70] These form the majority of Australian companies. They must be registered either as a company limited by shares, or as an unlimited company with share capital, but may
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have no more than 50 non-employee shareholders and must not engage in public fundraising; or more precisely, any activity that would require the lodgment of a fundraising document (called a “prospectus” –see exceptions in s 708). Part 1.5 of the CA (s 111J), contains a very useful summary called “the Small Business Guide”, which is directed to the conduct of proprietary companies. Proprietary companies are classified for disclosure purposes under s 45A as either “small” or “large” depending on whether they exceed any two of the following: • Gross revenue $25 million (formerly $10 million); • Gross assets $12.5 million (previously $5 million); • Number of employees (50 full-time equivalents at the end of the financial year – s 45A(5)).
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Public companies The existence of a corporation is a fiction, but the very meaning of that fiction is that the liability of its members shall be determined as if the fiction were the truth. Holmes J, Remington & Sons v Samara Bay Co (1886) 140 Mass 494 at 501.
[12.80] All corporations which are not proprietary corporations, are public companies. Many public companies are also listed on a stock exchange, (as at August 2018, there are approximately 2,270 ASX- listed companies) but many public companies are not listed. Public companies are able to engage in fund- raising activities that would require a prospectus, so long as they comply with the applicable provisions of the Corporations Act 2001 (Cth). A public company must use the words “Ltd” or “Limited” at the end of its name, to clearly indicate its status. The minimum number of members of a public company is one (s 114) and there is no maximum number. The minimum number of directors for a public company is three directors, of whom at least two must be Australian residents (s 201A) although there is no maximum. Public companies which are listed on the Australian Stock Exchange must comply with the requirements of the ASX Listing Rules, as well as the Corporations Act 2001 (Cth). Such corporations are much more highly regulated and subject to greater compliance obligations than ordinary public companies.
12.3 THE SIGNIFICANCE OF CORPORATE STATUS The corporate veil The economic historian of the future may assign to the nameless inventor of the principle of limited liability, as applied to trading corporations, a place of honour with Watt and Stephenson and other pioneers of the Industrial Revolution. The Economist (1926)
[12.90] Or not … As events have transpired since 1926 the inventor of the principle of limited liability may well rejoice in being nameless. The far-reaching effect of the principle was not, however, immediately appreciated by the courts. It was a judgment in 1897 of the UK House of Lords (now the UK Supreme Court) which confirmed the import of the provisions of the Companies Act 1862 (UK). As noted in Chapter 11, Salomon as a person was treated as completely distinct from Salomon & Co Ltd the company he registered, 596
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Chapter 12 The Modern Corporation
worked for, was major shareholder of, director of, and was secured creditor to: Salomon v Salomon & Co Ltd [1897] AC 22. Other cases such as Lee v Lee’s Air Farming Ltd [1961] AC 12 and Macaura v Northern Assurance Co Ltd [1925] AC 619 reiterate this basic proposition.
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Lifting the corporate veil [12.100] The practical reality of the corporate veil so clearly illustrated by Salomon’s case explains its rapid uptake. Nevertheless there exist situations where a court will engage in a practice that is referred to as a “lifting of the veil”, whereby the very real “legal fiction” of separate legal entity status gives way to the underlying brute reality that those involved with companies are its amanuenses, and should be made directly responsible for any improper usage of the corporate structure. This may be accomplished through the common law or on statutory grounds. Lifting the veil means that the court is willing to look behind the name of the company in order to ensure a just outcome in a particular matter before it. This is a rare occurrence. In a business context, it occurs in situations where a person attempts to avoid their existing legal obligations (Gilford Motors Ltd v Horne [1933] Ch 935), or attempts to perpetrate a fraud (Re Darby; Ex parte Brougham [1911] 1 KB 95) through the misuse of the corporate structure. The veil can also be lifted on statutory grounds for insolvent trading, where directors may be required to pay the company’s debts if they have been found to have contravened s 588G(2), and pursuant to ss 126-127 where certain assumptions are made regarding the signing of documents and corporate capacity. This may also happen practically in situations where a group of companies issue group accounts, although this is more of a practical matter of convenience than an actual piercing of the veil, and the separate legal entity principle will ordinarily apply to corporate groups: Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50.
The organic theory [12.110] The recognition of the reality of separate entity status and legal personhood for corporations has led to the need to adjust for this peculiar structure as it interacts with other areas of the law. One early difficulty encountered was in attributing responsibility for those actions of a company which involve fault, carry blame, imply bad faith or even establish guilt. While registration of a company may give it life, as a legal person it does not have the mind or other organs of a natural person; upon registration, a company consists of a certificate of registration and its corporate constitution or other form of internal governance rules. How, for example, can the criminal law, which requires proof of guilty intent (mens rea, the guilty mind, in addition to the actus reus, the guilty act), apply to such a company?
I wasn’t affected by the crash of ’29. I went broke in ’28. Gerald E Lieberman (1923-1986), American author.
To talk about imputing malice to corporations appears to their Lordships to introduce metaphysical subtleties which are needless and fallacious. Lindley LJ, Citizens’ Life Assurance Co Ltd v Brown [1904] AC 423 at 426.
The matter was examined by the House of Lords in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705. The conduct in question involved an injury to a member of the public in the course of the company’s operations. The action was against the company for the tort. A company is vicariously liable for the torts of its employees or agents, but here the question arose as to whether the company itself could be said to have been at fault. Viscount Haldane said that it could –that there is a class of person whose acts constitute the acts of the company itself, in this case, that person was the managing director. His Lordship (at 713-714) said:
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Business and the Law A Corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.
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He explained that the company became liable for its managing director’s acts not because it was responsible for his actions but “the company is liable because his action is the very action of the company itself”. This concept fuelled what has become known as the organic theory. Four decades later, Lord Denning pressed the organic theory to its conclusion. In HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159 at 172 he said: A company may in many ways be likened to a human being. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does, The state of mind of these managers is the state of mind of the company and is treated by the law as such.
In his final year of schooling at Sydney’s St Ignatius College, 16-year- old Charles Curran was asked by one of the priests to name the first man to use economic theories. Curran found that one easy, according to the school’s 1954 yearbook. “It was Noah, Father; he was the first man to use the double entry and to float a limited company,” he reportedly replied. Australian Financial Review (4 January 1990).
[12.120] Thus we are led to the position where thoughts and actions of certain persons involved in the life of the company are recognised as being those of the company. An important distinction here is between what might be identified is the directing mind and will of the company, in contrast to the hands which hold the tools and obey directions. A useful example of the limiting factor inherent in that distinction arose in Tesco Supermarkets Ltd v Nattrass [1972] AC 153. In this case the House of Lords was confronted with the act of one store manager out of a large chain of supermarkets. When he failed to have certain goods available at the advertised price, and the company was charged with breaching the Trade Descriptions Act 1968 (UK), the company claimed the fault was not its own but that of “another person”. The prosecution asserted that the store manager was not “another person” but was organically the mind of the company. The House of Lords held that the store manager was not to be identified as the directing mind or will of the company. As to those who may constitute the company organically, Lord Reid (at 171) said:
All powers granted to a corporation or to the management of a corporation… whether derived from statute or charter or both, are … exercisable only for the ratable benefit of all the shareholders as their interest appears. A A Berle, Harvard Law Review (1931) 44.
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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 that 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. It may not always be easy to draw the line but there are cases in which the line must be drawn.
The law has since evolved to recognise that the acts and knowledge of persons at lower levels of the organisational hierarchy may also be attributed to the company. This is illustrated in ABC Developmental Learning Centres Pty Ltd v Wallace [2006] VSC 171, where a line was drawn much more strictly on public policy grounds. Legislation has also provided some solutions to the problem of proving corporate criminal responsibility by providing sections that impute the knowledge of directors and other senior employees to the company: Part 2.5 of the Criminal Code Act 1995 (Cth) provides for the attribution of criminal liability to corporations in relation to offences created by Commonwealth statutes (see c hapter 10).
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Chapter 12 The Modern Corporation
The organic theory is also of significant importance in the management of internal relationships in the company. If the board of directors might be likened to the brain, shareholders might be likened to the lungs, or even the heart of the corporation, pumping liquid capital through the company’s veins. While scientific endeavour continues to shed light on the deepest connections between human organs, the law continues to illuminate the relationship between the corporation’s main organs: the board of directors and the members in general meeting.
12.4 MANAGEMENT AND OWNERSHIP OF COMPANIES
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Separation of investment from management [12.130] While other structures employed for the carrying on of a business envisage both ownership and control being vested in the same hands, as for example with sole traders and general partnerships, by virtue of their internal structuring the use of corporations allows for the separation of investment or ownership interests and control of the business of the company. While this might not be noticeable in a smaller company where the directors are the only shareholders, it becomes apparent when organisations grow to a size where directors’ shareholdings may only represent a small proportion of the total number of shares in the company. In a smaller family company, of course, the idea of a separation between ownership and management might practically be meaningless, though in the eyes of the law the powers and decisions of the board are distinct from the powers and decisions of the members in general meeting even though it may be precisely the same people making the decisions, yet in their respective capacities. The ability to separate investment from management becomes important when funds are sought from a wide range of investors who may be neither invited nor expected to join the board of directors, or the senior managers, controlling the company. In this context the facility provided by incorporation has been particularly valuable. It has created a mechanism through which people may invest and maintain some continuing rights (for instance, to vote on issues reserved for shareholders) while handing the control of the management of the business of the company to others, and while simultaneously limiting their liability for the debts of the enterprise to the amount payable on the shares subscribed for. Unless the company has minor objectives, or is family-owned and controlled, there will be a clear separation between investors and controllers. It is often the case that investors may not wish to be managers; and entrepreneurs, while they may invest, might not be able to fund the venture entirely themselves. It is thus inevitable that ownership may become more dispersed through growth, and that control may also be handed to certain people, who may also be shareholders or not, who are charged with the management of trading activities. The price that the shareholders (the investors) pay is that they can no longer command the direction of their investment on a day-to-day basis; yet they may have the power to elect those who will. This executive and administrative ability belongs, in the corporate structure, to the board and through it, to those to whom it has delegated such tasks.
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It is only the innate gentility of the average company director, the natural sweetness of your natures, which generally restrains many of you from expressing the feeling that the law is unnecessarily obscure and that lawyers intentionally speak in riddles, disguising meaning in a mass of verbiage so as the better to mystify the unsuspecting layman. Sir Ninian Stephen, National Conference, Institute of Directors (1984).
12.5 DIRECTORS, OFFICERS AND THEIR DUTIES [12.140] The subject of directors’ and officers’ duties is one of the most important areas of corporate law and involves many complex and interlinked issues. It is essential that those engaging with corporations have an understanding of the interrelationship between the common law duties, the equitable fiduciary duties and the statutory duties, but more importantly for non-lawyers, the practical manifestation of these legal rules. There are also some laws that are applied to all corporate officers and some laws only to directors, making the definitions in this area of significant importance.
Definitions [12.150] An artificial entity like a corporation must be able to make decisions and take actions through certain organs of the company. It can do this either directly, in an organic sense, through decisions of the board of directors or resolutions of the members in general meeting, which would be considered through the fiction noted above to be the decisions of the company itself. On the other hand, the company may engage in behaviours indirectly, for example, through the appointment of agents by the board of directors. The law has stated clearly that if a company’s constitution, or the replaceable rules in the CA through s 198A, provides the board this power of management, it is the board of directors (and not the shareholders, nor executive managers without board approval –see discussion below) who have the power to make certain decisions. Following NRMA v Parker (1986) 11 ACLR 1, even if shareholders disagree with the board they may not change the decisions directors have already made. However, shareholders could attempt to sell their shares, change the corporate constitution with a special resolution (s 136), or remove a director with an ordinary shareholders’ resolution: s 203C (this is optional for proprietary companies but is a right always available to shareholders public companies: s 203D). A director is defined in the dictionary set out in s 9 of the Act as: (a)
a person who: (i) is appointed to the position of a director; or (ii) is appointed to the position of an alternate director and is acting in that capacity; regardless of the name that is given to their position; and
(b)
unless the contrary intention appears, a person who is not validly appointed as a director if: (i) they act in the position of a director; or (ii) the directors of the company or body are accustomed to act in accordance with the person’s instructions or wishes.
While this might not seem to be a very helpful definition, it is important in the sense that it takes a functional approach to the imposition of responsibility –claiming you were not validly appointed will not prevent your being considered a director for the purposes of the imposition of liability if you have acted as a director (a “de facto” director) or were 600
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Chapter 12 The Modern Corporation
a person whose wishes were customarily followed (a “shadow” director) by the board. While directors must be natural persons over the age of 18, it is important to note an exception to this rule in the form of the shadow director concept, which applies to corporations wielding influence over other companies (through shareholding or secured creditor status), and thereby exposing themselves to liability for the actions of the companies over which they exercise such influence. At the other end of the spectrum, the simple title of “director”, for example, “finance director” or “director of marketing”, does not necessarily mean one will be considered a director; though they may satisfy the definition of an officer. Officers are defined in s 9 as: (a)
a director or secretary of the corporation;
or
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(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 attaching to the person’s professional capacity or their business relationship with the directors or the corporation).
Again, the definition takes a functional view in defining officers for the purposes of directors’ and officers’ duties. Directors may be executive or non-executive. The former include persons referred to as the managing director, who are appointed by the board, the title indicating the director plays a day-to-day role in the management of the business. Non-executive directors do not work at the business day-to-day, but instead attend board meetings as convened and provide their particular expertise to it in its deliberations. Non-executive directors may be considered independent or affiliated, indicating their degree of freedom from any personal or business relationship which might interfere with the objective exercise of their judgment in the exercise of their duties. Those occupying senior positions in the organisation and who work there on a day-to- day basis, but who have not been elected to play a role on the board, may be referred to as executive officers or senior managers, or collectively as “executive management” and may be considered officers for the imposition of liability should they satisfy the definitions noted above. This can include those referred to as members of the C-suite such as the CEO, CFO, COO, CIO or CTO if they satisfy one of the definitions above. If such executives do have a position on the board, they are referred to as executive directors. The law imposes a wide range of duties on such persons because of their ability to influence and damage the corporation’s interests, as well as those of employees, shareholders, creditors and the community.
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You have succumbed to the Gordon Gekko mentality and frenzy of the 1980s. You put yourself and your son in a position in which there was a hopeless conflict of interest. Judge Fricke (sentencing Reuben Lew, founder of the collapsed Estate Mortgage Managers on charges brought under the Companies Code for improperly using his position us a company officer to receive a secret commission) (1993).
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Business and the Law
A company secretary is a much more important person nowadays… He is an officer of the company with extensive duties and responsibilities … He is no longer a mere clerk. He regularly makes representations on behalf of the company and enters into contracts on its behalf within the day- to-day running of the company’s business. So much so that he may be regarded as held out as having authority to do such things on behalf of the company. Lord Denning, Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 at 717. It is not easy to strike the appropriate balance between letting companies get on with running their businesses in a truly free-enterprise environment on the one hand and, on the other hand, imposing appropriate duties and standards of performance on their directors. I venture to suggest that, in attempting to strike that balance, our legislatures and courts should proceed cautiously in intruding into the boardroom. Sir Lawrence Street, Business Review Weekly (11 November 1994).
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An executive director for example assumes three different capacities, and is therefore subject to the duties owed by all three positions within the company. An executive director is, simultaneously: • an employee of the company, owing a duty of fidelity; • a director of the company, and therefore subject to directors’ duties; and • an agent of the company, potentially with the ability to legally bind the company (should they be the MD for example). This can be contrasted with the role of the non-executive director, who is a member of the board and therefore subject to directors’ duties, but not an employee, nor an agent of the company. Another important office as regards the company’s day-to-day existence is that of company secretary. Early in the history of corporations, the position of company secretary was seen as a “servant of the board” or as a mere clerk. However, that position changed after Lord Denning’s judgment in Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711. His Lordship recognised that the secretary, who had rented motor vehicles for his personal use and paid for them on his corporate credit card, could bind the company as he held the “key administrative position”. This UK case was subsequently followed by the NSW Supreme Court in Club Flotilla (Pacific Palms) Ltd v Isherwood (1987) 12 ACLR 387. It is important to note that the authority only applies to administrative contracts rather than commercial contracts. Thus, the purchase of a photocopier by the secretary for example would be considered administrative, but to arrange the bank overdraft would be deemed commercial. The board could always give the secretary the express authority to enter a commercial contract, but it is not implied. The company secretary is bound by the same statutory duties as directors and is appointed by the board (s 204D). The importance of the role of secretaries is evidenced by the establishment of bodies such as the Institute of Chartered Secretaries and Administrators. The company secretary may be held personally criminally liable for offences outlined in s 188 and matters regarding maintaining the registered office and lodging annual returns and notices with ASIC. Secretaries are also subject to the broader officers’ duties under common law, equity and at ss 180-184 of the CA as discussed below. The actual role of the company secretary will depend upon the size and type of the corporate entity. Previously, all companies were required to have a company secretary; however, proprietary companies are now exempt from this requirement (s 204A). In practice, many proprietary companies still retain the company secretary, who also has a financial, accounting or legal compliance role.
Duties [12.160] In practice, it is only when the company’s operations are irregular, or officers are not fulfilling stakeholders’ expectations of it, that serious questions relating to officers’ duties are likely to arise. Officers’ duties are governed by a complex interrelationship between case law and legislation, which gives rise to duties under the common law, equity and statute. The natural overlap is due to the CA (in Part 2D.1) reflecting parts of the common law and equitable
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Chapter 12 The Modern Corporation
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principles. Some duties are specifically laid out in statute, such as insider trading in s 1043A. Other duties, such as those that arise when directors have interests in contracts entered into by the company, are both statutory (s 191) and fiduciary. Directors must not allow the company to trade while insolvent (s 588G) and they also have a common law duty to consider creditors in times of financial trouble. Probably one of the most important overlaps is the tort of negligence under the common law and s 180, the duty of care and diligence. The CA actually provides that the common law and equity are to be applied in conjunction with the statutory provisions in s 185. It is not unusual for an officer to be held liable for a breach of the Act, as well as breach of the common law and/or equitable duties though it is becoming less and less common with the ascendancy of statutory grounds of action in this area. An example of a director being held liable for all three of these kinds of duties occurred in State of South Australia v Clark (1996) 66 SASR 199. Clark was the CEO of the State Bank of South Australia (SBSA), which was owned by the State of South Australia. He negotiated the purchase of shares in a New Zealand company for $59 million, when in fact the true value was $21 million. He was sued for negligence, and breach of fiduciary duty for failing to disclose a relevant shareholding, and for breach of a relevant statutory duty. The court held Clark personally liable for breaching all three civil duties and the loss which, plus interest, which totalled $81,225,826.25. This principle relating to the enforcement of the duties of officers has been held as correct in Vines v ASIC [2007] NSWCA 75.
Q: What’s the difference between a supermarket trolley and a non-executive director? A: A supermarket trolley has a mind of its own, but a non- executive director can hold more food and drink. Money Programme, BBC Radio 4.
The common law development of the duties of corporate officers has occurred over 150 years. Many of the principles are based on ordinary principles of the common law and equity, such as honesty and avoiding the conflict of interests. However, due to the fact that officers did not require any special training or qualifications, the general standard expected has been very low (similar to the “reasonable person” in negligence, but with a greater element of subjectivity). Since the 1990s, the courts have started to impose and expect a higher duty of care, and this has been reinforced by statutory developments. This makes the statutory duties discussed further below a good guide to the standard of conduct expected of directors and officers in the execution of their roles today.
Common law duties [12.170] The main duties that are imposed by the courts at common law are the duty of care, skill and diligence, and the overarching common law duty to act honestly. The common law duty of care, skill and diligence that is expected by the courts has traditionally been set at an amazingly low standard. Lord Greene MR, in Re: Smith & Fawcett Ltd [1942] Ch 304, defined the duty as the requirement: To act bona fide for the benefit of the company as a whole and not for any collateral purpose.
My father dealt in stocks and shares and my mother also had a lot of lime on her hands. Hermione Gingold (1897-1987), English actress.
The basic test of whether this duty had been fulfilled was originally laid down in Re: City Equitable Fire Insurance Co Ltd [1925] Ch 407, where it was simply stated that the officers should take reasonable care. This was a subjective test that relied upon the individual officer’s level of skill, knowledge and experience in determining what was “reasonable”. This may be contrasted with the decision of Rogers CJ in AWA Ltd v Daniels t/a Deloitte Haskins & Sells (1992) 7 ACSR 759 and the decision of the Court of Appeal in Daniels v AWA Ltd (1995) 37 NSWLR 438, and the standard of care introduced by Parliament in
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Business and the Law The “putrid smell” from Advanced Foods, which drew complaints at a Central Hawke’s Bay District Council meeting on Friday, was a management problem, an environmental officer said today. Hawke’s Bay Herald-Tribune (New Zealand) (30 January 1995).
February 1993, now found at s 180(1). The content of the common law standard and that expressed in the legislation have been assessed to be identical, though they may result in different outcomes as discussed further below.
Equitable duties [12.180] At common law, all officers are expected to act honestly and reasonably in their activities. However, the equitable duties go further by requiring officers to comply with their fiduciary duty. Those people in a position to harm others or in a position of special advantage are required by equity to behave to a fiduciary standard. The High Court decision in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64 defined the fiduciary duty. Directors, like partners, trustees and agents, always owe a fiduciary duty to those they could easily harm, for example, the company as a separate legal person. As a fiduciary, there are three central tenets governing corporate behaviour: to avoid conflicts of interest, to not make a secret profit and to act for a proper purpose. All officers must avoid breaches of these equitable fiduciary duties, as a breach may result in the officer becoming a constructive trustee. This would mean that all proceeds that the officer has obtained in breach would be held on trust for the company: Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134; Mills v Mills (1938) 60 CLR 150. The fiduciary duty may be split into a variety of component parts, each with its own cases and judicial interpretations. Examples include:
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• Confidentiality –officers should maintain confidentiality in respect of information gained in their role as either a director or secretary of the company. In IDC v Cooley [1972] 2 All ER 162, the CEO breached confidentiality to take advantage of a corporate contract. • Conflicts of interest –officers should act in the best interests of the company and avoid personal benefits, which could give rise to conflicts of interest. This principle was established in Aberdeen Railway v Blaikie Bros [1843] All ER Rep 249 and illustrated in Green v Bestobell Industries Ltd [1982] WAR 1, where a senior executive passed confidential tender-bid information to his own family company. It is possible for a director to be released from the duty on the basis of full and frank disclosure, as in the case of Peso Silver Mines Ltd v Cropper (1966) 58 DLR (2d) 1, or by an application to the court for relief under s 1318. • Overriding proper purpose rule –the High Court has stated that officers must comply with a general proper purpose test in carrying out their duties. This was illustrated in Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11, where Whitehouse made significant changes to voting rights, which impacted on shareholders. The Court held that although Whitehouse believed these changes were in the best interests of the company, that they were made in breach of his fiduciary duty to act for a proper purpose, and were therefore invalid.
Officers’ statutory duties [12.190] Since the implementation of national corporate legislation, attempts have been made to codify the common law duties and impose a harsher penalty basis. In 1993, there was an attempt to decriminalise the statutory provisions by adopting a new idea called 604
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Chapter 12 The Modern Corporation
civil penalty provisions. These provisions are a hybrid of civil and criminal penalties for breaching the statutory officers’ duties. The Corporate Law Economic Reform Program Act 1999 (Cth) rewrote the entire officers’ duties provisions, in order to clearly distinguish between the civil, criminal and civil penalty provisions. It is important to note that an officer may be sued for breaches of the common law, equity or the statutory duties under s 185. The most important duties are: • Duty to exercise care and diligence (s 180(1)), which is identical in content to the common law standard of care, except it has different set of possible consequences in that it is a civil penalty provision (discussed at [12.200]). Section 180(1) was redrafted from its predecessors so that the director or officer must exercise their duties and powers with the degree of care and diligence of a reasonable person if they: – were a director or officer of the corporation in the corporation’s circumstances; and
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– occupied the position or office held by, and had the same responsibilities within the corporation as that officer. At common law and statute, the courts have recognised the overlap in the various duties. In particular, the courts have noted the similarities between the statutory duty in s 180 and the common law duty of negligence. This was mentioned in ASIC v Adler, Williams and Fodera (2002) 42 ACSR 80 and again in ASIC v Vines, Robertson and Fox [2005] NSWSC 738, as well as on appeal in Vines v ASIC [2007] NSWCA 75. This new standard only applies to conduct that occurred after 13 March 2000 and is treated as purely a civil penalty provision, with no equivalent criminal provision. To counterbalance the more stringent test of care and diligence, a statutory business judgment rule was introduced in s 180(2). This is a defence for all officers who are to be taken as complying with the duty in s 180(1) and the common law equivalent if they: – make the judgment in good faith for a proper purpose; and – do not have a material personal interest in the subject matter of the judgment; and – inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and – rationally believe that the judgment is in the best interests of the corporation. • Duty to act in good faith (s 181), which requires all officers to exercise their duties and powers in good faith in the best interests of the company and for a proper purpose. A breach of this section can attract civil penalties. The severity of any penalty applied depends upon whether there was any intention to deceive or defraud the company, members or creditors. If there is an attempt to be reckless or intentionally dishonest, a separate criminal offence may be committed under s 184(1).
Accountants are witchdoctors of the modern world. Harman J, Miles v Clarke [1953] 1 All ER 779.
• Duty not to misuse the officer’s position (s 182), which reflects the equitable fiduciary duty that an officer could easily take advantage of an opportunity that really belongs to the company. This provision is widely drafted to catch any officer or employee who is in breach. This is a civil penalty provision, but could also be prosecuted to a criminal
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standard under s 184(2), depending upon the presence of intent. The High Court in 1995 reviewed the concept of improper use of an officer’s position in R v Byrnes and Hopwood [1995] HCA 1. The directors could not defend themselves on the basis that their actions were in the company’s interest, while motivated by an ulterior motive (their own benefit).
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Creditors are a superstitious sect, great observers of set days and times. Benjamin Franklin. It is no limitation upon property rights or freedom of contract to require that when men receive from government the privilege of doing business under corporate form, which frees them from individual responsibility, and enables them to call into their enterprises the capital of the public, they shall do so upon absolutely truthful representations as to the value of the property in which the capital is to be invested. Theodore Roosevelt (1901). It just seemed to me, as a simple businessman, that it wasn’t necessary to state the obvious to the potential investor. Foiled businessman Bos Ansett, on why Budget Corporation Ltd’s accumulated losses of $20 million were not mentioned in the company’s 1988 prospectus, Business Review Weekly (31 October 1994).
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• Duty not to misuse information (s 183), which is a refinement of the general law duty not to take advantage of the officer’s position. Officers handle the company’s most sensitive information in the execution of their roles and such information should not be used for personal gain, or the detriment of the company. An interesting example of this provision being used is ASIC v Vizard [2005] FCA 1037. This is also a civil penalty provision, which may also lead to criminal consequences under s 184(3). • Prohibition on insolvent trading (s 588G), whereby directors are prohibited from allowing the corporation they manage to trade while insolvent, as this unfairly places creditors at risk. While the company is a separate legal entity and is liable for the debts it incurs, through s 588G(2) the CA allows for the “veil of incorporation” to be lifted in situations where directors have allowed the company to trade when it is unable to pay its debts. Importantly, unlike the sections above which apply to directors as well as other officers and even employees in the case of s 182 and s 183, s 588G only applies to directors (including de facto and shadow directors). Justice Mandie in the Victorian Supreme Court considered a list of factors which may be relevant in the determination of whether reasonable grounds exist to suspect insolvency in ASIC v Plymin [2003] VSC 123. A range of defences are contained in s 588H, not to mention recent reforms known as the “safe harbour” provisions, which provide directors with the latitude to make decisions which might improve outcomes for the company’s creditors in situations involving financial distress: s 588GA.
Officers failing their duties [12.200] It is important to understand that different types of legal causes of action undertaken by different parties can result in different outcomes. The key to understanding who might take action in any particular situation, and which is most appropriate, is first to ask: who has been wronged, and in what way; and then, what standard of expected behaviour has been breached, and by whom. In doing so it is important to remember that a company is a legal person to whom duties are owed, and which itself may take action for wrongs suffered. A legal action brought against the officers under the common law or for breach of equitable fiduciary duty may only result in a civil remedy. The main remedies are: • damages; • compensation; • account of profits; • injunctions (interim or final);
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Chapter 12 The Modern Corporation
• the constructive trust; • declarations.
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Under the CA there is a range of civil remedies and criminal sanctions that are available where there is a contravention of the Act. Importantly, should a section be designated a civil penalty provision as the sections relating to directors’ and officers’ duties noted above are (s 1317E), a range of different consequences may flow, including statutory compensation orders (should the action be taken by the company or ASIC), and disqualification orders and pecuniary penalties (which are not available to the company, only ASIC). In addition to this, the contravention of certain sections of the Act may result in an offence (ie the committing of a crime) which may be punishable by further criminal penalties. For example, should a director engage in insolvent trading and contravene s 588G(2) they will have breached a section designated a civil penalty provision, meaning they may be ordered to pay compensation (s 1317J), may be the subject of a disqualification order (s 206C), and/or may be ordered to pay a fine (s 1317G). Furthermore, should a court find the breach of the section was “dishonest”, the director will have breached s 588G(3), the contravention of which is considered an offence, meaning they may be liable for a fine of up to 2,000 penalty units (currently set at $210 per penalty unit: Crimes Act 1914 s 4AA(1)), imprisonment for five years, or both (Item 138, Schedule 3, CA). Added to these potential consequences is a suite of shareholder remedies contained in the Act which empower shareholders to take action against appropriate persons for their conduct in relation to the corporation’s activities. These include the oppressive conduct provisions (s 232), the option to seek the winding up of the company (s 461), statutory injunctions (s 1324), and the use of the statutory derivative action provisions in ss 236-237 on behalf of the company. Sir Anthony Mason CJ wrote in 1992 that “Oscar Wilde described fox-hunting as ‘the unspeakable in full pursuit of the uneatable’. Oscar Wilde, the supreme stylist, would have regarded our modern Corporations Law not only as uneatable but also as indigestible and incomprehensible”.
Professor Neville Norman, for the affirmative, summed up by saying there were three sorts of accountants, those who can count and those who can’t. 1995 Victoria CPA Congress.
Justice Graham in Ku v Song [2007] FCA 1189 in late 2007 stated: Whoever coined the expression “as clear as mud” must have been slaving over the extraordinary, and unnecessarily complex provisions of the Corporations Act and the Corporations Regulations … Gaining an understanding of the relevant law on this subject [share transfers] back in 1961 involved a five-minute exercise … Today, it requires hours of study, reference to numerous sections and regulations … Why the law had to be expressed in such an obscure way beggars belief.
While such difficulties persist, seen from a more wholistic perspective, the operation of the law in this area has seen considerable tightening and tidying over the last two and a half decades. The long lists of Corporations Act matters at the Federal Court, and the fact ASIC continues to prosecute and otherwise pursue seemingly endless breaches of the Act nevertheless indicate that appropriate managerial practice in relation to Australian corporations remains wanting; as ever, the law concerning corporations in Australia will continue to evolve in response.
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Well, as a member of the stock exchange, I would suck their brains out with a straw, sell the widows and go into South American zinc. Monty Python’s Flying Circus.
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QUESTIONS Which of these statements (1-3) are true? 1.
Directors always have limited liability. True or false?
2.
Directors in Australia are never sent to jail. True or false?
3.
Is it true that the ASX has a specific role in relation to corporate governance practices?
4.
One of the key features of a corporate body is limited liability and this is available only to: (a) Directors (b) The company secretary (c) Shareholders (d) Creditors (e) All the above.
5.
What is the role of ASIC? (a) The Australian Securities and Investments Commission only enforces the criminal law. (b) The Australian Securities and Investments Commission is responsible for the enforcement of the Corporations Act. (c) The Australian Stock and Investments Commission only enforces civil actions in corporate law.
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(d) The Australian Securities and Initiatives Commission only enforces civil penalties in corporate law. (e) All of the above. 6.
What would be the benefits of keeping companies under the corporate veil?
7.
Apart from the strictly necessary statutory duties of officers, what other duties should directors take into account?
8.
What form of punishment do you think is most appropriate for directors of companies who breach their duties?
WEB REFERENCES Australian Financial Review www.afr.com.au Australian Institute of Company Directors www.companydirectors.com.au Australian Prudential Regulation Authority www.apra.gov.au Australian Securities and Investments Commission www.asic.gov.au Australian Securities Exchange www.asx.com.au Chartered Secretaries Australia www.csaust.com Commonwealth Law https://www.legislation.gov.au/
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13
Relationships in Business: Distributors, Agents, Employees, Independent Contractors Andrew Terry Joseph Huan THE BUSINESS CONTEXT It may have been the case many years ago that a business could be conducted by an individual without forming relationships with others apart from the person for whom the work was performed. Those days have long passed. The vast majority of Australian business operate through a corporate structure which, even in a one-person company, requires an employment relationship to be entered into as the company being an artificial legal person cannot actually do the work required. And even sole traders form relationships with others apart from their customers in the course of their business operations. This chapter outlines the commercial and legal implications of the most common relationships in business –distributorships, agency, employment and independent contracting.
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13.1 BUSINESS RELATIONSHIPS ................................................................................................................................. 610 13.2 DISTRIBUTORSHIPS AND DEALERSHIPS ........................................................................................................ 612 13.3 AGENTS AND AGENCY ......................................................................................................................................... 613 [13.80]
The legal relationship ................................................................................................................................. 613
[13.90]
Types of agents ............................................................................................................................................. 614
[13.110]
Source of the agent’s authority ................................................................................................................. 615
[13.240]
Duties between principal and agent ....................................................................................................... 619
[13.290] Liability ......................................................................................................................................................... 621 13.4 EMPLOYEE OR INDEPENDENT CONTRACTOR? ........................................................................................... 622 [13.350]
The importance of the classification ........................................................................................................ 622
[13.440]
Employee or Independent Contractor: key indicators of the status of the relationship ............... 627
13.5 EMPLOYEES ............................................................................................................................................................... 632 [13.470]
The contract of employment ..................................................................................................................... 632
[13.490]
The industrial relations systems .............................................................................................................. 633
[13.520]
Workplace health and safety ..................................................................................................................... 634
[13.530]
Workers’ compensation .............................................................................................................................. 635
[13.550]
Employers’ liability for employees’ actions ............................................................................................ 636
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13.6 INDEPENDENT CONTRACTORS ......................................................................................................................... 637
13.1 BUSINESS RELATIONSHIPS [13.10] The aim of a producer of consumer goods is to get its product to the consumer. Every producer operates through a distribution system although the level of sophistication of the system adopted may vary substantially. In some cases the producer may deal directly with consumers either through direct marketing via e-commerce, mail order, telemarketing or door-to-door salespeople, or through a network of company-owned and operated retail outlets. However, because of the immense cost of establishing, operating and managing a retail distribution network through retail outlets it is more common for a producer to market its goods or services through an intermediary. The producer who entrusts its products to an intermediary obviously loses some control over the marketing of the product, and receives a “wholesale” rather than a “retail” price. However, the producer gains both through infrastructure savings and through exploiting the expertise, experience and efficiency of the distributor’s established retail network. The producer who decides to use an intermediary must decide the status of the relationship. Despite a number of terms which are commonly used interchangeably to describe an intermediary –dealer, distributor, reseller, agent, representative, licensee, franchisee – for legal purposes the intermediary is either a reseller or an agent. In a reselling relationship the producer/vendor sells the goods to the distributor/purchaser. In an agency relationship the producer/principal authorises the distributor/ agent to sell the goods on its behalf. The legal consequences of the relationships are very different. 610
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
The carelessness in the terminology is a complicating factor as illustrated by the International Harvester Company of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co [1958] HCA 16:
International Harvester Company of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co [1958] HCA 16 [13.20] The plaintiff in this case bought a machine through a local farm-machinery dealer who was
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described as an “agent” for the manufacturer. The machine purchased by the plaintiff was unsatisfactory but because of the dealer’s bankruptcy the purchaser sought to enforce his rights against the manufacturer. The High Court held that although the local farm-machinery dealer was described as an “agent” for the manufacturer, the word “agent” was used in a descriptive sense to mean “distributor” and his status was really that of a reseller. The machinery dealer was not an “agent” in the legal sense and thus no action lay against the manufacturer. The High Court, quoting Lord Herschell in Kennedy v De Trafford [1897] AC 180, stated that: No word is more commonly and constantly abused than the word “agent”. A person may be spoken of as an “agent”, and no doubt in the popular sense of the word may properly be said to be an “agent”, although when it is attempted to suggest that he is an “agent” under such circumstances as create the legal obligations attaching to agency that use of the word is only misleading. No one supposes … that the manufacturer or the head supplier contracts with the ultimate buyer or “consumer” as vendor. In the present case it appears clear enough that the transaction was carried through on the basis that [the retailer] sold the baler to the plaintiff company and that the defendant company was not the contracting party. There is nothing in the letters which in face of the facts could possibly authorise the contrary conclusion.
IN CONTEXT
Agents and resellers [13.30] The differences between agents and resellers are summarised by Collinge and Clarke in Law of Marketing in Australia and New Zealand (2nd ed, Butterworths, 1989) at [14.8]: • Where a producer sells through a reseller, the contract of sale is made between a purchaser and the reseller. Whereas if the producer utilises an agent, the contract of sale is made between the producer and the third party with whom the agent deals, that is, with a retailer or the consumer. • The producer, when selling to a reseller, has no contractual relationship with the person who buys from the reseller. On the other hand, the producer has a direct contractual relationship with the person who deals with an agent of the producer. Importantly, the producer may contract with the agent in order to control the resale of the product by that third party. This fact is particularly important where the agent is a wholesaler selling to retailers. • Where a producer uses a reseller or distributor, the possession, and risk of destruction, of the goods passes to the distributor. However, both remain with the producer
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… in your report here, it says that you are on extremely dull person. Our experts describe you as an appallingly dull fellow, unimaginative, timid, spinster, easily dominated, no sense of humour, tedious company and irrefutability drab and awful. And whereas in most professions these would be considered drawbacks, in accountancy they are a positive boon. John Cleese et al, And Now for Something Completely Different (Screenplay, 1971).
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who uses an agent to distribute its goods. When considering the costs of insuring goods or warehousing them pending sale, who retains possession of the goods becomes an important consideration. • The responsibilities of the buyer under the Sale of Goods Acts as to payment for the goods can only apply to a reseller but not to an agent (although of course they apply to the agent’s customer). Likewise, the responsibility for the reasonable quality of the goods rests with the reseller upon resale but not with the agent. • Misstatements made by the reseller in the course of selling are his responsibility. Any such misstatements made by an agent of the producer become the responsibility of the producer (although the producer will normally be entitled to be indemnified by the agent). Not surprisingly, in view of the very much more extensive responsibilities and risks undertaken by a reseller, the margin on resale is normally substantially in excess of the commission to which the agent is entitled upon arranging a sale.
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13.2 DISTRIBUTORSHIPS AND DEALERSHIPS There are highly successful businesses in the United States. There are also highly paid executives. The policy is not to intermingle the two. Philip R Wrigley.
[13.40] Distribution arrangements encompassing reselling are much more common than distribution arrangements encompassing agency. Reselling arrangements vary substantially in their complexity. At one extreme the distributor may be a mere reseller (eg a department store which buys and resells the products of thousands of suppliers). At the other extreme the reseller may be given an exclusive territory, tenure and the right to use the supplier’s business names and marks together with assistance such as training and advertising in return for undertaking to concentrate exclusively or principally on the marketing of the supplier’s products. A reselling arrangement of this level of sophistication is described as a franchise –a disciplined distribution strategy which currently accounts for at least 25% of all retail sales in Australia.
IN CONTEXT
Distributors and franchisees [13.50] A distributorship (or dealership) is an agreement between two legally independent
parties, the vendor and purchaser. The purchaser only has a licence to stock the vendor’s product and does not gain the benefits of the ongoing support of a franchise system. The purchaser will usually be required by the vendor to hold adequate stock and maintain the premises in a way that will reflect well on the vendor’s product. In the case of a distributorship, the main points of difference with a franchise are that the arrangement is generally much less formal, may not have the same degree of certainty of term, may or may not be exclusive, might tend to cover a larger geographic area, and would leave the marketing merchandising and sale decisions largely to the distributor.
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
No royalties are payable to the supplier by the distributor. The supplier’s profit arises from the difference between the price at which they manufacture or which they pay for the goods and the price at which they are able to sell the goods or the distributor. S Giles, M Redfern, A Terry, Franchising Law and Practice (Butterworths, 1998) at [1.0420]
13.3 AGENTS AND AGENCY [13.60] In the commercial world business people and consumers require the services of another person to act as their representative –in legal terms, as their agent. Agency is a relationship which arises when one person (the principal) authorises another person (the agent) to act on the principal’s behalf. Essentially, the basis for agency law is commercial convenience: the law recognises that legal persons (companies or individuals) will, especially in business, act through other persons on whom authority has been conferred.
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The volume and diversity of commercial transactions conducted by agents are significant. Businesses, consumers and even governments use agents on a daily basis. Modern commercial activity would not be able to expand at its current rate without the use of agents in negotiations and deal making. Agency provides a number of commercial benefits to the principal. Agents often provide highly specialised services, but as the principal’s representative, agents are bound to act on the instructions and in the interests of the principal at all times. The law of agency is generally to be found in common law, but contemporary commerce, technology and the rapid speed of entering into contracts, such as foreign exchange contracts or the sale of shares, have brought about the need to develop more comprehensive rules to govern the relationship between agent and principal. In most States and Territories specific legislation has been enacted to supplement the common law for particular categories of agents in the travel, real property, securities and mercantile industries. [13.70] When an agent enters into a transaction on behalf of the principal, any contract that is formed will be between the principal and the third party. The contract will not be between the agent and the third party. However, before an agent can create a contract between the principal and third party, two major conditions must be satisfied: 1.
There must be a legally recognised relationship of agency.
2.
The agent must have acted within the scope of the authority given to her or him by the principal.
For almost a century, cases have appeared from time to time in the law reports illustrating the fact that the word “agent” is often used in business as meaning one who has no principal but who on his own account offers for sale some particular article having a special name … No-one supposes that the “distributing agent” or “exclusive agent” in a particular “territory” for a proprietary commodity or specific kind of article or machine is there to put a “consumer” into contractual relations with the manufacturer. International Harvester Co of Australia Pty Ltd v Carrigan’s Hazeldene Pastoral Co [1958] HCA 16 at [8].
Both conditions are determined objectively by reference to the conduct of the parties. For example, persons who act in a way that gives rise to a reasonable inference that they have conferred authority upon another are bound as principals even if they did not actually intend that any authority be conferred.
The legal relationship [13.80] An agency may arise out of an express contract between the principal and the agent. Such a contract may be verbal or written (or a combination of both) and is called
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an agency by express agreement. The terms of this contract will dictate the rights and obligations of the principal and the agent, and will usually be supplemented by additional rights and obligations that are to be implied or inferred by the law as discussed below. Not all agencies, however, are created through an express agreement. Some agencies are created through implication or by operation of the law. For example, a brother may do things on behalf of a sibling over a period of time in dealing with the sibling’s property. This could create an agency relationship with the brother having implied authority to have dealt with, and to continue to deal with the property on behalf of the sister (as the court found in Cummings v Sands [2001] NSWSC 7).
Types of agents [13.90] An agent can only do things such as enter into a contract on behalf of the principal if the agent has authority. Hence, the principal is only liable for the actions of the agent that are authorised and fall within the scope of the agent’s authority.
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There are four types of agents depending on the scope of authority that is granted: • A universal agent has unrestricted authority to contract on the principal’s behalf. The usual method of appointing such an agent is a power of attorney –a deed under which a principal empowers another, the “attorney”, to act in all matters for the principal as agent. • A general agent has lesser, but nevertheless substantial, powers to act on the principal’s behalf (eg to manage the principal’s business). • A special agent is appointed for a specific purpose and has narrower powers (eg to act in a particular matter and not generally). • A del credere agent is an agent with specific powers to sell goods and, in consideration for a premium on the usual commission, is paid an extra commission (del credere commission) to guarantee the payment for the goods sold.
IN CONTEXT
Types of agency agreements Why don’t they burn this Act? It is ridiculous … Yeldham J, commenting on the Auctioneers and Agents Act 1941 (NSW).
[13.100] Implied: Agency relationships may be implied by law, for example, partners
under the Partnership Act of each State are specifically agents of the partnership and each other partner. Informal: An agency agreement can be quite informal and ad hoc, for example, a fruit retailer, who is running short of supplies, may ring up a buying agent and ask them to look for a particular products from a wholesaler (who is probably an agent for the grower). Formal: Agency agreements can also be quite formal and may appear in a written form containing extensive terms. One formal type of agency is the appointment of a person with the power of attorney. These agents normally have a lot of discretionary power, perhaps even to run a business. Where large amounts of money are involved it is a good idea to formalise an agency relationship.
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
Department of Industry, Innovation, Science, Research and Tertiary Education, Working with Contracts (2013) p 32.
Source of the agent’s authority [13.110] The primary source of the agent’s authority is the agent’s agreement with the principal. The type of authority that is created from this agreement is called actual authority. There are two types of actual authority: express actual authority and implied actual authority.
Lord Grade decided to expand from television into motion pictures and put a lot of money into Dino de Laurentiis’s epic, The Sinking of the Titanic. After he lost most of his investment the mogul observed: “It might have been cheaper to raise the Atlantic”. P Hay, Harrap’s Book of Business Anecdotes (Harrap, 1988).
Authority may also be created even if such authority was not actually agreed upon, expressly or implicitly, by the principal and agent (ie the authority arises irrespective of the agreement between the agent and principal). There are three types of such authority: • apparent authority or ostensible authority; • authority by ratification; and • authority by operation of the law. Only one type of authority needs be present in order for an agent’s acts to bind the principal. Often, though, there will be more than one type of authority present. If no authority is present, then the agent’s acts cannot bind the principal.
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Actual authority [13.120] The most common type of authority is actual authority. Actual authority arises from the powers that are expressly and implicitly given to the agent. The scope to the agent’s actual authority is to be established from the express and implied terms of the agency agreement. Actual authority was explained by Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties Ltd [1964] 2 QB 480 at 502, as follows: An “actual” authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope, is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade, or the course of business between the parties. To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the “actual authority”, it does create contractual rights and liabilities between the principal and the contractor.
This judgment was affirmed and followed by the High Court of Australia in Crabtree- Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd [1975] HCA 49. Actual authority, accordingly, may be express or implied or both.
Express actual authority [13.130] The most obvious way in which an agent acquires authority to act on behalf of a principal is when the principal expressly grants this authority to the agent through the use of express verbal or written words. These express words form the express terms of the agency agreement. For example, a business (as principal) may appoint an agent under a contract and in that contract, the business will expressly state what the agent
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is entitled to do on behalf of the principal, the duration of the appointment and the commission.
Implied actual authority
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This rebate is available on production of proof that your sole income is from superannuation. It applies to the account holder and not the dog. Rotorua District Council, Animal Control Dog Registration Fees (leaflet, New Zealand, 1996).
[13.140] Implied authority will usually arise in circumstances whereby the appointment of the agent does not expressly state what powers or authority the agent has. Or, if it does, the statement of authority is incomplete. Often it is impractical for a principal to expressly stipulate or define the precise scope of authority granted to the agent. It is therefore usual for the agent’s express authority to be supplemented with implied authority in order to give full effect to the intentions of the parties. For example, if an agent is appointed for a particular purpose such as to sell the principal’s goods, then the agent will have implied ancillary right to do what is necessary or incidental in carrying out that purpose even if such power was not expressly granted. Implied authority may also arise in agency relationships that develop over time. As an agent becomes more competent and qualified, the agent may incrementally and implicitly acquire greater authority to carry out tasks that were not originally contemplated at the time of appointment. However, given that the purpose of the implied authority is to give effect to the intentions of the parties, there can never be implied authority if such authority conflicts with the express intentions of the parties. That the scope of the agent’s implied authority is less certain than an express grant of actual authority is illustrative in Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9.
Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9 [13.150] In this case, a law firm called Allens Arthur Robinson (AAR) was engaged by Queensland
Investment Corporation (QIC) to draft and finalise documentation in relation to the redevelopment of the Westpoint Shopping Centre at Blacktown. There was no evidence that QIC had given AAR express instructions to perform tasks relating to the financial and legal management of the project, in particular, the compilation of a financial document called the “payment schedule”. Despite this, AAR had compiled three payment schedules on behalf of QIC over a period in excess of a year. QIC was aware of this and paid its legal fees without objection. Under dispute in the case was whether or not AAR had authority to compile a fourth payment schedule as agent for QIC. As such authority was not expressly granted, the court was called upon to determine whether or not such authority could be implied. The court looked at the parties’ past conduct, their relationship and the surrounding circumstances and held that such authority could be implied in order to give effect to the parties’ true intentions. Although it was not an issue before the court, apparent authority would in any case have been present.
Apparent or ostensible authority Let every eye negotiate for itself. And trust no agent. Shakespeare, Much Ado about Nothing.
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[13.160] Apparent or ostensible authority is derived from the appearance of authority, where a principal allows a third party to believe that the agent has authority even though the agent has no actual authority. An appearance of authority that is solely created by the agent by falsely holding out that the agent has authority will not give rise to apparent authority. The principal must also, at least to some extent, be responsible for creating the appearance of authority. Knowingly allowing an agent to act beyond the actual
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
authority granted without intervening would be enough to satisfy this requirement if doing so would lead a third party to believe that the agent does have actual authority. In the employment context, as exemplified in the case study below, apparent authority will be created by the mere appointment of a person into a position of authority. Appointing a person into a position of authority is deemed at law to be representation by the employer (as principal) that the employee possesses the same actual authority that a person would usually posses while occupying the same or similar position. The appointment will therefore create an impression in the eyes of a third party that the employee has a certain degree of authority. Unlike implied authority, this will be the case even if express limitations have been placed upon the employee’s authority.
Panorama Developments (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 [13.170] This case involved the activities of the company secretary of the Panorama Developments com-
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pany. The company secretary hired expensive cars purportedly on behalf of the company for the purpose of transporting clients of Panorama. In fact, the company secretary had no actual authority (express or implied) to hire the vehicles and was actually using the hire cars for his own private purposes. The Court of Appeal held that the hiring of cars was within the usual authority of a person in the position of a company secretary, and so the company secretary’s conduct in this case was within the apparent or ostensible authority. Thus, Panorama Developments was held to be a party to the hire contracts created by the company secretary and therefore liable for the debts arising from them.
[13.180] In an earlier English case, Freeman & Lockyer v Buckhurst Park Properties Ltd [1964] 2 QB 480, Diplock LJ specified the conditions that are required to be met in order for a company to be bound by a contract that is entered into by an agent that lacks actual authority. It must be shown: (a)
that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the third party;
(b)
that the representation was made by a person or persons who had “actual” authority to manage the business of the company either generally or in respect of those matters to which the contract relates;
(c)
that the third party was induced by the representation to enter into the contract (the third party relied on it); and
(d)
that under its memorandum or articles of association (now called the constitution) the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.
Professor Neville Norman, for the affirmative, summed up by saying there were three sorts of accountants, those who can count and those who can’t. 1995 Victoria CPA Congress.
Summers v Solomon (1857) 119 ER 1474 [13.190] The principal had employed a manager to run a jewellery shop. In the course of employment, the
manager (as agent) ordered jewellery on behalf of the shop. The manager was subsequently made redundant, but despite this, ordered some more jewellery purportedly on behalf of the shop and disappeared with it. Even though the ex-manager did not have actual authority to bind the principal to this transaction (as this
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Business and the Law authority had been withdrawn upon termination of the ex-manager’s employment), the principal was held liable to pay for the jewellery because the ex-manager had apparent authority. Apparent authority was present because the ex-manager’s prior dealings with the supplier had led the supplier to believe that the ex-manager still had authority and the principal was held responsible for creating this impression by failing to give the supplier notice of the ex-manager’s termination of employment. The lesson to be learnt from this case is that if revocation or lapse of authority is not notified to repeat customers, these customers may continue to assume that the agent still has authority even after this authority has been withdrawn. In appropriate cases, newspaper notices should be published confirming that the agency has been terminated.
[13.200] An analogous situation may arise where, although the agent has no prior dealings with a third party, the principal acts in a manner that leads the third party to think that the agent does actually have authority even though no actual authority (express or implied) has been conferred.
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Authority by ratification [13.210] If an agent lacks actual or apparent authority, then the acts of the agent cannot bind the principal. In such circumstances, a principal will not be bound by any contract that the agent purports to enter into on behalf of the principal. However, if the contract is favourable to the principal, the principal may choose to approve or ratify the contract and thereby create authority by ratification. Authority by ratification therefore arises when a principal retrospectively approves an unauthorised act by another person purportedly acting on the principal’s behalf. If a contract is ratified, the agent is regarded at all relevant times to have possessed the necessary authority. Given that the principal is acting in respect of a past event, the scope of authority conferred by ratification will be limited to that event. My father dealt in stocks and shares and my mother also had a lot of time on her hands. Hermione Gingold (1897-1987), English actress.
A principal’s silence could amount to ratification in circumstances whereby the principal is made aware of the unauthorised act but despite this, chooses not to intervene. The voluntary inaction of the principal could be construed as implicit approval of the unauthorised act. However, as illustrated in Russo v Buck [2006] SASC 380, the courts are generally reluctant to construe silence as amounting to ratification.
Russo v Buck [2006] SASC 380 [13.220] Mr Russo was given various correspondence by a lender that clearly outlined his obligations in
relation to a loan transaction that his friend, Mr Buttigieg, had purportedly entered into on his behalf. Although Mr Buttigieg did not have any authority to act as agent on behalf of Mr Russo (Mr Russo’s signature was forged on the relevant loan documentation), the lender (as third party) nonetheless argued that Mr Russo was bound by the transaction as principal. The lender argued that Mr Russo’s failure to object to the correspondence which outlined his obligations under the loan transaction amounted to retrospective approval or ratification of the transaction itself. However, Justice Doyle rejected this argument holding (at [158]): But I do not infer from Mr Russo’s silence and inactivity an awareness or knowledge … In short, I do not regard Mr Russo’s failure to respond, as, in the circumstances, indicating unequivocally that he accepts responsibility for the further borrowing made by Mr Buttigieg. To my mind considerable care must be exercised in treating a mere failure to respond as amounting to ratification by acquiescence of an event (the forgery) such as occurred here. 618
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
Authority by operation of the law [13.230] Agency by operation of law arises primarily in emergency situations where the law imposes an agency relationship upon the parties in order to provide a person (called an agent of necessity) with legal authority to do something on behalf of another person (the principal). An agency by operation of law will be imposed even if the parties have not contemplated such a relationship. For example, a carrier of goods usually enters into a contractual but not an agency relationship to carry goods. However, a carrier may be authorised by the law as an “agent of necessity” to incur expenditure on behalf of the owner of goods if such expenditure is necessary to preserve the owner’s goods. This will happen in situations where for example the owner fails to pick up the goods at the scheduled time of delivery and the owner cannot be contacted but the goods require immediate refrigeration otherwise they would perish. The law will construct an agency relationship to allow the carrier to act in the capacity of an agent and arrange cold storage on behalf of the owner without being personally liable for the costs (as the owner is deemed to be the principal, the owner and not the carrier will be liable for the costs of storage).
Duties between principal and agent [13.240] The law imposes certain duties upon both the agent and principal.
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Duties of agent to principal [13.250] Common law has developed a number of duties that an agent owes to a principal which apply unless modified expressly or impliedly by the principal and the agent. For example: • The agent must carry out the principal’s instructions personally and cannot delegate performance to another. • The agent is under a duty of diligence, care and skill to the principal. The agent should exercise the standard of diligence and care equal to that expected of a principal in similar circumstances. The degree of skill expected is that which is usual given the nature of the work and the training of the agent (if an agent is unable to perform a particular task, then the agent should say so). As part of these general duties, it is the responsibility of the agent to keep proper accounts that disclose all financial matters relating to the principal.
You don’t impose a fiduciary duty simply because you think someone’s conduct is dishonest. Tom Hughes QC, opening News Ltd’s appeal against the High Court’s finding that NSW clubs had a duty to the ARL, Business Review Weekly (3 June 1996).
[13.260] The law also imposes fiduciary duties on agents. For example, the agent: • must act honestly and in the interests of the principal; • must keep accounts and preserve the confidentiality of any information acquired through the relationship; • must avoid a conflict of duty and interest. For example, an agent such as a solicitor should not act on behalf of both parties to a dispute unless the parties have consented to this; • must not use the principal’s property or information for self gain;
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Business and the Law I have no use for bodyguards, but I have a very special use for two highly trained certified public accountants. Elvis Presley.
• must not make a secret profit from the agency. This fiduciary duty has been described as a duty of utmost loyalty. The example most cited is that the agent must not accept a secret commission (ie a commission without the principal’s knowledge) from a third party in return for contracting with that party on the principal’s behalf. The rule was stated over a century ago by James LJ in Parker v McKenna (1874) LR 10 Ch App 96 when he said (at 124) that: No agent in the course of his agency, in the matters of his agency can be allowed to make any profit without the knowledge of his principal … that rule is an inflexible rule and must be applied inexorably by this court, which is not entitled … to receive evidence, or suggestion or argument as to whether the principal did or did not suffer any injury in fact, by reason of the dealing of the agent.
The common law rules are supplemented by legislation in all Australian jurisdictions which make the organising or the taking of a secret commission, and related actions, criminal offences. These duties bear a resemblance to the duties owed by company directors to the companies they direct.
Hewson v Sydney Stock Exchange Ltd (1967) 87 WN (NSW) 422 [13.270] A stockbroker had actively traded shares as agent for his clients. At the same time but without
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the clients’ knowledge, he traded shares for himself in competition with his clients. The court condemned his conduct (at 425) in the following words: Both Mr Hewson and the Stock Exchange have, throughout the events leading up to this litigation and throughout the litigation itself, proceeded on the basis that there is no impropriety in a sharebroker carrying on also a business as a share trader. This cannot be permitted to pass without critical comment. The primary function of a sharebroker is to advise clients and to act on their behalf in the purchase and sale of shares. He occupies a position which imposes on him important obligations toward his client. This is recognised by the Stock Exchange itself, within whose articles and by-laws are provisions directed towards requiring proper standards of integrity to be observed by brokers. A fundamental principle of commercial morality will be gravely compromised if brokers are permitted to enter the market and to trade not for their clients but in competition with them. The words of Lord Cairns LC in Parker v McKenna (1874) LR 10 Ch App 96 are as true today as they were in 1874: “Now, the rule of this court, as I understand it, as to agents, is not a technical or arbitrary rule. It is a rule founded upon the highest and truest principles of morality. No man can in this court, acting as an agent, be allowed to put himself into a position in which his interest and his duty will be in conflict.”
Duties of principal to agent [13.280] Common law has also developed a number of duties that a principal owes to an agent unless otherwise modified expressly or impliedly by the principal and the agent. For example, the principal: • must remunerate the agent in accordance with the agency contract even if the principal has not obtained a benefit, provided the agent has performed what he or she was engaged to do; • must reimburse the agent for the expenses incurred in performing the agency, provided the agent has acted within authority. 620
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
Liability Liability of principal to agent and agent to principal [13.290] The liability of a principal to the agent and agent to the principal is dictated by the agency contract, the common law duties (as discussed above) and any statutory duties that the parties owe each other. However, the liabilities that a principal and agent owe to each other will often not affect the rights and obligations of the third party.
Liability of principal to third party and third party to principal [13.300] A principal will only be liable to the third party for the acts of an agent if the agent has acted within the scope of its authority (or the agent’s acts have been ratified). Likewise, a third party will be liable to the principal if the agent has acted with authority or the principal has ratified the acts of the agent.
Liability of agent to third party
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[13.310] The third party cannot sue the agent or be sued by the agent if the agent has acted with authority. However, there are circumstances when the agent will be personally liable to a third party.
Q: What’s the difference between a supermarket trolley and a non-executive director? A: A supermarket trolley has a mind of its own, but a non-executive director can hold more food and drink. Money Programme, BBC Radio 4.
Orix Australia Corporation Ltd v Moody Kiddel & Partners Pty Ltd [2006] NSWCA 257 [13.320] Orix was a financier and agreed to finance QCE in the purchase of a number of cranes from
Nelson. Moody was a finance broker and acted as agent for QCE in securing the finance from Orix. QCE and Nelson together committed a fraud on Orix by obtaining finance from Orix for cranes that did not actually exist. Both parties had supplied false data to Moody which Moody gave to Orix. Orix relied on this data to provide the finance. When the fraud was discovered, Orix argued that Moody had acted in a misleading and deceptive manner in breach of the law when passing on the false information. The court held that Moody was merely acting within its authority as agent for QCE and was therefore not liable. It was important that Moody was not the source of the information and had no knowledge of the fraud, but was merely acting as a conduit in passing on the information.
Breach of warranty of authority [13.330] The first group of such cases arises when the agent acts with apparent authority but has no actual authority. It has already been seen that the principal and third party are parties to such transactions with both possessing the right to enforce the contract. The third party, however, has an additional right or option of suing the agent for breach of warranty of authority. Such an action is only available if the third party had no knowledge of the lack of authority: Yonge v Toynbee [1910] 1 KB 215. The third party may also sue the agent for breach of warranty of authority where the agent acts without any authority whether actual, implied or apparent. The action of breach of warranty of authority allows the third party to sue the agent to recover damages
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suffered because of the agent’s unauthorised acts. A modern application of this principle can be found in the Northern Territory Supreme Court case of Construction Enterprises Pty Ltd v Lafarge Plasterboard Pty Ltd [2002] NTSC 21, which involved similar facts to Yonge v Toynbee.
Undisclosed principal It is a socialist idea that making profits is a vice; I consider the real vice is making losses. Winston Churchill.
[13.340] The doctrine of the undisclosed principal operates when the agent contracts with a third party but fails to disclose that she or he is acting on behalf of a principal. Where the third party is not made aware of the agency (there is no legal obligation to disclose this), the agent becomes personally liable on the contract. Where the third party becomes aware of the existence and identity of the principal then the third party may elect to sue the principal instead. However, an action cannot be taken against both agent and principal. Upon disclosure of the agency, the principal is able to enforce the contract as principal, but only if the terms of the agreement are compatible with the existence of an agency such as when the third party could not have contemplated that the contract was other than with the agent (as principal).
13.4 EMPLOYEE OR INDEPENDENT CONTRACTOR? The importance of the classification Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
[13.350] The distinction must be drawn between an agreement that creates a contract of employment or a contract of service on the one hand and a contract for services on the other hand. The contract of service creates an employer-employee relationship. A contract for services creates a principal-independent contractor relationship. The distinction is important –very important –because the entitlements, and consequences, that apply to employment relationship do not apply to independent contractor relationship. Employees are entitled to statutory benefits, such as annual leave, long service leave, workers’ compensation and superannuation contributions, whereas independent contractors are not. Unfair dismissal law do not apply to independent contractors. Additionally, employers have to pay payroll tax only in respect to employees. Moreover, under the doctrine of vicarious liability, an employer can be held responsible for wrongs committed by an employee who is acting in the course of their employment, but not for wrongs committed by an independent contractor. There is a fine distinction between a contract of service and a contract for services. The courts have developed tests to assist in identifying the nature of the contract. The significance of the consequences that flow from the distinctions and the difficulty in determining which category a particular relationship falls into have led the courts to establish tests by which the question can be resolved. Those tests have evolved over a period of time and the manner of their application may vary according to the circumstances of the particular case. As noted, the determination of the status of the person performing the work as an employee or as an independent contractor has important ramifications. 622
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
The Gig Economy Media Release, 12 June 2018
[13.360] The gig economy may be described as an environment in which temporary positions are common and organisations contract with independent workers for short- term engagements. This is a rapidly growing sector of the economy as readers who have utilised the services of companies such as Uber or Deliveroo would be aware. The growth of the gig economy has indeed led to speculation that the future will foster a “horde of freelancers” –a rise in casualisation of the workforce and a demise in traditional employment. Despite the prevailing opinion that gig workers are contractors rather than employees, this has yet to be authoritatively resolved. In June 2018 the Fair Work Ombudsman filed legal action in the Federal
Court against Foodora arguing that while Foodora engaged the workers as independent contractors they were in reality employees and as such entitled to minimum wages, workers compensation and other protections of employment. The Fair Work Ombudsman, Natalie James, has commented that: The only way to answer the question of whether the workers delivering the meals are employees or ‘independent contractors’ is for someone to ask a court to consider the specific ‘relationships’ between a company and its workers. As the national workplace relations regulator, the Fair Work Ombudsman is now putting this question of significant public interest before a court to consider. Media Release, 12 June 2018
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Postscript In Klooger v Foodora Australia Pty Ltd [2018] FWC 6836 the Fair Work Commission held, on 16 November 2018, that Mr Klooger, a food delivery worker engaged by Foodora to deliver food by bicycle, was an employee and not an independent contractor. He was, accordingly, entitled to bring an unfair dismissal claim.
The control test [13.370] The central test and the one most frequently resorted to in determining a worker’s status is the control test. This was put at its simplest in 1880 by Lord Bramwell, who said “a servant is a person subject to the command of his master as to the manner in which he will do his work”: Yewens v Noakes (1880) 6 QBD 530 at 532. This test essentially calls for an objective determination of the degree of control which one person can exercise over the work of another.
For most people life begins at 5 o’clock on Friday arvo. C McGregor, Profile of Australia (Penguin, 1966).
The main difficulty that has arisen in relation to the test is that it was originally based on the premise that an employer was in a position to direct a worker in the performance of the relevant tasks. Two significant obstacles now stand in the way of that premise. 1. A great deal of the work carried out today requires skills so complex and technical that the employer is not capable of directing the employee. 2. The emergence of large corporations has divorced executive administration from areas such as production, leading again to an inability to control the day-to-day activities of employees. While there may be room for argument as to the validity of these obstacles, the courts have accommodated them by declaring that the importance of control does not depend
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upon its actual exercise so much as in the right of the employer to exercise it. This has been expressed by a former Chief Justice of the High Court, Sir Owen Dixon, in Humberstone v Northern Timber Mills [1949] HCA 49 at [18] as follows: The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter’s order and directions.
Another important case, which specifically dealt with the issue of the right of control, is Zuijs v Wirth Brothers Pty Ltd [1955] HCA 73.
Zuijs v Wirth Brothers Pty Ltd [1955] HCA 73 [13.380] The question was whether a highly skilled trapeze artist who was injured while working in a circus
was an employee. The circus proprietors had no say in the performance of the worker’s act, which had been devised by the performers themselves. Zuijs was engaged as a part of a team of trapeze artists. The High Court held that Zuijs was employed under a contract of service and was entitled to payment of workers’ compensation. The court held that the nature of the task was not conclusive of the relationship, confirming that even if the performance of a task depends on the natural skills or gift of the person the proprietors may still be regarded as an employer because of the right to control and supervise.
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Other tests [13.390] The control test is no longer the sole criteria for defining an employee. As the nature of the modern workforce became more complex, additional tests were developed to encapsulate more distinctive employment relationships. In Re Australian Timber Workers Union v Monaro Sawmills Pty Ltd [1980] FCA 43, the Federal Court stated that the right to control was inconclusive in itself as there may be other countervailing features. In this case the court also looked at the degree to which the employee is integrated, or “part and parcel” of the organisation. This became known as the “integration” or “organisation” test –a more holistic approach looking at the totality of the relationship and including a variety of criteria. [13.400] The leading Australian authority is Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1, where the High Court warned that a simple reference to the control test will not suffice. Mason J said (at [9]) that: the existence of control, whilst significant, is not the sole criterion by which to gauge whether a relationship is one of employment. The approach of this court has been to regard it merely as one of a number of indicia which must be considered in the determination of that question.
Deane J noted (at [2]): The distinction between “employee” and “independent contractor” has become an increasingly amorphous one as the single test of the test of the presence or absence of control has been submerged in a circumfluence of competing criteria and indicia. I don’t want any yes-men around me. I want everyone to tell me the truth –even though it costs him his job. Samuel Goldwyn.
624
As to the indicia to be considered, Mason J noted such matters as: • the manner of remuneration by which an employee is usually paid (a salary or wage from which income tax is deducted) compared with an independent contractor who will usually be paid for units of completed work rather than simply for hours, and will be paid a pretax amount; • the provision and maintenance of equipment which is usually the function of the employer; and
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
• the right to delegate work to another being not usually within the scope of an employee’s authority, but a right frequently reserved by contractors.
Vabu Pty Limited v Federal Commissioner of Taxation (1996) 33 ATR 537 [13.410] In this case, a company operating the business known as “Crisis Couriers” sought a declaration
that it was not an employer (for purposes of the superannuation guarantee scheme) but that its deliverers were independent contractors. The couriers were paid according to the number of deliveries and the distance involved, and they supplied and maintained their own vehicles. The Commissioner for Taxation asserted that the relationship was one of employment because of the degree of control exercised by the company. The couriers were required to wear company uniforms, to maintain standards of appearance, to upgrade their vehicles at the request of the company, to accept work allocated to them, to work a prescribed number of hours and to deliver the goods in accordance with the company’s directions. The NSW Court of Appeal held that the couriers were independent contractors and not employees. Meagher JA observed that Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1 required the court to apply not a simple control test but to take into account a variety of factors. While he agreed that the aspects of control were significant, he thought that they were outweighed by other matters, including the fact that the couriers supplied and maintained their own vehicles and other equipment, that they provided their own capital and running expenses and suffered the risk of loss, that they were not paid a wage or salary but were rather paid by the delivery, and that they were taxed as independent contractors not as employees. The other judges constituting the Court of Appeal were in substantial agreement with the findings of Meagher JA.
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Hollis v Vabu Pty Ltd [2001] HCA 44
Case Study
Background
[13.420] This case involved the consideration of whether a bicycle courier’s relationship was that of
employment or independent contractor in order to determine whether Vabu was vicariously liable for the courier’s negligence. Vabu conducted a business named “Crisis Couriers” which delivered parcels and documents in the Sydney area. Hollis was a courier with a firm named “Team Couriers”. On 22 December 1994, Hollis was leaving a building in Ultimo and after taking a couple of steps onto the footpath was struck and knocked to the ground by a cyclist. The cyclist went over the handlebars and landed in front of Hollis. After saying “Sorry, mate” the cyclist left the scene ignoring Hollis’ calls. The cyclist remained unidentified but he was wearing a jacket which had the words “Crisis Couriers” written on the front and back. Hollis retained a knee injury that required surgery and resulted in a 25 per cent permanent deficit in the knee. The court, despite finding that the cyclist was a bicycle courier employed by Vabu and that he was on Vabu’s business at the time of the accident, entered a verdict for Vabu finding that the bicycle couriers who worked for Vabu were not its servants or agents but independent contractors. The judge at first instance considered that he was constrained by the decision of the NSW Court of Appeal in Vabu Pty Limited v Federal Commissioner of Taxation (1996) 33 ATR 537 to conclude that the bicycle couriers were independent contractors and not employees of Vabu. The decision was appealed and the finding upheld by the Court of Appeal. Issue The High Court effectively overruled the decision of the NSW Court of Appeal in the taxation case above and reaffirmed the Stevens case. The central question was again whether the couriers employed by
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Vabu were independent contractors or employees. The majority of the High Court considered that the NSW Court of Appeal had placed too much weight on the fact that the couriers (in both the taxation case and trial and appeal cases) were required to own and maintain their own bicycles. They considered that this factor only showed that the employer had negotiated this benefit, but as the capital outlay for the bicycles was not large and because they could be used for purposes other than work, the couriers were not operating a business on their own account. The High Court considered a number of factors in its determination. These included how much control the couriers had over the manner of performing their work; the fact that the couriers were presented to the public and to those using the courier service as emanations of Vabu wearing uniforms with the business logo; that Vabu superintended the courier’s finances and there was no scope for the couriers to bargain the rate of their remuneration; inability to refuse work offered them by Vabu and having prescribed hours; which all together indicated a level of control sufficient to establish the employment contract. Decision The High Court found that there was considerable scope for the actual exercise of control. Vabu retained control of the allocation and direction of the deliveries. The courier’s work was allocated by a Vabu fleet controller. They delivered goods in the manner in which Vabu directed. They were the very essence of the public manifestation of Vabu’s business. Given these factors the High Court said it would be unrealistic to describe the couriers as other than employees. The High Court held that the relationship between Vabu and the bicycle courier who struck down Hollis was that of employer and employee. Vabu thus was vicariously liable for the consequences of the courier’s negligent performance of his work.
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Implications The importance of Vabu is that it reinforces the indicia or multi-factor approach to determining control so as to establish the employment contract. It follows that, in Australia, evidence of control is still a key factor in determining the employment relationship, and that there are numerous factors that may contribute to this examination. The weight which is to be given to each factor will vary. The main list of factors that have developed through the case law includes whether the employee: • has the right to exercise control over the work and how the work is performed, the place of work and hours of work; • has a separate workplace and advertises her or his own services; • provides and maintains significant tools or equipment; • is free to work for others; • can delegate work to others; • is provided annual and sick leave; • has taxation taken out of her or his pay; • is incorporated; and • whether it states in the contract that he or she is an independent contractor. The implication of the multi-factor approach is that the terms of an employment contract will not always be determinative in relation to the employment relationship. Even if a contract specifies that a person is an independent contractor, this may not be sustained under the multi-factor approach. This is particularly the case where there is strong evidence of control as in a situation where incorporation is a condition of employment facilitated by the employer rather than a voluntary action by the employee. 626
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
IN CONTEXT
Employee or Contractor
We’re overpaying him, but he’s worth it. Samuel Goldwyn.
[13.430] As noted in the above discussion a central feature of employment law is
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the requirement to establish the employment contract; ie the relationship of employer and employee. A number of issues arise out of this basic requirement. First, as noted in the Vabu case above, there is the question of how an employer may structure its business to avoid the responsibilities that attach to the status of an employer. Taxation considerations were a major concern in the first Vabu decision, but the later case focused on the issue of vicarious liability for personal injuries. Some businesses may consciously set out to reduce exposure to liabilities such as workers’ compensation, workplace health and safety laws, various taxation requirements and industrial laws by creating principal and contractor arrangements in preference to employer and employee relationships.
A second issue is that there may be novel applications of the various tests used to establish the employment contract. For example, in Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8 the High Court held that an Archbishop in the Greek Orthodox faith in South Australia was entitled to be regarded as an employee on the basis that even though his relationship with the church was pre-eminently spiritual there were aspects of the relationship which were intended to give rise to enforceable rights. This contract was a contract of employment because of the degree of control exercised by the Church over the Archbishop. Previous decisions of industrial tribunals have held that no contract existed as between clergy and the church on the basis that the relationship was merely a consensual compact, not based in contract law. But in Ermogenous the successful claim was for long-service leave, which was payable on proof of continuous service as an employee. It follows from Ermogenous that some relationships not previously considered to give rise to enforceable rights may in fact give rise to employment obligations.
Employee or Independent Contractor: key indicators of the status of the relationship [13.440]
Comparison of Employee and Independent Contractor Indicators Factor Control
Employee Indicator The worker is subject to the direction of the business operator, or the direction of an employee of the business operator, as to where, when and how the work is to be performed
Independent Contractor Indicator The worker is free to decide the manner in which they will complete the task and achieve the agreed result
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Giuseppe’s owner Craig Andrew said the three main qualities for the job were speed, agility and driving skills. “Actually, Merv has none of those, but he’s still the best delivery boy we’ve had, he said.” Southland Times, New Zealand, (12 April 1996).
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Factor Payment
Employee Indicator The worker is paid on a time basis or at “piece rates”
Provision of labour/ materials
The worker wholly or predominantly provides labour. The business operator supplies all or most of the materials and equipment necessary for the work to perform their services. Where the worker provides their own tools or materials they are usually reimbursed or paid an allowance The worker receives superannuation, sick leave, recreation leave or long service leave or is paid extra in lieu of such entitlements Income tax is deducted from the payments made to the worker
Entitlements
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Tax
Hours of work
Continuity
628
Independent Contractor Indicator The business operator pays the worker on the basis of a quote to achieve a set result (generally without regard for the time taken). Payment is made to an interposed entity. The worker supplies all or most of the materials, equipment and tools needed to complete the contracted work (not just tools of the trade or a motor vehicle used to drive to and from a work site)
The worker makes provision for their own superannuation and is not entitled to sick leave, recreation leave or long service leave Income tax is not generally withheld from the payments made to the worker. However, a worker can request a business operator to withhold tax from payments made to them (see s 12-55 of Sch 1 to the Taxation Administration Act 1953 (Cth)). In these cases, the voluntary withholding of tax is not necessarily indicative of an employer/employee relationship The worker works set hours The worker works the hours (either by agreement with the necessary to complete the task business operator or under an to the standard, and within the award) timeframes, specified by the business operator The worker has been working The worker does not provide for the business operator for services to the business operator a continuous extended period on a regular or continuous basis of time
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
Factor Representation to the public
Responsibility for quality
Delegation
Insurance and licences ABN
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Risk
Dismissal/ resignation
Employee Indicator The worker is recognised as part of the business operator’s business
Independent Contractor Indicator The worker is not seen as part of the business operator’s business; that is, the worker is recognised as operating their own business The business operator, not the The worker is legally liable worker, is legally responsible for the quality of the work performed for the quality of the work performed by the worker The worker is required to The worker employs others to perform the work personally assist them in doing the work, or (they are not able to delegate is able to delegate or subcontract or subcontract the work) the work to other persons of their choice Maintained by the business The worker maintains the operator relevant and necessary licences and insurance policies The worker does not have an The worker has an ABN ABN All risk is borne by the The worker bears the commercial business operator risk of deriving a profit or suffering a loss for the work performed and incurs significant expenses in deriving income. Payments are reduced to cover the cost of rectifying defects The business operator can The worker is free to choose suspend or dismiss the worker, whether to accept or refuse work or the worker can cease to from the business operator work for the business operator, regardless of whether the worker has completed any particular task or not
Determining whether a worker is an employee [2011] VICSROPTA 5 (Available at: http://www. sro.vic.gov.au)
Commissioner of State Revenue v Mortgage Force Australia Pty Ltd [2009] WASCA 24 [13.450] Mortgage Force Australian (MFA) engaged consultants to act as its agent for receiving applications from consumers which are passed to MFA for processing by financial institutions. The issue was whether the commissions paid to consultants were “wages” under the Western Australian pay-roll tax laws in which case payroll tax was payable on them.
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629
Business and the Law The court considered the applicable legal principles in the distinction between an employee and an independent contractor (at [62]-[66] and [70]-[71], references omitted): The determination of whether a person is an employee or an independent contractor is a question of fact. See Zuijs v Wirth Brothers Pty Ltd [1955] HCA 73 … In Queensland Stations Pty Ltd v Federal Commissioner of Taxation [1945] HCA 13 Latham CJ said: If the work to be done by one person for another is subject to the control and direction of the latter person in the manner of doing it, the person doing the work is a servant and not an independent contractor, and prima facie his reward would be wages. An independent contractor undertakes to produce a given result, but is not, in the actual execution of the work, under the order or control of the person for whom he does it In the application of the control test, it is the right to exercise control (rather than actual control) which is of fundamental importance, although actual control is plainly relevant. A different approach, usually referred to as the organisation or integration test, was formulated by Denning LJ in Stevenson Jordan & Harrison Ltd v Macdonald & Evans [1952] 1 TLR 101: One feature which seems to run through the instances is that, under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for services, his work, although done for the business, is not integrated into it but is only accessory to it
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In Co-operators Insurance Association v Kearney [1965] SCR 106, the Supreme Court of Canada approved the organisation test: Under the pressure of novel situations, the courts have become increasingly aware of the strain on the traditional formulation [of the control test], and most recent cases display a discernible tendency to replace it by something like an “organization” test. Was the alleged servant part of his employer’s organization? Was his work subject to coordinational control as to “where” and “when” rather than “how”. … [In Humberstone v Northern Timber Mills (1949) 79 CLR 389] Dixon J said: The question is not whether in practice the work was in fact done subject to a direction and control exercised by an actual supervision or whether an actual supervision was possible but whether ultimate authority over the man in the performance of his work resided in the employer so that he was subject to the latter’s order and directions. But the existence of control, whilst significant, is not the sole criterion by which to gauge whether a relationship is one of employment. The approach of this Court has been to regard it merely as one of a number of indicia which must be considered in the determination of that question … Other relevant matters include, but are not limited to, the mode of remuneration, the provision and maintenance of equipment, the obligation to work, the hours of work and provision for holidays, the deduction of income tax and the delegation of work by the putative employee. Wilson and Dawson JJ noted, to similar effect: The classic test for determining whether the relationship of master and servant exists has been one of control, the answer depending upon whether the engagement subjects the person engaged to the command of the person engaging him, not only as to what he shall do in the course of his employment but as to how he shall do it. The modern approach is, however, to have regard to a variety of criteria. This approach is not without its difficulties because not all of the accepted criteria provide a relevant test in all circumstances and none is conclusive. Moreover, the relationship itself remains largely undefined as a legal concept except in terms of the various criteria, the relevance of which may vary according to the circumstances. 630
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors … Where there is a written agreement between the parties, the agreement is the primary, but not the only, source of information as to the nature of the relationship between them.
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The court recognised a number of aspects of the relationship which suggested that the consultants were independent contractors: 1.
The consultants were not required to work from a particular place, or to work specified or particular hours, or to obtain a specified or minimum number of applications for finance from clients and were not promised a minimum volume of work or, indeed, any work.
2.
The consultants were entitled to provide the services at such times and on such days as they may decide and were entitled to provide the services in a manner entirely within their discretion.
3.
The parties agreed that the consultants would be independent contractors and not employees.
4.
The consultants were not entitled to annual leave, sick leave, long service leave, paid overtime, superannuation, worker’s compensation or other insurance, paternity, maternity or any similar leave.
5.
The consultants were obliged, at their own expense, to provide their own motor vehicles, mobile telephones, pagers and computers subject to any agreement which may be made in a particular case.
6.
The consultants were entitled to appoint a “sub-agent” in her or his place.
7.
The consultant could be a natural person, a corporation, a partnership or a trustee.
8.
The agreement did not make any provision for the manner in which the consultants should locate clients or liaise with the financial institutions or determine which loan products to recommend.
9.
The agreement did not prohibit or restrict the consultants from carrying on any other work or business activity.
10.
The agreement did not specify the manner in which the consultants should advertise for business or otherwise solicit applications for finance.
11.
The agreement did not make any provision for MFA to deduct income tax from the commissions payable to the consultants.
12.
The manner in which the parties observed and performed their respective obligations was consistent with the provisions of the agreement.
The court who also recognised a number of factors which suggested that the consultants were employees: 1.
The arrangements between MFA and the consultants were not analogous to a franchise arrangement and none of the consultants carried on her or his own independent business of arranging finance on behalf of clients; MFA, in substance, ran its business through the consultants.
2.
The agreement provides, in substance, that the consultant will use her or his best endeavours to promote the business of MFA.
3.
Several provisions of the agreement confer on MFA the capacity to control the consultants and their activities.
4.
The agreement in effect provides that any intellectual property derived from the information which is used to generate applications for finance is an entitlement of MFA and not the consultants.
5.
The weight to be given to some of the consultants being corporations or partnerships is diminished by the powers conferred under the Pay-Roll Tax Act 2002 (WA) to disregard an agreement, and to determine that any party shall be deemed to be an employer, and that any payment shall be determined to be wages.
6.
The remuneration structure, which provided an effective financial incentive to encourage the consultants to work diligently.
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631
Business and the Law The court concluded (at [109]) that: when all of the competing and, in some instances, conflicting features of the relationship between the parties are viewed and weighed in their totality they militate decisively in favour of the conclusion that the consultants were independent contractors and not employees. It was held that the consultants were independent contractors and not employees and that the commissions paid to them were not “taxable wages”.
13.5 EMPLOYEES
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The “putrid smell” from Advanced Foods, which drew complaints at a Central Hawke’s Bay District Council meeting on Friday, was a management problem, an environmental officer said today. Hawke’s Bay Herald- Tribune, New Zealand (30 January 1995).
[13.460] Lord Wedderburn wrote in his 1971 book, The worker and the Law, that “most workers want nothing more of the law then that it shall leave them alone”. The reality of course is that there is a massive body of law impacting on employment which is a matter of interest to most of us. The vast majority of those who work, work as employees. In most cases the boss is also an employee of a corporate employer albeit at a more enviable pay grade than yours or mine. With the increasing sophistication and size of business throughout the twentieth century the declining influence of the individual worker was compensated for by the mobilisation of labour through the union movement. Today unions are not as dominant as they were last century –except in some industry sectors where they remain very powerful –but the lessons of the hard fought victories of the union movement on behalf of employees generally have not been forgotten. Society today recognises its obligation to protect employees in a variety of circumstances. There is a large and important body of legislation dealing with the industrial relations, wages and conditions, workplace health and safety, and workplace discrimination. The major political parties are of course not always in agreement as to the nature, scope and extent with the Liberal/National Coalition and the Labor Party being divided on a number of philosophical principles. The battle between John Howard’s Work Choices and Kevin Rudd’s Fair Work Australia still resonates today.
The contract of employment [13.470] An employment contract is an enforceable agreement between an employer and an employee. The contract can be written, verbal or both and contain both express and implied terms. The express terms negotiated by the parties are supplemented by well established implied terms –on the part of the employee to comply with lawful and reasonable directions, to act in good faith and to work with care and diligence, and on the part of the employer to pay wages or salary, to provide a safe work environment, to indemnify the employee the expenses properly incurred and to act in good faith. Minimum entitlements to wages and conditions are for most employees contained in enterprise agreements (which are negotiated and tailored for the needs of the particular enterprises) or awards (which provides a safety net of minimum pay rates and employment conditions for particular industries or occupations). The National Employment Standards set minimum standards that cannot be overridden by the terms of enterprise agreements or awards. 632
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
In Context
Protecting vulnerable workers [13.480] The Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth) was introduced to protect vulnerable workers after revelations of systemic exploitation of employees of franchisees of a number of well-known franchise networks. Despite the franchisor not being the employer of the franchisees’ employees the amendment makes a franchisor liable for a variety of different contraventions of the Act by franchisees within their network in circumstances where they knew or reasonably ought to have known about the contraventions, but failed to take reasonable steps to prevent those contraventions from occurring.
When asked, “How many people work for you?”, management quips, “nearly half”. L E Boone, Quotable Business (Random House, 1992).
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The industrial relations systems [13.490] Employment in Australia is regulated primarily by the federal Fair Work Act 2009 (Cth) which confers and protects significant workplace and industrial rights in relation to matters including wages and employment conditions, industrial action and termination of employment. It establishes the Fair Work Commission as the national workplace relations tribunal responsible for, inter alia, the national workplace standards which cannot be overridden by terms of enterprise agreements or awards. The Act also establishes the Fair Work Ombudsman (FWO) as an independent statutory office to “promote harmonious, productive and cooperative workplace relations” and “ensure compliance with Australian workplace laws”: see http://www.fairwork.gov.au/about-us/our-role. The FWO’s functions include the provision of advice, assistance and information about the law to employees, employers and outworkers and the investigation of possible contraventions of the law.
Termination of the employment contract
The wages of sin is death, but the wages of engineers are worse. Banner at an engineering union meeting (1946).
[13.500] The employer has a contractual right to terminate the employment in one of two ways –by giving the employee proper notice of termination, or payment in lieu of notice if the contract so provides. The employer may also terminate the employment immediately where grounds for summary dismissal exist. The lawful exercise of the power to summarily dismiss depends upon determining whether there has been a breach by the employee of the express or implied terms of the contract, or a demonstrated intention not to be bound by those terms and, second, an assessment of whether the breach is sufficiently serious to allow summary termination of the contract. In cases of unfair dismissal –when an employee is dismissed from her or his job in a harsh, unjust or unreasonable manner or where a dismissal was not a case of genuine redundancy –an unfair dismissal may be sought from the Fair Work Commission. Special rules under the Small Business Dismissal Code apply to small employers with less than 15 employees. Small business employees cannot make a claim for unfair dismissal in the first 12 months following their engagement. If an employee is dismissed after this period and the employer has followed the Code then the dismissal will be deemed to be fair.
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IN CONTEXT
The Small Business Dismissal Code Summary Dismissal
[13.510] It is fair for an employer to dismiss an employee without notice or warning when
the employer believes on reasonable grounds that the employee’s conduct is sufficiently serious to justify immediate dismissal. Serious misconduct includes theft, fraud, violence and serious breaches of occupational health and safety procedures. For a dismissal to be deemed fair it is sufficient, though not essential, that an allegation of theft, fraud or violence be reported to the police. Of course, the employer must have reasonable grounds for making the report. Other Dismissal
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In other cases, the small business employer must give the employee a reason why he or she is at risk of being dismissed. The reason must be a valid reason based on the employee’s conduct or capacity to do the job. The employee must be warned verbally or preferably in writing, that he or she risks being dismissed if there is no improvement. The small business employer must provide the employee with an opportunity to respond to the warning and give the employee a reasonable chance to rectify the problem, having regard to the employee’s response. Rectifying the problem might involve the employer providing additional training and ensuring the employee knows the employer’s job expectations. Procedural Matters In discussions with an employee in circumstances where dismissal is possible, the employee can have another person present to assist. However, the other person cannot be a lawyer acting in a professional capacity. A small business employer will be required to provide evidence of compliance with the Code if the employee makes a claim for unfair dismissal to Fair Work Australia, including evidence that a warning has been given (except in cases of summary dismissal). Evidence may include a completed checklist, copies of written warning(s), a statement of termination or signed witness statements.
Workplace health and safety Britain has invented a new missile. It’s called the civil servant –it doesn’t work and it can’t be fired. Sir Walter Walker.
[13.520] The biggest issue in any workplace is health and safety; this affects all employees, and their families. Workplace injuries cost billions of dollars a year in lost time, in addition to medical costs, personal and family costs, and the burden on the community. Workplace health and safety laws are increasingly harmonised through the adoption by States and Territories of the model Work Health and Safety Act, which aims to provide all workers in Australia with the same standard of health and safety protection regardless of the work they do or where they work by: • protecting the health and safety of workers and other people by eliminating or minimising risks arising from work or workplaces;
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors
• ensuring fair and effective representation, consultation and cooperation to address and resolve health and safety issues in the workplace; • encouraging unions and employer organisations to take a constructive role in improving work health and safety practices; • assisting businesses and workers to achieve a healthier and safer working environment; • promoting information, education and training on work health and safety; • providing effective compliance and enforcement measures; and • delivering continuous improvement and progressively higher standards of work health and safety. Significant penalties can be imposed on non-complying employers.
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Workers’ compensation [13.530] Prior to the introduction of modern workers’ compensation arrangements an injured worker could receive compensation for a workplace injury only through a common law negligence action. Today all Australian jurisdictions have no-fault workers’ compensation laws under which employees suffering a work-related injury are compensated without having to prove negligence on the part of the employer. The workers’ compensation schemes –for example Workers Compensation Act 1987 (NSW) –are funded by a compulsory levy imposed on employers. The entitlements vary across Australia. With the introduction of statutory no-fault workers’ compensation scheme the access of injured employees to common law negligence actions (which generally provide a higher level of compensation) have been significantly restricted. Some jurisdictions have since removed access to the common law entirely, while others have subjected it to heavy restrictions regarding the available heads of damage, and the amount of damages recoverable. In NSW common law negligence actions, known as “work injury damages” claims, can be brought only if the injured worker has at least 15% permanent impairment and damages are payable only for economic loss that is for past and future wages and superannuation loss and not for any other head of damages.
We have a lot of players in their first year. Some of them are also in their last year. Bill Walsh, American professional football coach.
The issue of whether the injury sustained by the employee is a “workplace injury” has, predictably, given rise to much litigation. While “journey claims” are dealt with in State and Territory legislation (in all cases journeys undertaken for work purposes are connected but there is no consistency as to entitlements in respect of journeys to and from work), the issue of entitlement in cases such as injuries suffered at for example an after- hours work party is determined on a case-by-case basis.
IN CONTEXT
Personal injury arising out of or in the course of employment [13.540] The issue of whether an employee’s injury is covered by workers’ compensation is of course more complicated when injuries which occurred to a worker who was not actually
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Andrew Carnegie was showing a delegation through one of his plants when he stopped to talk to a gray-haired, stooped employee. “Let’s see, Wilson,” he asked, “how many years exactly have you been working for me now?” “Thirty-nine, sir,” Wilson beamed. “And may I add that in all those thirty-nine years I made only one trifling mistake.” “Good work,” grunted the steel magnate, “but from now on, please try to be more careful”. P Hay, The Book of Business Anecdotes (1988).
engaged at the time of the injury in the essential activities of her or his employment, but was away from home as a result of that employment. In Pioneer Studios Pty Ltd v Hills [2015] NSWCA 222 the respondent had attended a party at her employer’s premises. At about 3.30 am when about to leave the party, she fell over a balustrade in the stairwell and suffered significant injuries to her head and shoulder when hitting the landing on the level below. The party had been organised by a co-worker to celebrate his birthday and to farewell a co-worker who was leaving the employer. The employer made no financial contribution and had no involvement in organising the party but had given permission for the use of the premises. Mrs Hill claimed that she attended the party because she was encouraged to and thought she could make a good impression on her employer by meeting clients and co-workers. In Hatzimanolis v ANI Corporation Ltd [1992] HCA 21 the worker was working in a remote area (at Mount Newman in Western Australia), not far from a tourist attraction at Wittenoom Gorge. On his day off, the worker suffered an injury when the vehicle in which he was travelling to visit the Gorge overturned. In Comcare v PVYW [2013] HCA 41 the worker (referred to as PVYW to retain her anonymity for obvious reasons) was a Commonwealth public sector employee, who had travelled to a country town for her employment and was required to stay overnight in a motel. During the evening, while having intercourse with an acquaintance, a light fitting was dislodged from above the bed falling on her face and injuring her. Ms Hills was unsuccessful, Mr Hatzimanolis was successful, PVYW was not successful.
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Employers’ liability for employees’ actions Contractual liability [13.550] The employment relationship will give rise to an agency relationship in situations where the employee is authorised to act as agent on behalf of the employer as principal. In accordance with the principles of agency law identified above, the employee’s acts will only bind the employer if the employee has the requisite authority to act on behalf of the principal in relation to those acts, or the employer ratifies those acts.
Tortious liability [13.560] The most important area of liability of employers for employees arises in relation to the tortious acts of employees. The doctrine of vicarious liability provides that an employer is liable for torts of employees acting in the course of their employment. If, for example, an employee in an accounting firm is negligent in performing work for a client, defames someone in a published report or carelessly drops a heavy object on a working colleague, the employer is liable for the tort. The liability is vicarious in that the employer, although not having done wrong, is responsible because of the relationship with the employee. It should be noted that the negligent employee is also liable in tort and can be sued. Invariably the employer is the party who is sued because it is more likely 636
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Chapter 13 Relationships in Business: Distributors, Agents, Employees, Independent Contractors The closest to perfection a person comes is when he fills out a job application form. Stanley J Randall.
that the employer will have the resources to pay the damages awarded, usually because the employer is insured for just such risks, in addition, the ability of the employer subsequently to recover from the employee is statutorily restricted in some States, see for example the Employees Liability Act 1991 (NSW), which protects employees from being called upon to contribute to damages awarded. The judgment of the House of Lords in Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555, that a negligent employee is in breach of the implied term requiring the exercise of reasonable care and therefore liable to indemnify the employer for losses suffered, has seldom been used. Most employers recognise the poor industrial relations image projected if they take legal action against employees. The Lister case is, however, available as a potential source of liability for an employee in places other than New South Wales, and in fact was relied on in the local court of Western Australia in June 1996 when an employee was ordered to pay damages to his employer for equipment repairs. The difficulty inherent in these cases was evidenced by the fact that the defendant at the time of the judgment was unemployed and living in a caravan with his wife and three children.
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13.6 INDEPENDENT CONTRACTORS [13.570] The significance of the distinction between an employment relationship and an independent contractor relationship was noted above. An independent contractor is not an employee and the legislative protection the law provides to employees in relation to a range of employee entitlements, such as superannuation and workers’ compensation, is not available to independent contractors. The independent contractor is responsible for her or his own insurance, tax, worker’s compensation, superannuation, licensing fees, professional services. The independent contractor is responsible for her or his own insurance, tax, workers’ compensation, leave provisions, superannuation, licensing fees, and professional services. An independent contractor is a legal relationship with the hirer/ principal and the rights and obligations are primarily those expressed, agreed upon or implied in the contract for services. Under the Fair Work Act 2009 (Cth) an employer who tries to disguise an employment relationship as an independent contracting relationship commits an offence. Under the Independent Contractors Act 2006 (Cth) the Federal Courts have jurisdiction in relation to unfair or harsh independent contractor contracts. When determining whether a contract is unfair or harsh, a court may consider: • the relative strengths of the bargaining positions of the parties; • whether any undue influence or unfair tactics were used against a party; • whether the contract provides total remuneration that is less than that for an employee performing similar work; and • any other matter that the court thinks is relevant. Where a court finds that a contract is unfair or harsh, it may order that the terms of the contract be re-written to add or remove clauses, or that parts of the contract will have no effect, or that the contract be set aside.
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QUESTIONS 1.
How do the courts determine whether a person performing services for another is doing so as an employee or as an independent contractor?
2.
What consequences follow for both parties if a relationship is held to be: (i)
a contract of service; or
(ii)
a contract for services.
3.
Is an “authorised distributor” an agent of the manufacturer or simply a reseller? What consequences follow from the legal status of the relationship?
4.
How can a principal be liable for an agents’ action which was not expressly authorised?
WEB REFERENCES Employment contracts https://www.fairwork.gov.au/awards-and-agreements/employment- contracts Fair Work Ombudsman https://www.fairwork.gov.au/ Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Safe Work Australia https://www.safeworkaustralia.gov.au/
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Franchising Andrew Terry THE BUSINESS CONTEXT Franchising is essentially a strategy for cloning a business through the replication of proven management and business systems. It is a method of business operation which has revolutionised the distribution of goods and services and transformed the business landscape of most countries. In the words of the 1997 Fair Trading Report, it is an “increasingly popular form of economic organisation providing an alternative means of expanding an existing business or an alternative means of entering an industry” which contributes substantially and beneficially to the strength of the Australian economy. Franchising is one of the fastest growing business sectors in Australia today. All consumer goods and services, most business services and, increasingly, quasi-professional services are provided by the 1,200 franchise systems currently operating in Australia. Franchising is a highly significant strategy for small business, and is increasingly adopted by big business, and must be considered by any entrepreneur wanting to enter an industry or by any existing business seeking to expand its operations. This chapter examines the nature, operation and legal regulation of franchising.
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14.1 THE NATURE OF FRANCHISING ........................................................................................................................ 640 [14.20]
Product and trade name franchises ......................................................................................................... 641
[14.30]
Business format franchises ........................................................................................................................ 641
14.2 THE DEVELOPMENT OF FRANCHISING .......................................................................................................... 642 14.3 THE SIGNIFICANCE OF FRANCHISING IN THE AUSTRALIAN ECONOMY ......................................... 644 14.4 COMMERCIAL ISSUES ........................................................................................................................................... 646 [14.120] Strengths ....................................................................................................................................................... 647 [14.160] Weaknesses .................................................................................................................................................. 650 [14.200] Opportunities ............................................................................................................................................... 651 [14.210] Threats ........................................................................................................................................................... 652 [14.230]
Franchising risks .......................................................................................................................................... 653
14.5 THE FRANCHISOR-FRANCHISEE RELATIONSHIP ....................................................................................... 655 [14.260]
The operations manual .............................................................................................................................. 656
[14.270]
The franchise agreement ........................................................................................................................... 656
14.6 REGULATING FRANCHISING .............................................................................................................................. 659 [14.330]
1997 Fair Trading Report ............................................................................................................................ 660
14.7 THE FRANCHISING CODE OF CONDUCT ....................................................................................................... 660 [14.370]
Agreements subject to the Code .............................................................................................................. 661
[14.400]
Prior disclosure, standards and mediation ............................................................................................ 664
[14.460] Enforcement ................................................................................................................................................. 668
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[14.470]
2018 Inquiry into the Franchising Code of Conduct ............................................................................ 669
14.1 THE NATURE OF FRANCHISING [14.10] The 1997 report of the House of Representatives Standing Committee on Industry, Science and Technology, Finding a Balance: Towards Fair Trading in Australia, (the 1997 Fair Trading Report) explained that: Under the system, the franchisor, holding property rights over a marketing system, business service or product (identified by a brand name or trade mark) enters a contract or agreement with the franchisee and grants, under certain conditions, the right to use a business brand name or trade mark and the right to produce or distribute the franchisor’s product or service. Good franchising is very good. It is undoubtedly the most efficient and effective distribution system ever invented. Good franchising is so much better than independent business operation but bad franchising is so much worse. Andrew Terry.
640
Franchising is not a business itself. It is a method of doing business –an innovative and dynamic method of distributing goods and services. It encompasses a wide variety of different practices that are used in different ways, and with varying degrees of sophistication, in many different industries. There are nevertheless two main categories of franchises: • product and trade name franchises; • business format franchises.
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Chapter 14 Franchising
Product and trade name franchises [14.20] Commercial franchising originally developed in the mid-nineteenth century as arrangements under which franchisees were granted the right to distribute a manufacturer’s product within a specified territory or at a specific location, with the use of the manufacturer’s identifying name or trademark, in exchange for fees or royalties. These arrangements are essentially exclusive branded distributorship arrangements where the franchisor provides either the product (as in new motor vehicle distributorships), or the essential ingredient or know-how to a manufacturer (as in soft-drink bottling) for distribution in an exclusive territory under the franchisor’s trademarks.
Business format franchises
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[14.30] Business format franchises differ from product and trade name franchises through the imposition of a business format or an entire system for conducting a business. Standardisation, consistency and uniformity across all aspects of the business is the key to business format franchising. In its contemporary business format mode, franchising is a sophisticated business relationship whereby a franchisor develops a unique or individual manner of doing business and permits the franchisee to use that system, in a controlled fashion, in the operation of the franchisee’s independently owned business. Business format franchising is characterised by an ongoing business relationship between franchisor and franchisee which includes the product, service and trademark, as well as the entire business concept itself – a marketing strategy and plan, image, comprehensive operational standards, systems and formats, operating manuals, training, quality control and a continuing process of assistance, guidance and supervision. It is a symbiotic relationship in which the needs of the franchisor and the franchisee blend in a commercial marriage of convenience. A US Government report (US House of Representatives Committee on Small Business, Franchising in the US Economy: Prospects and Problems (1990) p 13) explains that this form of franchising: has provided the means for merging the seemingly conflicting interests of existing businesses with those of aspiring entrepreneurs in a single process that promotes business expansion, entrepreneurial opportunity and shared cost and risk.
It is business format franchising that is driving the development of franchising and expanding its influence to virtually every industry sector. It is business format franchising which has seen McDonald’s develop from one small outlet in San Bernardino, California in the early 1950s to over 37,241 outlets today (970 of which are in Australia where McDonald’s opened their first outlet in Yagoona, Sydney in 1971). The world’s largest fast food system in terms of outlets is nevertheless Subway which originated in 1965 in Bridgeport, Connecticut and today has over 45,000 outlets worldwide –almost 1,400 of which are in Australia. The largest franchise system by number of outlets is 7-Eleven with 66,579 stores in 17 countries (June 2018) with almost 700 of these in Australia.
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[14.40] I was too young to be an avid enthusiast for the franchise, but like billions of people I remember as a child sitting around with the family on a Friday night with pizza and popcorn and a “Die Hard” movie on. Jai Courtney.
Figure 14.1: Business Format Franchising Exercises continuing control
Franchisor
Provides: • Brand • Product and/or service • System/business format • Image and standards • Training • Initial and ongoing support and assistance • Marketing • Site or territory
Accepts significant loss of independence
Franchisee
An enterprise which has developed a proven concept and system
Ongoing relationship
• Pays fee • Initial % of turnover • Continuing Flat • Marketing Incorporated in • Other product supply • Subject to continuing controls • Obliged to adhere to franchisor’s system • Business identified with franchisor • Significant dependence on franchisor’s brand and business system
A legally and financially independent enterprise which invests and takes the risk of losing its capital through renting the franchisor’s system
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(Copyright © Andrew Terry)
14.2 THE DEVELOPMENT OF FRANCHISING
The overwhelming evidence … is that franchising represents one of the most important marketing techniques for the distribution of goods and services in Australia now and in the future and its methodology will appeal to many more industry sectors in the future. Franchising Task Force, Final Report (1991).
642
[14.50] The American Isaac Singer is generally credited as the founder of franchising. In 1851 he invented not only the world’s first viable domestic sewing machine but also a new method of distribution under which independent salesmen paid fees to acquire exclusive territorial rights. By the 1930s in the United States, franchising was entrenched as the preferred method of distributing motor vehicles and gasoline and its presence was being felt in retail marketing and the emerging services sector. However, in terms of growth and innovation, the decade of the 1950s was the most significant period. The growth of franchising in that period is explained by the expanding post-war economy and a growing interstate highway system. This was the era in which Harlan Sanders (Kentucky Fried Chicken) and Ray Kroc (McDonald’s) built national chains along the developing interstate networks. The innovation in franchising in that period is explained by the evolution of franchising from product and trade name franchising, characterised by an independent sales relationship between supplier and dealer in which franchised dealers concentrate on one company’s product line and to some extent identify their business with that of the supplier, to the more sophisticated business format franchising. The latter is characterised by an ongoing business relationship between franchisor and franchisee which includes the product, service and trademark, as well as the entire business concept itself, training and continuing process of assistance, guidance and supervision. It is not surprising that most of the growth in franchising since the 1950s has been in business format franchising. It is
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Chapter 14 Franchising
this form of franchising which offers the best opportunity today for an individual seeking to open a business, and the statistics confirm a markedly reduced rate of small business failure for franchisees in comparison with independent business start-ups.
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Ray Kroc is generally recognised as the founder of business format franchising. Kroc acquired the rights to McDonald’s from two brothers, Dick and Mac McDonald, who had already unsuccessfully attempted to exploit the remarkable success of their San Bernadino hamburger shop through franchising. Ray Kroc revolutionised the system for which he acquired licensing rights in 1954, and which he later bought outright, by imposing the discipline of an entire business system on a much looser arrangement. The realisation that elaborates management systems could be cloned provided the key to the development of business format franchising. It was the success of several US fast-food franchise systems that had been introduced to Australia in the early 1970s which alerted the local business community to business format franchising and since that time it has been embraced by the Australian marketplace with unrestrained enthusiasm. Its rapid growth from obscurity to a matter of significant legal, commercial, social and economic concern parallels the US experience. Franchising emerged as a significant force in Australia during the 1980s, influenced by similar economic, demographic and social factors to those which drove its earlier development in the United States, in particular the increasing difficulty faced by independent small businesses in competing with the national chains, the opportunities provided by the growing services sector, and the rising sense of entrepreneurism among key groups within the population. Franchising also met the need for existing businesses that sought alternative, less costly methods for expanding operations and distribution networks in response to rising capital costs, unfavourable tax changes and growing pressure to reduce costs and eliminate debt. Although product and trade name franchising has a greater share of the overall franchising market, business format franchising is the most rapidly growing sector. The business format franchise is not only the preferred and appropriate model for the majority of new franchise systems but is also the product of an evolutionary process for many older product and trade name franchise systems. The current reorganisation of the petroleum retailing industry is the best example: petroleum retailers are in a process of metamorphosis from branded product distributors to full business format franchisees. [14.60] The original business format franchise model was “direct single unit franchising” where the franchisor contracts directly with an individual franchisee for the operation of a single franchised unit. Business format franchising today is characterised by incredible diversity as proven businesses apply the basic business format franchise model in different ways. Successful franchise organisations develop formats and build systems which accommodate the unique characteristics of the business being franchised. Some of the most common variations are: • multiple unit franchising, where a franchisor licenses the franchisee to open a number of outlets; • subfranchising, where the franchisor appoints a subfranchisor who has the right to grant franchises in a particular territory; Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-22 20:23:51.
Small Business is a vital part of Australia’s economy. The franchise industry is extremely important to the small business community, employing hundreds of thousands of Australians. It gives the public access to successful Australian enterprises as well as some of the most recognizable international brands. The Hon Bruce Billson MR, Minister for Small Business, The Future of Franchising (April 2014).
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• area development franchising, where a franchisor grants to an area developer the right to operate multiple franchises in a defined territory; • combination franchising or co-branding (a “franchise within a franchise”) where one franchise is “combined” with or linked to another franchise in one outlet; • multiple concept franchising, where a franchisor develops a number of related franchise concepts.
14.3 THE SIGNIFICANCE OF FRANCHISING IN THE AUSTRALIAN ECONOMY [14.70] The former Small Business Minister Bruce Billson has recently commented that franchising “is a significant and growing part of our small business community and has displayed a great capacity for nurturing innovation and entrepreneurship in Australia … [It] makes a valuable contribution to our national economy and local communities” (The Future of Franchising, 2014). The second reading speech of the Competition and Consumer Amendment (Industry Code Penalties) Bill 2014 (Cth) echoed these sentiments:
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The franchise industry is very important to the small business community … It gives the public access to successful Australian enterprises as well as some of the most recognisable international brands. Indeed, the franchising sector displays great capacity for nurturing innovation and entrepreneurship –the majority of franchise systems in Australia are developed right here rather than being overseas imports.
The most recent survey of the Australian franchising sector –“Franchising Australia 2016”, published by the Franchise Council of Australia and Griffith University, supports the extent of the contribution of franchising to the national economy –1,120 business format franchise systems in Australia operating through over 79,000 units employing over 460,000 people and with total sector sales turnover estimated at A$146 billion. Franchising businesses account for almost 4% of the 2 million businesses which constitute the Australian business community.
I hate that word “franchise” –it always makes me think of French fries. Sigourney Weaver.
IN CONTEXT
Survey of Australian Franchising 2016 Executive summary Franchise brands
[14.80] There are an estimated 1120 franchise brands operating in Australia compared
with 1160 in 2014. This gradual reduction in franchise systems is expected as the sector continues to mature. Whilst the number of brands has declined, individual franchise systems have grown internally with modest increases in the number of franchise units. Franchise units
There are an estimated 70 700 business format franchised units and 8300 company-owned units, producing a total of 79 000 units operating in business format franchises in Australia. 644
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Chapter 14 Franchising
Whilst the number of franchised units has slightly increased and company units have decreased there has been no net overall change in the number of franchise units since 2014. Approximately 4 percent of small businesses in Australia are franchise units. An additional 6050 fuel retail and 4618 motor vehicle retail outlets are estimated. Sales turnover The total sales revenue of business format franchises was estimated at $66.5 billion in 2016 (compared with $65 billion in 2014). Together with estimated motor vehicle sales of $43.4 billion and fuel retail of $36 billion, the total sales revenue for the entire franchising sector was estimated to be $146 billion (compared with $144 billion in 2014). Employment in business format franchising Despite a relatively flat economy, the number of people employed in franchising has increased gradually since 2012. Moreover, the proportion of people employed on a permanent, full time basis has increased, suggesting a more optimistic outlook ahead. This trend is not reflected in the wider economy which has experienced a slight decline in full-time employment. It is estimated that more than 470 000 people are employed directly in franchise brands.
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Industries The retail (non-food) industry dominates franchising with 26 percent of brands operating in this segment. A further 19 percent of franchise brands are found in accommodation and food services. Contributing to the service sector are 15 percent of brands operating in administration and support services and 10 percent of brands providing other services such as personal services, automotive repairs and IT services. Size of systems As the size of franchise brands varies considerably, we compared smaller systems (up to 50 franchise units) with larger systems (more than 50 franchise units). Small franchise brands, which tend to be younger, held a median of 15 franchise units compared with larger, more mature brands which held a median of 117 units. Across the sector, franchise brands continued to grow internally over the past 12 months. This growth occurred primarily in the service sector –a finding which was reflected in the wider economy. Age of systems Sixty percent of franchise brands have been franchising for more than 10 years. Organisations piloted their business concept for a median of two years prior to commencement of franchising. Cost of a new franchise unit The total start-up cost for a new retail franchise unit was $287 500 compared to $59 750 in a non-retail franchise. This included an initial franchise fee of $31 500 in retailing compared to $28 000 in non-retail franchises. Franchising disputes Disputes with franchisees involving an external advisor were reported by 25 percent of franchisors with a median of 2 of their franchisees. The proportion of franchisees in dispute with
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their franchisor across the sector was estimated at 1.8 percent, consistent with previous surveys. The most common causes of disputes were those related to franchisee compliance, communication issues and disputes regarding fees. International operations Ninety percent of franchise brands responding to the survey originated in Australia and 32 percent of these are currently franchising internationally. This proportion is consistent with that reported in 2014. New Zealand remains the most common destination despite its small potential market. Asian-Pacific Centre for Franchising Excellence, Franchising Australia 2016
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[14.90] The survey statistics confirm the findings of previous Australian and overseas reports that the sector is “contributing substantially and beneficially to the strength of the Australian economy” and that franchising by its very nature, is perhaps the only form of business organisation that tends to create new business units providing new entrepreneurs, new jobs, new services, as well as new export opportunities. Despite the significance of the statistics given above, the impact of franchising cannot be measured simply by reference to number of establishments, level of employment and sales revenue. Franchising is a significant, vital and rapidly developing sector of the Australian economy but its impact goes beyond the economic. Franchising also provides significant social contributions of importance to society generally including: • contributing to the growth of the services sector;
Truly great brands are far more than just labels for products; they are symbols that encapsulate the desires of consumers; they are standards that are held aloft which the masses congregate. Tony O’Reilly.
• encouraging diversity and the servicing of niche markets; • delivering greater consumer choice, and convenience; • promoting consistent quality in products and services; • providing the economic and social benefits of proprietorship to those franchisees who would otherwise be employees; and • increasing the viability of small business. [14.100] In fact, the benefits are even more significant. In competition terms, the community benefits through a reduction in the extent of vertical integration in the marketplace and the efficient utilisation of small business: franchising enables “the development of small business where the only other option is direct operation by bigger business” (Trade Practices Consultative Committee, Small Business and the Trade Practices Act (1979) at [11.17]). Australian courts would presumably echo the sentiments expressed by the US Supreme Court in United States v Arnold Schwinn 388 US 365 (1987) –franchising provides “significant social and economic contributions of importance to the whole society”.
You can’t do well unless your franchisees do well. Richard Cole, Founder Geeks on Call.
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14.4 COMMERCIAL ISSUES [14.110] The strong growth of franchising is not surprising. In its contemporary business format mode, franchising is a sophisticated business relationship whereby
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Chapter 14 Franchising
a franchisor develops a unique or individual manner of doing business and permits the franchisee to use that system, in a controlled fashion, in the operation of the franchisee’s independently owned business. Business format franchising is characterised by a comprehensive and ongoing business relationship between franchisor and franchisee governing all aspects of the business and its operation. It is a symbiotic relationship in which the needs of the franchisor and the franchisee blend in a commercial marriage of convenience.
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Strengths [14.120] The strengths of franchising are obvious. It provides a win/win situation. The rapid growth and development of franchising is readily explained by the undoubted advantages it offers over alternative established methods of distribution. In simple terms, it blends the particular advantages of big business and small business: “… it can provide a marrying of the accepted benefits of the enterprise, initiative and personal commitment and contact of a small-scale local private enterprise with those of management, economic power, technological facilities and financial resources of a large-scale business enterprise” (S Redfern and M Greenberg, “Going into Franchising? A Practitioners’ Guide” (1983) 57 Law Institute Journal 821 at 822). Franchising works because it is beneficial to both parties. All successful business transactions presumably offer benefits to both parties, but franchising is the business world’s classic example of symbiosis, the association of two different organisms living attached to each other for their mutual advantage. In successful franchise systems, the franchisee and the franchisor form a symbiotic relationship that enriches them both.
Advantages for the franchisor [14.130] The advantages to the franchisor are significant. The franchisor benefits through rapid market penetration and expansion without the need for a massive capital outlay to establish a complex organisation, which enables a market to be secured before competitors exploit the concept. The franchisor’s expansion is largely paid for by the franchisee, as each outlet is financed by the franchisee’s own capital. The franchisor’s business is enhanced because of the franchisee’s motivation stemming from personal financial investment in the business. The franchisees build the franchisor’s goodwill. The conversion of managed outlets to franchised outlets not only provides a source of capital but invariably increases turnover. Management is simplified and many irritants (such as strikes and “sickies”) and expenses (such as payroll taxes and insurances) are reduced or eliminated. Franchising provides the opportunity to retain key employees in the organisation rather than simply training them as potential competitors. Franchisees are also subject to greater controls than employees: franchise agreements are more rigorous than awards and employment contracts. Once established, the owners of the outlets represent a regular source of income to the parent company, since in addition to an initial franchise fee they generally pay it a percentage of gross revenues and usually share advertising and promotion costs. The franchisor may, of course, receive other income streams through the provision of initial equipment packages, the provision of goods or services, and the leasing or sub-leasing of sites. The caution of Ray Kroc is nevertheless relevant in this context.
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Kroc credits much of the success of his system to the proposition that (R Kroc, Grinding It Out. The Making of McDonald’s (Henry Regners Company, Chicago, Ill, 1977) p 79): there is a basic conflict in trying to treat a man as a partner on the one hand while selling him something at a profit on the other. Once you get into the supply business you become more concerned about what you are making on sales to your franchisee than with how his sales are doing. The temptation could become very strong to dilute the quality of what you are selling him in order to increase your profit.
Advantages for the franchisee
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The new shopping malls make possible the synthesis of all consumer activities, not least of which are shopping, flirting with objects, idle wandering, and all the permutations of these. Jean Baudrillard.
[14.140] The advantages to the franchisee are substantial. The franchisee benefits from being able to compete effectively as a small-business person in markets otherwise impenetrable to him. The risks of independent business operation are minimised by the opportunity to participate in the services, facilities and proven business system of a larger organisation. The franchisee benefits from public recognition of the system and its established name, reputation and goodwill. In comparison with independent small-business operations, franchising offers a range of important advantages including higher profit margins, lower failure rates, easier entry into the marketplace, lower capital requirements and access to management assistance and training. Business format franchising is particularly successful because it provides franchisees with not simply a product and a name but with a whole image and a way of doing business in accordance with a proven business system. The franchisee benefits from system-wide advertising and promotional support, greater buying power and better borrowing opportunities, in addition to a range of initial and continuing services provided by the franchisor. The services offered by the franchisor will vary, but the more assistance is provided in all aspects of the business the greater the likelihood of the franchisee, and thus the franchise system, being successful. The benefits provided may, and in most cases should, include assistance with site selection, premises design and fit-out, business, managerial and technical training, staff training, equipment selection, stock selection, business operation methods, and ongoing assistance in relation to all aspects of the business.
IN CONTEXT
Evaluating a franchise opportunity [14.150] Investment in a franchise represents a significant commitment for a franchisee in
terms of financial resources, time and commitment. It is a decision which should not be taken lightly and requires careful consideration of, and advice in relation to, a number of factors on which the success of the venture will depend: • the business and its product or service; • the franchise system; • the franchisor; • the financial equation; • the potential franchisee’s own suitability to be a franchisee.
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Chapter 14 Franchising
The business concept The prospective franchisee must be satisfied as to the basic commercial viability of the business being franchised. Franchising is the replication of a proven business concept. It is not a magic formula which will save a bad business concept, product or service. The concept must be attractive and have a proven capacity to attract consumer support. There must be a proven and ongoing demand for the product or service. There must be a distinctive image. The franchise system In addition to being satisfied as to the basic commercial viability of the business being franchised, the prospective franchisee must also be satisfied that the franchise system – the manner in which the proven concept is replicated by franchisees –is sound. The franchise system is the total “package” provided by the franchisor –the extent of the rights granted, the services provided, the business conditions, and the detailed rules, specifications, procedure, standards and policy documented in the franchise agreement and the operations manual. Its practical viability should be proven through an existing network.
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The franchisor A franchisee enters into a long-term and interdependent relationship with the franchisor. The ongoing commitment, support and assistance of the franchisor will be a key factor in the success of the franchised business. The franchisee must carefully consider whether the particular franchisor is one with whom such a significant long-term relationship should be forged. The franchisor’s track record and experience, commitment and future plans are among the factors that must be carefully assessed. The financial equation The franchisee will, of course, pay initial and in most cases continuing fees for the rights granted by the franchise agreement. Detailed financial and business planning, and specialist advice, is necessary to ensure that the business can support these expenses in addition to the usual initial and ongoing costs of establishing and operating a business. The potential franchisee’s suitability The prospective franchisee must also assess his or her suitability to be a franchisee. For most franchises, prior experience is not a requirement as the franchisor’s training, systems and ongoing support and assistance will equip the franchisee to successfully operate the business. However, in addition to the usual challenges of running a business –motivation, family support, hard work, people skills and so on –franchising imposes particular challenges. The Australian Government Publishing Service in its booklet Evaluating a Franchise provides this advice: Are you the type of person who is likely to enjoy operating a franchise? The operation of a franchise is not quite like running your own business. There may be more advantages than being an employee, but it may not suit you. The constraints on your independence may make you feel that you are little more than an employee. You may, over time, bitterly resent the continuous payment to the franchisor for royalties, advertising and training.
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In franchising you are in business for yourself but not by yourself. The franchisee operates the business under licence from the franchisor and must accept that the franchise agreement will impose significant restrictions on his or her independence and business freedom.
Weaknesses A salesman is got to dream, boy. It comes with the territory. Arthur Miller.
[14.160] A franchise system may fail because its “public face” is misconceived. Franchising will not save the wrong product, image or concept, although the franchisor may initially benefit through the franchise fees of gullible franchisees. There are obvious problems with these franchise systems that offer little more than a catchy name. Over- rapid expansion, which leads to insufficient support of new franchisees and the exploitation of an unproven system, will cause severe problems. Franchise systems may also fail because the internal aspects of the system are unsatisfactory. In the absence of a balanced relationship, both in terms of the services provided and a financial package which offers appropriate returns to both parties, there is little hope of the long-term relationship from which both franchisor and franchisee benefit. It is hardly surprising that franchising is not without some disadvantages to the parties.
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Disadvantages for the franchisor [14.170] From the franchisor’s perspective, the decision to franchise may prove to be economically unsound over time in changed market conditions, and the selection of an inappropriate franchisee may prove detrimental to the integrity of the system as a whole. Franchisees often develop a feeling of independence when the business is operating successfully and, forgetting that their success is due in large measure to the franchisor, regard the franchisor as superfluous and the monthly request for royalties ungracious.
IN CONTEXT
Franchisor Liability for Franchisee Conduct No way dude. Mike Myers.
[14.180] The relationship between franchisor and franchisee is one of independent con-
tractors. Franchisees are not employees, partners or agents of the franchisor and the franchisor is not legally responsible for their conduct. Franchising could not operate if it were otherwise. The 2015 ABC Four Corners documentary that exposed a systemic practice of some 7-Eleven franchisees exploiting and under paying working while head office allegedly turned a blind eye nevertheless brought into stark focus the issue whether franchisors should be liable for franchisee misconduct in such circumstances. The Fair Work Amendment (Protecting Vulnerable Workers) Act 2017 (Cth) was introduced to protect such vulnerable workers. Despite the franchisor not being the employer of a franchisee’s employees the amendment makes the franchisor with a significant degree of control and influence over a franchisee’s
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Chapter 14 Franchising
affairs liable for a variety of contraventions of the Act by franchisees within their network in circumstances where they knew or reasonably ought to have known about the contraventions, but failed to take reasonable steps to prevent those contraventions from occurring (s 558B).
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Disadvantages for the franchisee [14.190] The disadvantages of franchising for franchisees can be significant. The essential feature of business format franchising is the provision of an entire business format to which the franchisee must adhere. Ray Kroc is attributed with the observation that in business format franchising “discretion is the enemy of order, standardisation and quality”. It follows that it is inherent in most franchise relationships that the franchisor has a significant capacity to control the activities of a franchisee to ensure that uniformly high standards are maintained as between the various franchise outlets. Standardisation is vital not only because one bad franchisee can bring the entire system into disrepute but also because, in many franchise operations, uniformity of service will be one of the main customer attractions. The franchise agreement will invariably allow termination if specified standards are not met and, except in unusual circumstances, the courts will not interfere with the franchisor’s right to terminate the agreement of unsatisfactory franchisees as “Obviously it is vital to the integrity and success of the entire franchise system that the standards be uniform and that they be enforced. Uniformity must be central to the identity of the system and maintenance of identity and uniformity must be essential to continued operation of the system for the profit of all”: (Coordinated Corporate Services Ltd v National Video Inc (1984) 82 CPR (2d) 251 at 255 (Supreme Court of British Columbia)). The franchisee may resent the restrictions on normal freedoms enjoyed by an owner of a business: the controls imposed, the need to pay ongoing royalties and the lack of freedom to make independent business decisions. Although the franchisee is an independent business person, the franchisee’s right to operate the business is granted by and limited by the agreement. On expiry or termination of the agreement, the franchisee has no right to continue operating the business and no right to share in any goodwill that may have accrued to the system during the franchisee’s tenure: Ranoa Pty Ltd v BP Oil Distribution Ltd (1989) 91 ALR 251 at 257 (Full Federal Court). Franchisees are frequently concerned that they will lose the value of goodwill built up by them if the franchisor terminates or fails to renew the franchise and that their profitability will be impaired if nearby outlets are opened by their franchisor. It is the loss of independence that distinguishes franchisees from other independent business persons and provides the basis for most problems arising within franchising arrangements. Successful franchisors accommodate these concerns by building a sound relationship and taking decisions that are aimed at long-term viability.
Opportunities [14.200] Assuming continuing growth in the Australian economy, growth potential exists for business format franchising in most industries, but particularly in the services
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The window of opportunity is open today for American specialty retailers to come in and establish their brand either through franchising, licensing deals or distribution partnerships. Fadi Farra.
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sector. Franchising may provide the most effective method for developing countries in the region to be able to build a services-oriented economy, and Australian businesses are increasingly exporting franchising technology. In difficult economic times, franchising is a particularly appropriate strategy, providing opportunities not available to the independent small-business person. The franchising sector has remained surprisingly robust during economic downturns, with good franchise systems increasing their turnovers and expanding their networks. Franchising provided the opportunity for many victims of the previous recession, with retrenchment cheques but without jobs, to acquire their own business to the mutual benefit of themselves and the franchise system. Franchisees, backed by marketing and management support, are today the preferred tenants of prime shopping centre sites and the preferred customers of business lending institutions. Franchising is also spreading from its small-business base as large companies recognise its benefits and adopt a conversion franchising strategy to better utilise their resources. The prediction that franchising in the United States will achieve 50% of all retail sales within 10 years suggests that the opportunities in Australia, where the figure is currently about 20%, are far from exhausted.
Threats
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[14.210] Franchising is not a universal solution. It is, of course, susceptible to the “domino” effect. Unethical or inappropriate actions in relation to a particular franchisee may cause other franchisees to question their relationship with the franchisor and place the integrity of the system as a whole at risk. For prospective franchisees, cooperatives or buying and/or marketing groups may provide the advantages sought, or the loss of independence may be unacceptable. For prospective franchisors the issue is not whether a business can be franchised. The issues are: 1.
Should it be franchised? Is there a sound initial concept proven in practice and distinctive in its image which can be better exploited through franchising to the benefit of both franchisor and franchisee?
2.
How should it be franchised? What level of sophistication is required to build an appropriate, commensurate and long-term relationship?
[14.220] Ultimately the greatest threat to franchising arises not from the nature of franchising but from its inappropriate employment or execution. The prerequisites for success in franchising rest on a number of factors largely within the control of the franchisor. The massive achievements and continuing development of franchising are built on a proven model. Strong viable and successful franchise systems incorporate a number of essential features: • a proven product or service with ongoing potential; • a proven and successful business format which can be taught and replicated; • a unique selling proposition; • a distinctive image; • an established and recognised brand name or trademark; • profitability for franchisor and franchisee; 652
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Chapter 14 Franchising
• appropriate franchisee selection; • structured growth and network development; • the ability to provide the necessary training support, advice and assistance and to audit and enforce the system image, standards, procedures and controls; • effective communication; • a relationship structured, negotiated and conducted in good faith; and • strong, competent and ethical management. Franchising that conforms to this model is generally successful and the greatest challenge to the franchising sector is that posed by systems which seek a free ride on the impressive credentials of franchising without making a commitment to or satisfying the model.
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Franchising risks
The franchise and the virus work on the same principle, what thrives in one place will thrive in another. Neal Stephenson.
[14.230] Australia’s regulatory instrument for franchising, the Franchising Code of Conduct, requires franchisors to make a number of disclosures 14 days before the franchisee signs the agreement or makes a non-refundable payment. However, by that stage the franchisee may have become emotionally committed to entering the franchise. The 2014 Franchising Code of Conduct attempts to counter this emotional attachment by requiring the franchisor “as soon as practicable after the prospective franchisee expresses an interest in acquiring a franchised business” to provide the prospective franchisee with a generic risk statement –an Information Statement for Propective Franchisees –which is intended to assist prospective franchisees with a simple snapshot of some of the pitfalls and benefits of franchising (cl 11).
IN CONTEXT
Information statement for prospective franchisees [14.240] Thinking of becoming a franchisee? It is important to consider the risks and rewards. Entering a franchise is a big decision. Before you do so, you should: • Conduct due diligence –this means researching the franchise system and talking to current and former franchisees. • Get advice –get legal, accounting and/or business advice from professionals with expertise in franchising. • Read all the documents –carefully study the disclosure document, franchise agreement and any other documents provided by the franchisor. • Know your rights –make your own enquiries to ensure that it is the right decision for you. The Franchising Code of Conduct sets out the rights and obligations of the people involved in a franchising relationship. It can be found at http://www.comlaw. gov.au.
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You should also consider taking a specialist franchising or business course before making a decision to enter a franchise agreement. There are free, online education courses available for prospective franchisees. Some courses can be found here http://www.franchise.edu. au/education.html. Surprisingly, the stereotype that people don’t like monolithic clones of McDonald’s-type stores is … so much not the case … Part of the appeal [of Starbucks] is that it is the same everywhere –you can go in and know exactly what you’re getting. Robert Meyer.
What is franchising? Franchising is a model for doing business. When you enter a franchise agreement, the franchisor controls the name, brand and business system you are going to use. The franchisor grants you the right to operate a business in line with its system, usually for a set period of time. There is no guarantee you will be able to keep your franchise business after the initial period of the agreement ends. Franchisors and franchisees must comply with the Franchising Code of Conduct, which exists under the Competition and Consumer Act 2010, as well as consumer and company laws. The Franchising Code sets out minimum requirements for a franchisor to provide specific information to you. A franchise agreement, once entered into, is a legally binding contract that sets out the terms of the franchise. Why consider franchising?
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A franchise can offer particular benefits over other types of businesses. For example, franchises may have an established product or service and an existing reputation and image. It may also give you access to the franchisor’s experience and knowledge in the industry, planning, marketing skills and operating procedures. Some franchise systems provide support, some do not.
First come up with a good product or service and give it a catchy name. Then recruit an army of entrepreneurs to carry that name into cities and towns all across the US or even the world. Time Magazine (31 August 1987).
You should carefully think about whether the franchise system you are considering suits your business experience, skills and needs. Understanding the franchising relationship Two important features of franchising are that the franchisor has established the business system you are using and that most franchise systems rely on each franchise maintaining consistency. For those reasons, franchisees are usually required to strictly comply with the operating procedures set down by the franchisor. As a result, you may be limited in the changes you can make to the franchise system without the agreement of the franchisor. You will usually also be bound by confidentiality obligations. This includes limits on your rights to use the franchisor’s intellectual property or business system outside the franchise. Most businesses adjust to meet changes in the market. The franchisor might make changes to the franchise system at any time but does not have to discuss them with all franchisees. Unexpected expenses In franchising, as in any business, unexpected expenses may arise. Events such as a natural disaster or a change in the law or Australian standards can impact your business. You need to have a business plan that takes this into account when working out the funds you will need for the future. You should also make sure you have the type of insurance which is right for your situation.
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Chapter 14 Franchising
During the life of your franchise agreement, a franchisor might also decide to update computer systems or introduce new uniforms or change the appearance of the franchise system. These changes might not have been thought about when you entered the agreement. Those costs would normally be paid by the franchisee under the agreement. The risks of franchising Statistics suggest franchises have a lower failure rate than other businesses, but franchising is not risk free. Franchising is a business and, like any business, there is the potential for a franchisor or franchisee to become insolvent. If this occurs this may have significant impacts on your business, for instance, you may no longer be able to use the franchise system’s branding.
The business of franchising is surrounded by a grand myth given life by the legitimate successes of franchising. Buy a franchise –buy someone else’s idea, his or her expertise and support –and you buy success. The reality is much starker. Especially when you buy into a new franchise. J Ralson, Venture Magazine (March 1988).
Some of the things you should think about are: • How much working capital or extra funds you need for the first year or two while the business is getting established. • Consumer demand for products or services is not the same in every geographical area and a franchise system might not be successful in every area. • As a franchisee, you may not have an exclusive territory. • Your franchisor may have the ability to compete with you online.
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• As a franchisee, you won’t necessarily have the choice of where you buy the products you need to run the business, even if you believe you can get those products for a lesser price somewhere else. • An agreement may allow the franchisor to terminate the agreement even if there hasn’t been a breach by a franchisee. • Some locations are better for some businesses than others (ie consider a shopping centre versus a main street). • The economy has its ups and downs. • Whether the business is a fad or should it pass the test of time. You may not have an automatic right to renew your agreement once the initial term is over. You should think about what happens at the end of the agreement: • Will you be able to recover your outlay and make a profit during the term of the agreement? • What are your rights and responsibilities around renewing your franchise agreement? • What are the rules about you selling your business? • Are there any restrictions on you starting a similar business if you want to?
14.5 THE FRANCHISOR-FRANCHISEE RELATIONSHIP [14.250] The relationship between the parties is enshrined in two primary documents – an operations manual and a franchise agreement.
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The operations manual [14.260] The essence of franchising is the replication of the franchisor’s entire business system. The comprehensive blueprint for the operation of the franchised outlet –the detailed rules, procedures, specifications, standards, formats, policies –is usually set out in a confidential Operations Manual (or, given the extent of the necessary information, a series of Operations Manuals addressing specific aspects of the business). The franchise agreement will ascribe contractual effect to the manual so that breach of the operational requirements is a breach of the agreement. Given that the Operations Manual is a “living” document which must be revised and amended from time to time to accommodate system developments, the franchise agreement will usually give the franchisor the right to amend the manual.
The franchise agreement
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[14.270] The relationship between the franchisor and franchisee is a contract. The franchise agreement is the formal document which sets out the parties’ rights and obligations. It is the ultimate reference point for the operation of the relationship and, given the intricacy of the relationship, is usually a long and complex document. It will, typically, record the parties’ agreement in relation to key issues such as grant of franchise, term and renewal, territory and location, names and marks, premises and equipment, products and services, fees and payments, franchisor’s obligations, franchisee’s obligations, advertising and reporting, inspection and audit, transfer, termination and restrictive covenants.
IN CONTEXT The history of the McDonald’s System is the story of an organisation that learned how to harness the power of entrepreneurs –not several but hundreds of them. It is run by decisions and policies considered to be for the common good. J Love, McDonald’s: Behind the Arches, (Bantam Books, 1986) p 8.
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Summary of typical clauses in a franchise agreement [14.280] Clause Parties
Grant of franchise
Limitations on the grant
Clause description Identifies the parties to the contract. If the franchisee is a company, personal guarantees of directors may be required Identifies what intellectual property rights are granted, to whom, on what conditions and for how long. These rights are collectively described as the franchisor’s system Specifies any limitations on the use of the intellectual property or reservation of rights to the franchisor or other parties. The franchise may be limited to a specific location or territory. The territory may be exclusive or reserve the right for the franchisor to sell further franchises or distribute the goods or services through other channels (eg the internet)
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Chapter 14 Franchising
Clause Term and renewal
Payment and fees
Franchisor’s responsibilities
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Franchisee’s responsibilities
System compliance
Transfer
Termination
Clause description Specifies the term of the agreement and any rights for renewal. The term will ordinarily be long enough for the franchisee to generate an adequate return on the initial investment. Renewal may be at the franchisee’s option provided preconditions are met (which may include a fee, refurbishment, refresher training, etc) Outlines who pays what, when and what happens if payment is not made. If ongoing fees are payable, they may be set as fixed fee or as a percentage of gross sales. Non-payment may attract sanctions The franchisor’s core responsibility is to provide the intellectual property. The agreement may provide further responsibilities, such as support, services, training, conduct of marketing activities, provision of system improvements, etc The franchisee’s responsibilities may be extensively detailed. Key obligations may include complying with the system, only using the intellectual property in the manner authorised, meeting any performance standards, attending training, and cooperating with the franchisor and others in the network The franchisee must comply with the system as described in the agreement and the operations manual. The agreement normally provides the franchisor with the unilateral right to vary the operations manual so long as the variation is consistent with the agreement Specifies the circumstances when the franchisor or franchisee may transfer the franchise. Usually the franchisee must obtain the franchisor’s consent to transfer. In such cases, the agreement may also specify the grounds for withholding consent or that such consent should not be withheld unreasonably Specifies the circumstances when either party may terminate the agreement. Usually only the franchisor will have an express right to terminate the agreement early. The grounds for termination may include franchisee insolvency, serious breach of the agreement, or breach and failure to remedy the breach within some specified period
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Clause Clause description Consequences of termina- Outlines what happens on termination or expiry tion or expiry of the agreement. This may include returning all intellectual property and stock to the franchisor, transferring of any leased premises, and taking down all signs. The ex-franchisee may also be bound not to compete in a similar business for some period Dispute resolution Provides for how disputes to be resolved. The clause may outline a process for mediation as a prerequisite to arbitration and/or litigation Ministry of Economic Development, Review of Franchising Regulation in New Zealand, Discussion Document, (August 2008) pp 10, 11.
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A relational contract [14.290] Despite the relationship between franchisor and franchisee being enshrined in a contract there is increasing recognition of the difference between a franchise agreement and other commercial agreements. Franchising is relational contract –it gives rise to an ongoing relationship rather than a one-off exchange. A relational contract is one which exhibits a number of features which a New Zealand appellate judge has summarised as follows (Thomas J in Bobux Marketing Ltd v Raynor Marketing Ltd [2001] NZCA 348 at [43]-[44]): At McDonald’s, global consistency is laid out in a phone- book-thick operating manual that covers such topics as how to greet the customer, how the bathrooms must be cleaned, and the temperature of the oil used to fry the potatoes. J Daniels and C Daniels, Global Vision (McGraw Hill, 1993) p 97.
In essence, relational contracts recognise the existence of a business relationship between the parties and the need to maintain that relationship; the difficulty of reducing important terms to well defined obligations; the impossibility of foretelling all the events which may impinge upon the contract; the need to adjust the relationship over time to provide for unforeseen factors or contingencies which cannot readily be provided for in advance; the commitment, likely to be extensive, which one party must make to the other, including significant investment; and that they are in an economic sense likely to be incomplete in failing to allocate, or allocate optimally, the risk between the parties in the event of certain future contingencies … Consequently, a relational contract is one which involves not merely an exchange but a relationship between the contractual parties. The parties are not “strangers” in the accepted sense and much of their interaction takes place “off the contract” requiring a deliberate measure of communication, co-operation, and predictable performance based on mutual trust and confidence. Expectations of loyalty and interdependence mark the formation of the contract and become the basis for the rational economic planning of the parties.
This is an apt description of the typical business format franchise agreement in which relational consideration features prominently. The Explanatory Statement for the 2014 Franchising Code of Conduct acknowledges this reality: The nature of franchising dictates that each party’s contractual obligations are ongoing and variable, forming a contract that is fundamentally based on an ongoing relationship. These are not discreet, one-off exchanges between parties on clearly defined terms that characterise ordinary contractual agreements. 658
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Chapter 14 Franchising
It is argued in the franchising literature that the instrument to accommodate the realities of the relational franchising relationship within traditional classical contract law principles which favours predictability and certainty through enforcing the written contractual provisions over legitimate business expectations is the implied term of good faith. The introduction of an obligation of good faith in the 2014 Franchising Code of Conduct recognises the special relational nature of the franchise agreement.
14.6 REGULATING FRANCHISING
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[14.300] Franchising as with any other business activity is subject to the underlying laws of general application to the formation and operation of all business relationships: most of the chapters in this book address areas of law which impact on franchising –contract, tort, intellectual property, competition and fair trading laws regulate franchising in the same manner as they regulate all commercial endeavour. The prohibition of misleading conduct and of unconscionable conduct under the Australian Consumer Law have had a particular impact on franchising and much of the case law has developed in the context of franchising.
The fundamental secret to McDonald’s success is the way it achieves uniformity and allegiance to an operating regimen without sacrificing the strengths of American individualism and diversity. McDonald’s manages to mix conformity with creativity. J Love, McDonald’s: Behind the Arches, (Bantam Books, 1986) p 7.
Entrepreneurship and business creation in a free enterprise society such as ours necessarily includes an element of risk and it should certainly not be the role of Government to remove risk. Nevertheless in the particular circumstances of franchising there are elements quite different to normal business development because of the control of the franchisor which can be an overriding risk for other than purely business or commercial reasons. Those special additional risks arising in part because the balance of power in the franchising relationship should be minimised while leaving the commercial risks and decisions to be handled by the parties concerned.
Although franchising is widely practiced in about 130 countries less than a third of these have dedicated franchise regulation. The extent to which the law has a role in regulating what are essentially commercial issues of sound business practice is a difficult question. There is a strong body of opinion that the greatest threat to franchising is the imposition of an unnecessary regulatory regime which would stifle entrepreneurship and diversity and threaten the impressive growth of franchising. There is also a strong lobby that regards the absence of regulation and the opportunity for exploitation as the greatest threat to its rational development. [14.310] While this debate continues to rage internationally it has been conclusively resolved in Australia. After a succession of inquiries and reports, the recommendations of which have ranged over the entire regulatory spectrum –from voluntary self-regulation to specific legislation tailored for the franchising sector –since 1998, the underlying commercial laws have been supplemented by a dedicated regulatory regime for franchising in the form of the Franchising Code of Conduct (the 1998 Code, and then the 2014 Code).
IN CONTEXT
Regulatory regimes of the franchising sector in Australia [14.320] • Pre-1981: regulation only under the general law;
Council of Small Business Organisations in Australia, submission (1986).
• 1981-1987: quasi-regulation under the “prescribed interest” (now “managed investment schemes”) provisions of the Corporations Law; • 1987-1993: deregulation (through excluding typical franchise arrangements from the “prescribed interest/managed investments” provisions; • 1993-1996: voluntary self-regulation under the Franchising Code of Practice;
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• 1997-1998: deregulation; • 1998-2014: mandatory regulation under the 1998 Franchising Code of Conduct. • 2015: mandatory regulation under the 2014 Franchising Code of Conduct.
1997 Fair Trading Report [14.330] The immediate catalyst for the introduction of the first mandatory Franchising Code of Conduct by regulations prescribed under Pt IVB of the Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)) was the 1997 Fair Trading Report which concluded that concerns about unfair conduct towards small business were justified and should be addressed urgently. The Fair Trading Report was uncompromising in its support of small business in Australia and its criticism of unfair conduct by big business. The Committee identified particular problems for small firms in: • obtaining full information on a venture prior to entering into it; • understanding complex documentation; • having terms and conditions of contracts imposed rather than being given an opportunity to negotiate them; • harsh business conduct within a commercial relationship; and Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
• accessing the justice system. These problems were found to be most prevalent in the franchising and retail tenancy sectors. The foreword to the Fair Trading Report noted that: Unfair conduct by big business towards small business is [a]major concern [and] has been a matter of grave concern for many years. Not only has such conduct the potential to impact heavily on the economic health of the small business sector and on the allocation of resources generally, it can also involve heavy social cost. You can’t do business with bad people and you can’t get hurt with good people. That’s all there is to know. Howard Shepherd, Banker.
The 1988 Franchising Code of Conduct was one of the government’s major responses to the Report. [14.340] The original 1998 Franchising Code of Conduct was replaced in 2015 by a revised 2014 Franchising Code of Conduct in response to the recommendations of the 2013 Review of the Franchising Code of Conduct Report (the Wein Report). The Wein Report concluded that while the 1998 Code operated “effectively within a very dynamic and difficult economic environment … like most industries, there are changes that could be made to improve upon which is already a robust model”.
14.7 THE FRANCHISING CODE OF CONDUCT [14.350] The Franchising Code of Conduct is an integral and widely accepted part of the franchising infrastructure in Australia. It is a mandatory industry code prescribed by regulations under Part IVB of the Competition and Consumer Act 2010 (Cth). 660
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Chapter 14 Franchising
The purpose of the Franchising Code is “to regulate the conduct of participants in franchising towards other participants in franchising” [cl 2]. When the Franchising Code commenced in 1998, the Explanatory Statement stated that its objectives were to: • address the imbalance of the power between franchisor and franchisees; • raise the standards of conduct in the franchising sector without endangering the vitality and growth of franchising; • reduce the cost of resolving disputes in the sector; and • reduce the risk and generate growth in the sector by increasing the level of certainty for all participants. Broadly, it seeks to achieve this by prescribing certain rules with respect to the interaction between franchisors and franchisees, requiring franchisors to disclose specific information to franchisees to assist them in conducting due diligence prior to entering into a franchise agreement, and setting out standards of conduct required in the relationship. Minister for Small Business, Explanatory statement, “Select Legislative Instrument No 168 (2014)”.
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Agreements subject to the Code [14.370] One of the most difficult issues in franchising regulation is the formulation of an appropriate definition. Franchising is not a business itself; it is a way of doing business. Just as different businesses in different industries have widely different characteristics, so it is likely that franchise systems in different industries will have great differences in structure and format. The lack of any common jurisprudential approach to franchising is explained by the fact that until the introduction of the mandatory Franchising Code of Conduct there has been no generally accepted definition of franchising in court decisions, regulations or legislation. Franchising is essentially a marketing concept and there is no unanimity as to how it should be defined for legal purposes. The term is indiscriminately applied to a diverse range of relationships and within the generality of the concept there are considerable individual differences. The obligations under the Code are activated by a business relationship falling within the definition of “franchise agreement” in cl 5(1): A franchise agreement is an agreement:
Franchising is a significant and growing part of our small business community and has displayed great capacity for nurturing innovation and entrepreneurship in Australia. The Government’s commitment to these important franchising reforms will ensure that our regulatory settings remain responsive to the needs of the sector to promote confidence, competitiveness and productivity. Ministerial Statement on the 2014 Franchising Code of Conduct. The biggest threat to McDonald’s lies within –and that is us as a company becoming complacent. There are a lot of companies that get fat, dumb and happy and take their eye off the ball and forget about serving customers. Charlie Bell, Former McDonald’s CEO.
(a) that takes the form, in whole or part, of any of the following: (i) a written agreement; (ii) an oral agreement; (iii) an implied agreement; and (b) in which a person (the franchisor) grants to another person (the franchisee) the right to carry on the business of offering, supplying or distributing goods or services in Australia under a system or marketing plan substantially determined, controlled or suggested by the franchisor or an associate of the franchisor; and (c) under which the operation of the business will be substantially or materially associated with a trade mark, advertising or a commercial symbol: (i) owned, used or licensed by the franchisor or an associate of the franchisor; or (ii) specified by the franchisor or an associate of the franchisor; and
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Business and the Law (d) under which, before starting or continuing the business, the franchisee must pay or agree to pay to the franchisor or an associate of the franchisor an amount including, for example: (i) an initial capital investment fee; or (ii) a payment for goods or services; or (iii) a fee based on a percentage of gross or net income whether or not called a royalty or franchise service fee; or (iv) a training fee or training school fee;
but excluding:
(v) payment for goods and services supplied on a genuine wholesale basis; or (vi) repayment by the franchisee of a loan from the franchisor or an associate of the franchisor; or (vii) payment for goods taken on consignment and supplied on a genuine wholesale basis; or (viii) payment of market value for purchase or lease of real property, fixtures, equipment or supplies needed to start business or to continue business under the franchise agreement.
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Rafferty v Madgwicks [2012] FCAFC 37 [14.380] The issue before the court was whether a business venture involving the sale of modular accommodation units manufactured in China and sold in Australia constituted a franchise agreement subject to the Franchising Code of Conduct.
In relation to the requirement of a “system or marketing plan” the court held (at [172]) that the following factors may be indicative: … specific requirements for accounting and record keeping; reservation by the franchisor of a right to audit the books of account and other records; inability of the franchisee to supply goods or services to customers without the franchisor’s approval; reservation by the franchisor of the right to approve promotional and advertising material; provision by the franchisor of bonus structures or equivalent for those selling its goods or services; provision by the franchisor of training for staff selling its goods or services; stipulation of retail pricing structures, sales structures, sales quotas and the like; creation of marketing and sales territories; reservation by the franchisor of the right to approve sales staff; reporting systems in relation to profit or turnover; restriction on the franchisee selling competing products; controls on the use of brand and trading names; requirements for signage and merchandising; management structure; and badging requirements (mandatory use of trading name, uniforms, stationery, etcetera).
In relation to whether a system or marketing plan is “substantially determined, controlled or suggested by the franchisor” the court notes that this is “closely related to whether there is a scheme or marketing plan at all” (at [173]): Matters relevant to determination, control or suggestion may include: the extent to which the franchisee’s business involves the sale of the franchisor’s goods and services; the degree to which the franchisor assumes responsibility for some centralised management and for uniform standards regarding quality; whether or not the franchisor places the franchisee under an obligation with respect to advertising and promotional campaigns; and the extent to which the franchisor controls the franchisee’s business, having regard to advertising and financial support, auditing of books, inspection of premises, hiring of staff, sales quotas, management training and the like.
662
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Chapter 14 Franchising The court concluded that the agreements involved the grant of a right to carry on the business of supplying goods or services under a system or marketing plan; and that this was, or was to be, substantially determined, controlled or suggested by the franchisor. The agreement was therefore a franchise agreement and subject to the Code.
Workplace Safety Australia v Simple OHS Solutions Pty Ltd [2015] NSWCA 84 [14.390] Workplace Safety Australia Ltd (WSA), provided online subscription packages designed to assist
businesses to meet their obligations under occupational health and safety legislation. Under a Distribution Agreement, Simple OHS Solutions Pty Ltd (Simple), agreed to act as the exclusive distributor of WSA’s subscription packages. Under the agreement, Simple was required to: set out a business plan indicating how it intended to operate its business; administer all sales in accordance with a process prescribed by WSA; use standard forms prescribed by WSA; comply with a manual provided by WSA; and comply with all reasonable directions of WSA.
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The Court of Appeal held that the distributor agreement was a franchise agreement under the Franchising Code of Conduct for reasons set out in the headnote (references omitted): (i)
The definition of “franchise agreement” in cl 4(1)(b) of the Franchising Code of Conduct contains three separate requirements. First, the franchisor must grant the franchisee the right to carry on the business of offering, supplying or distributing goods or services in Australia. Second, the right to carry on the business must be a right to carry it on under a “system or marketing plan”. Third, the system or marketing plan must be substantially determined, controlled or suggested by the franchisor.
(ii)
As one of the principal purposes of the Franchising Code of Conduct is to protect franchisees, the Court should not interpret its provisions in a way which would circumvent this purpose.
(iii)
The word “system” in cl 4 (1)(b) refers to a method of operation under which a business is to be conducted. It is not necessary for a franchise agreement to spell out the details of a system or marketing plan. As the clause contemplates that the business will be carried out under a system or marketing plan, it is at least necessary that the agreement provides for that to occur, even if the terms of the plan are not settled or prescribed in the agreement.
(iv)
In order to give effect to the purpose of the Franchising Code of Conduct, namely, to protect franchisees, the word “control” in cl 4(1)(b) should be taken to mean the power to direct or restrain the content of the business plan on any substantial issue. The question is to be determined by practical and commercial considerations.
(v)
The criteria described in Rafferty v Madgwicks as indicating a franchise agreement, while helpful in determining whether such an agreement exists, are not essential to its existence. The Court must consider the agreement as a whole. The relevance of the extent to which the franchisee’s business involves the sale of the franchisor’s goods and services is somewhat limited in circumstances where an agreement relates to a discrete business activity in respect of which the franchisee has separate rights and obligations. The Code is concerned with the business the subject of the franchise agreement.
(vi)
The Distribution Agreement conferred on Simple the exclusive right to provide, grant or confer subscription packages, which fell within the definition of “services” in the Competition and Consumer Act. Simple’s business was to be carried on under a system or marketing plan as it was required to: set out a business plan indicating how it intended to operate its business; administer all sales in accordance with a process prescribed by WSA; use standard forms prescribed by WSA; and comply with a manual
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Business and the Law provided by WSA. This system or marketing plan was substantially controlled by WSA as Simple was required to comply with WSA’s directions and WSA could refuse to consent to Simple’s marketing activities. Thus, the Distribution Agreement was a franchise agreement under the Franchising Code of Conduct and WSA was not entitled to terminate [otherwise than in compliance with the Code].
Prior disclosure, standards and mediation [14.400] The Code regulates franchising conduct in three areas: • Mandatory prior disclosure; • Mandatory standards; • Mandatory mediation.
Prior disclosure [14.410] Prior disclosure is the principal regulatory strategy to redress the information imbalance inherent in the franchise relationship. The Franchising Code of Conduct in prescribing a comprehensive prior disclosure regime gives effect to the philosophy expounded by the Blunt Committee in 1979:
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No law can, or should, act to prevent the holding or seeking of high aspirations, however unlikely to be satisfied. However, it has been a long standing philosophy of free enterprise government that it is a legitimate role of government to provide, or cause by law to be provided, and accurate informational framework within which individual aspirations are formulated.
Under the Code the Franchisor must give a prospective franchisee a disclosure document providing information under the following headings: • Franchisor details; • Business experience; • Litigation; • Payments to agents; • Existing franchises; • Master franchises; • Intellectual property; • Franchise site or territory; • Supply of goods or services to a franchisee; • Supply of goods or services by a franchisee; • Supply of goods or services –online sales; • Sites or territories; • Other payments; • Marketing or other cooperative funds; • Financing; • Unilateral variation of franchise agreement; 664
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Chapter 14 Franchising
• Arrangements to apply at the end of the franchise agreement; • Amendment of franchise agreement on transfer of franchise; • Earnings information; and • Financial details. The Disclosure Document together with copies of the Franchising Code of Conduct and the franchise agreement itself must be provided to the prospective franchise (or to a franchisee on the renewal or extension of an existing franchise at least 14 days prior to entry into agreement or payment of a non-refundable payment (cl 9). The first page of the Disclosure Document is a warning to the prospective franchisee:
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… Entering into a franchise agreement is a serious undertaking. Franchising is a business and, like any business, the franchise (or franchisor) could fail during the franchise term. This could have consequences for the franchisee … … A franchise agreement is legally binding on you if you sign it … … Take your time, read all the documents carefully, talk to other franchisees and assess your own financial resources and capabilities to deal with the requirements of the franchised business. You should make your own enquiries about the franchise and about the business of the franchise agreement. It is often prudent to prepare a business plan and projections for profit and cash flow. You should also consider an educational course, particularly if you have not operated a business before …
The Code requires prospective franchisees to certify that they have “received, read and had a reasonable opportunity to understand the disclosure document and this Code” (cl 10.1) and before a franchise agreement is entered into the franchisor must have received from the prospective franchisee signed statements that the prospective franchisee has been given advice by any of an independent legal adviser, business adviser or accountant, or the franchisee has been told that that kind of advice should be sought but has decided not to seek it (cl 10(2)). The consequences of contravention of cl 10.1 were considered by the High Court in Master Education Services Pty Ltd v Ketchell [2008] HCA 38:
The goal of franchising should remain that of providing both the franchisee and franchisor with a better opportunity to succeed … As compared with an integrated system or even “dual distributor”, franchising provides the franchisor and each franchisee with the best opportunity to perform those specialised functions for which each of them is well adapted. H Brown, Franchising Realities and Remedies (1978) p 12.
Master Education Services Pty Ltd v Ketchell [2008] HCA 38 [14.420] Clause 11.1 of the 1998 Franchising Code of Conduct (equivalent provision of the 2014 Code is cl 10.1) provides that:
The franchisor must not:
(a) enter into, renew or extend a franchise agreement; or
(b) …
(c) receive a non-refundable payment (whether of money or of other valuable consideration) under a franchise agreement or an agreement to enter into a franchise agreement; unless the franchisor has received from the franchisee or prospective franchisee a written statement that the franchisee or prospective franchisee has received, read and had a reasonable opportunity to understand the disclosure document and this code.
It was not disputed that the franchisor was in breach of this clause: “the franchisor had not received the written statement from the franchisee”. However, it was also not disputed that the franchisor had provided, as Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-22 20:23:51.
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Business and the Law required by the Code, the disclosure document, a copy of the Code and the opportunity to read and understand the documentation. The breach was what is commonly referred to as a technical breach. The Court at first instance accepted that no loss has been shown to have been suffered by the franchisee as a result of the non-compliance. The Court of Appeal nevertheless overturned the decision of the Supreme Court in favour of the franchisor and held that what was prohibited was not just conduct –failure to receive the written statement –but the contract itself and the recovery of money under it. The franchisor’s contravention rendered the franchise agreement illegal and unenforceable by the franchisor who was therefore unable to recover unpaid royalties. The Court of Appeal was not sympathetic to the argument that the breach was merely “minor, technical or procedural” commenting that “this is an argument that needs to be taken up with the Parliament”. In any event the franchisor’s breach was not regarded as inconsequential –“the disclosure requirements of the Code were clearly enacted for the protection of prospective licensees”. The franchisor’s appeal to the High Court was successful, the court unanimously holding non-compliance gave rise to remedies under the Trade Practices Act 1974 (Cth) rather than attracting the “harsh consequences provided by the common law”. The court noted (at [41]) that:
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It is possible to agree with the views of [the Court of Appeal] that the “franchisor’s breach” … was not “inconsequential” and that the “disclosure requirements of the Code were clearly enacted for the protection of prospective licensees” without embracing [the] conclusion that the remedy implicit in the circumstances was that provided by the common law. The context of the Act itself, and the range of remedies that it affords for an established breach of an industry code, produce the conclusion that the better view of the legislation is that propounded by the appellant. It is the view to which this court should give effect.
The High Court noted that an unfortunate consequence of the Court of Appeal decision was that (at [39]) it would “render void every franchise agreement entered into where a franchisor had not complied with the Code”, and that to this “would be to give the franchisor, the wrong-doer, an opportunity to avoid its obligations and at the same time to place the franchisee in breach of obligations to third parties. A preferable result, and one for which the Act provides, is to permit a franchisee to seek such relief as is appropriate to the circumstances of the case”.
Standards and conduct [14.430] The Code addresses the power imbalance which characterises the typical franchisor-franchisee relationship through a number of provisions, regulating particular conduct and composing particular standards: • Cooling off period –franchisees have a seven-day “cooling off” period after signing the franchise agreement during which they can terminate for any reason (cl 26). • Association of franchisees –the franchisor must not induce a franchisee not to associate with other franchisees (cl 33). • Prohibition on general release from liability –a franchise agreement must not require a franchisee to provide a general release of the franchisor from liability towards the franchisee (cl 20). • Marketing funds –the franchisor must maintain a separate bank account for marketing and advertising fees which can be used only for disclosed purposes (cl 39). • Transfer –the franchisor cannot unreasonably withhold consent to the franchisee’s request to transfer the franchise to another person (cl 25). 666
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Chapter 14 Franchising
• Termination –except in special cases the franchisor cannot terminate the franchise agreement because of the franchisee’s breach without providing reasonable notice and an opportunity to remedy the breach (cl 27-29). • Careful expenditure –the franchisor is prohibited from requiring a franchisee to undertake significant capital expenditure not disclosed in the Disclosure Document or agreed to or justified by the franchisor (cl 30). • End of term arrangements –the franchisor must give six months’ notice of non- renewal (cl 18). • End of term restraints –a restraint of trade clause will not be enforceable if the franchisor refuses to renew an agreement without paying genuine compensation (cl 23). The obligation to act in good faith [14.440] One of the most important provisions introduced in the 2014 Code is a broad and explicit statutory obligation to act in good faith to address what has been described as the “interdependent nature of the franchise relationship [which] leaves the parties vulnerable to opportunistic conduct” (Parliamentary Joint Committee on Corporations and Financial Services, “Opportunity not opportunism: Improving conduct in Australian Franchising”, Parl Paper No 547 (2008)). Clause 6 provides that: Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Obligation to act in good faith (1) Each party to a franchise agreement must act towards another party with good faith, within the meaning of the unwritten law from time to time, in respect of any matter arising under or in relation to: (a) the agreement; and (b) this code.
This is the obligation to act in good faith.
Civil penalty: 300 penalty units.
The attraction of franchising lies in the benefits it offers to franchisors … franchisees … and customers. Franchising enables franchisors to expand their business very quickly with limited financial commitment, often permits franchisees to enjoy relatively high incomes along with the satisfaction of self-employment, and provides consumers with a wide variety of products and services of consistent quality at low cost. When combined with favourable demographic conditions, which include high disposable income and demand for consumer goods and services, these benefits appear to explain the substantial growth of franchising. US International Trade Commission (1995).
(2) The obligation to act in good faith also applies to a person who proposes to become a party to a franchise agreement in respect of: (a) any dealing or dispute relating to the proposed agreement; and (b) the negotiation of the proposed agreement; and (c) this code.
Matters to which a court may have regard
(3) Without limiting the matters to which a court may have regard for the purpose of determining whether a party to a franchise agreement has contravened subclause (1), the court 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.
Franchise agreement cannot limit or exclude the obligation
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Business and the Law (4) A franchise agreement must not contain a clause that limits or excludes the obligation to act in good faith, and if it does, the clause is of no effect. (5) A franchise agreement may not limit or exclude the obligation to act in good faith by applying, adopting or incorporating, with or without modification, the words of another document, as in force at a particular time or as in force from time to time, in the agreement.
Other actions may be taken consistently with the obligation
(6) To avoid doubt, the obligation to act in good faith does not prevent a party to a franchise agreement, or a person who proposes to become such a party, from acting in his, her or its legitimate commercial interests. (7) If a franchise agreement does not: (a) give the franchisee an option to renew the agreement; or (b) allow the franchisee to extend the agreement;
this does not mean that the franchisor has not acted in good faith in negotiating or giving effect to the agreement.
Mediation
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[14.450] Over recent years a range of alternative dispute resolution (ADR) techniques have developed to provide a more formal alternative to “informal negotiation” and a less formal alternative to arbitration or litigation. ADR techniques involve an independent facilitator –most commonly a mediator or conciliator –engaged by the parties to assist them to resolve their problems in a consensual manner acceptable to both. Not surprisingly, the franchising sector is a significant beneficiary of the growing trend to ADR as the ongoing and interdependent franchising relationship is unlikely to survive the adversarial nature and “win/lose” (or, in practice “lose/lose”) outcome of traditional court-based dispute resolution. The Code provides a process for dispute resolution designed to provide the opportunity for the parties to explore, with the assistance of an experienced mediator, a consensual collaborative solution to the dispute. A franchise agreement must provide for a complaint handling procedure allowing dispute to be dealt with by an informal dispute resolution procedure with mediation as a fallback provision if the parties cannot themselves resolve the dispute.
Enforcement [14.460] The ACCC is responsible for the enforcement of the Code and has a wide range of enforcement tools at its disposal but private enforcement action by franchises can be taken. Contravention attracts civil consequences –including pecuniary penalties (of up to $63,000) but breach does not have criminal consequences. The ACCC can issue infringement notices ($10,500 per alleged breach) and substantiation notices, can conduct random audits, and can seek redress by way of damages for all franchisees harmed by a franchisor’s Code breach.
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Chapter 14 Franchising
2018 Inquiry into the Franchising Code of Conduct [14.470] In March 2018, the Senate announced a parliamentary inquiry to look into Australia’s franchise sector and the operation and effectiveness of the Franchising Code of Conduct –an action taken in response to the highly publicised failings of some of Australia’s largest and most prominent franchise systems –7-Eleven, Dominos, Retail Food Group (the franchisor of a number of systems including Michel’s Patisserie, Gloria Jeans, Donut King, Brumbies, Crust Pizza) and Caltex. The extent of public interest and concern is apparent from the fact that over 200 public submissions and almost 200 confidential submissions were received. The committee’s report is expected before the end of 2018 and it is anticipated that it will recommend stronger laws and markedly increased penalties.
QUESTIONS 1.
Explain the concept of business format franchising and how it differs from product and trade name franchising.
2.
What is business format franchising and what are its major advantages and disadvantages for: (i) the franchisor; (ii) the franchisee;
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(iii) the consumer; and (iv) society generally. 3.
What have been the major factors influencing the development of a regulatory regime for franchising in the form of the Franchising Code of Conduct? The comment of Burchett J in Bateman v Slatyer [1987] FCA 58 may provide a starting point: “What had been ‘proven’ was that the concept of franchising was capable of returning large sums to the franchisor. In the circumstances, to invite persons to join the company as franchisees upon the basis that they would get the benefit of a proven concept was akin to the invitation to join in a treat which the Walrus and the Carpenter extended to the oysters in Through the Looking Glass.”
4.
“In a perfect world we would not have franchises at all because I think they are all nonsense”: J R Rau MP, South Australian Franchising Inquiry.
Give your reasons for agreeing or disagreeing with Mr Rau.
WEB REFERENCES ACCC franchising information http://www.accc.gov.au Federal Government’s “Business Entry Point” http://www.business.gov.au Franchise Council of Australia http://www.franchise.org.au
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Franchise Mediation Advisor http://www.franchisingmediationadviser.com.au International Franchise Association http://www.franchise.org Parliamentary Joint Cmmittee on Corporations and Financial Services, Inquiry into the operation and effectiveness of the Franchising Code of Conduct https://www.aph.gov. au/ P arliamentary_B usiness/ C ommittees/ J oint/ C orporations_a nd_F inancial_S ervices/ Franchising
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15
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Privacy Anna Ward THE BUSINESS CONTEXT Privacy is recognised as a fundamental human right in the Universal Declaration of Human Rights adopted by the United Nations in 1948, Art 12 of which provides that: No one shall be subjected to arbitrary interference with his privacy, family, home or correspondence [and] everyone has the right to the protection of the law against such interference.
Privacy has been defined as “the claim of individuals, groups or institutions to determine when, how and to what extent information about them is communicated to others”: A F Westin, Privacy and Freedom (Atheneum, 1967). It has also been said that privacy is simply the right to be left alone. A “right to be forgotten” in the digital era is a principle of the EU’s 1995 European Data Protection Directive (95/46/EC) (Art 12). The increasing powers of public officials, the development of new intrusive business practices and increasingly sophisticated information technologies have provided a real and urgent challenge to the legislature to formulate appropriate protection. The rapid growth of privacy protection particularly under the federal Privacy Act 1988 (Cth) has meant that privacy considerations have assumed a significant place in Australian business law. The international legal controls in place for the protection of privacy have a widespread impact on the conduct of business globally. They are general in scope and apply across the whole range of commerce.
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15.1 THE MEANING OF PRIVACY................................................................................................................................. 672 15.2 AN EVOLVING PRIVACY TORT?............................................................................................................................ 673 [15.50]
The common law ......................................................................................................................................... 673
15.3 RECOMMENDATIONS FOR A STATUTORY PRIVACY ACTION.................................................................. 677 15.4 THE FEDERAL PRIVACY LAWS............................................................................................................................. 681 [15.170] The Privacy Act 1988 (Cth) .......................................................................................................................... 681 [15.200]
The Australian Privacy Principles ............................................................................................................ 682
[15.230]
Application of the Privacy Act 1988 (Cth) ................................................................................................ 685
[15.260] Exemptions ................................................................................................................................................... 686 [15.350]
Information subject to the Privacy Act .................................................................................................... 687
[15.360] Compliance .................................................................................................................................................. 688 [15.380] Enforcement ................................................................................................................................................. 688 [15.400]
Complaint handling .................................................................................................................................... 689
[15.430]
Other Federal Privacy Laws ...................................................................................................................... 690
15.5 AUSTRALIAN STATE AND TERRITORY PRIVACY LAWS............................................................................... 691 15.6 SURVEILLANCE ........................................................................................................................................................ 691 15.7 INTERNATIONAL DATA PRIVACY LAW............................................................................................................. 692
15.1 THE MEANING OF PRIVACY Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
[15.10] In Australian Law Reform Commission, For Your Information: Australian Privacy Law and Practice, Report No 108 (2008) it was suggested that privacy can be divided into a number of separate, but related, concepts (at [1.31]): • Information privacy, which involves the establishment of rules governing the collection and handling of personal data such as credit information, and medical and government records. It is also known as “data protection”; • Bodily privacy, which concerns the protection of people’s physical selves against invasive procedures such as genetic tests, drug testing and cavity searches; • Privacy of communications, which covers the security and privacy of mail, telephones, email and other forms of communication; and • Territorial privacy, which concerns the setting of limits on intrusion into the domestic and other environments such as the workplace or public space. This includes searches, video surveillance and ID checks. [15.20] ALRC, Privacy, Report No 22 (1983) regards the chief “dangers to privacy” in Australia as including (at [5]): • Growing official powers: The powers of increasing numbers of public officials to intrude into the lives and property of Australians are growing. • New business practices: New intrusive practices have developed in recent years, such as electronic surveillance, credit reporting and direct marketing. • New information technology: The computerisation of personal information has enormous advantages, but it also presents Australian society with new dangers, now well documented and understood. 672
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Chapter 15 Privacy
IN CONTEXT
Privacy in the information age [15.30] Invasions of privacy are becoming increasingly common with the rapid growth of social media and surveillance and communication technologies. … The proliferation of social media has meant that invasions of privacy through online forums, such as the alarming trend of jilted lovers posting sexually explicit photographs of ex-partners on the internet, has immediate and vast reaching repercussions.
I was unwise enough to be photographed in bed wearing a Chinese dressing-gown and an expression of advanced degeneracy. Noël Coward.
Privacy is also being impacted by other new technologies, such as increasingly affordable surveillance drones which fly overhead and can film people in their backyards and on private property. NSW Legislative Council Standing Committee on Law and Justice, Committee Chair, the Hon Natasha Maclaren-Jones MLC, Media Release (6 July 2015).
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IN CONTEXT
Benefits from invasions of privacy? [15.40] It is easy to forget that society often benefits from invasions of privacy. On a global scale, WikiLeaks has exposed, among other things, the harsh and often unknown realities of war including torture and large-scale civilian deaths. Closer to home, we have seen invasions of privacy leading to the capture and prosecution of criminals. Who can forget the tragic CCTV footage that helped lead to Jill Meagher’s killer being charged and found guilty of her senseless murder? However, rapidly evolving technology, the dominance of social media and unscrupulous behavior by the tabloid media in Britain culminating in the News of the World phone hacking scandal, have affected society’s attitude towards privacy and resulted in renewed discussion in Australia about whether privacy laws should be tightened. C Jones and R Loader, “Privacy in the Digital Age” (2014) 88(12) Law Institute Journal 30.
15.2 AN EVOLVING PRIVACY TORT? The common law [15.50] Anglo- Australian law has not developed a right of privacy in the sense described above. Although an invasion of privacy may in the circumstances constitute a defamation, a trespass, a nuisance, a breach of confidence or a breach of contract, and give rise to a remedy under these specific actions, the common law has not developed any
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Business and the Law A (wo)Man Without Privacy is a (wo)Man Without Dignity: It’s Time for a Tort of Invasion of Privacy. Penelope Watson, [2007] PrecedentAULA 4; (2007) 78 Precedent 4.
general right of privacy (with the exception of the lower court decisions in Queensland (see [15.80]) and Victoria (see [15.90]). In Australia, the opportunity for the High Court in the 1930s to recognise a tort of privacy was not taken. In Victoria Park Racing and Recreation Grounds Co Ltd v Taylor (1937) 58 CLR 479, the defendant had set up an observation platform on land adjoining the plaintiff’s land (on which horse races were conducted) in order to broadcast descriptions of the races. The High Court held by majority that the plaintiff’s action in nuisance should fail. Latham CJ noted (at 495) that: The claim under the head of nuisance has also been supported by an argument that the law recognises a right of privacy which has been infringed by the defendant. However desirable some limitation upon invasions of privacy might be, no authority was cited which shows that any general right of privacy exists.
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In a strong dissenting judgment, Evatt J favoured a more expansive judicial role that would evidence “an appreciation of the function of law under modern conditions” (at 518). This case illustrates the multidimensional nature of a claim to privacy. The plaintiff was not seeking privacy in the sense of preventing intrusion into its private affairs or public disclosure of private information but was seeking to benefit from the publicity value of the spectacle of horse racing. Such a right would be extremely difficult to formulate because the claim to privacy conflicts with a claim to information. The delicate balancing of competing interests in this area may be thought to have been no more challenging than the development of the tort of negligence but the High Court nevertheless implied that if a right of privacy is to be granted it will be a legislative rather than a judicial development. [15.60] Until recently there has been little indication of any change in judicial attitude. In 1993, for example Nicole Kidman and Tom Cruise were unsuccessful in a Federal Court action to prevent New Idea magazine publishing family pictures: Gray J stated that “a right of privacy is not yet recognised by the law in Australia”. The High Court in Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd [2001] HCA 63 opened the possibility of the judicial development of a right to privacy. Lower court decisions in Queensland and Victoria have recognised a right of privacy but there is as yet no definitive superior court decision.
Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd [2001] HCA 63 [15.70] An unidentified trespasser had broken into the respondent’s licensed abattoir and with hidden video
equipment had secretly recorded the slaughter and processing of brushtail possums. The film was supplied to Animal Liberation Ltd who provided it to the ABC, which intended to broadcast it. The abattoir obtained an interlocutory injunction to restrain the use of the video, which the High Court overturned. Gleeson CJ noted that the issue of whether the abattoir could prevent the ABC from using the film as it pleased raised questions of principle “invoking concepts of unconscionability, free speech, rights of property and privacy”. In this case free speech prevailed but the High Court observed, in the words of Callinan J (at [335]), that: having regard to current conditions in this country, and developments of the law in other common law jurisdictions the time is ripe for consideration whether a tort of invasion of privacy should be recognised in this country, or whether the legislatures should be left to determine whether provisions for a remedy for it should be made.
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Chapter 15 Privacy The High Court did not take the opportunity presented by the case to formulate a new tort of invasion of privacy, it not being necessary to decide this issue in the particular circumstances of the case. However, all six justices made it clear that the development of a right to privacy at common law was open to the courts in the future.
Grosse v Purvis [2003] QDC 151 [15.80] An indication of the path superior courts may follow in introducing a common law right to privacy is given by the judgment of Judge Skoien in the District Court of Queensland in Grosse. His Honour said (at [442], [444]) that: It is a bold step to take, as it seems the first step in this country to hold that there can be a civil action for damages on the actionable right of an individual person to privacy. But I see it as a logical and desirable step. In my view there is such an actionable right … In my view the essential elements would be
a) a willed act by the defendant,
b) which intrudes upon the privacy or seclusion of the plaintiff,
c) in a manner which would be considered highly offensive to a reasonable person of ordinary sensibilities,
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d) and which causes the plaintiff detriment in the form of mental psychological or emotional harm or distress or which prevents or hinders the plaintiff from doing an act which she is lawfully entitled to do.
Jane Doe v Australian Broadcasting Corporation [2007] VCC 281 [15.90] The ABC unlawfully revealed the name of a rape victim on air. In awarding the plaintiff $234,000 Judge Felicity Hampel in the Victorian County Court recognised that she was creating a new privacy tort:
The invasion or breach of privacy alleged here is an actionable wrong which gives rise to a right to recover damages according to the ordinary principles governing damages in tort.
Judge Hampel acknowledged that it was not appropriate for her to attempt to formulate an exhaustive definition of privacy which is an imprecise concept: In accepting the invitation, I am doing no more than taking the next, incremental step in the development of the recognition of the right to protection against, or provide remedy for, breach of privacy by seeking to identify the principle applicable to the facts of this case.
[15.100] While subsequent Australian case law has not resolved the status of a tort of privacy (see Chan v Sellwood; Chan v Calvert [2009] NSWSC 1335 and Sands v State of South Australia [2013] SASC 44) there are nevertheless increasingly common judicial statements supportive of the development of a privacy tort within the common law (see Maynes v Casey [2011] NSWCA 156; Saad v Chubb Security Australia Pty Ltd [2012] NSWSC 1183; Gee v Burger [2009] NSWSC 149; Dye v Commonwealth [2010] FCA 720 and Doe v Yahoo!7 Pty Ltd [2013] QDC 181). Privacy Commissioner v Telstra Corporation Ltd [2017] FCAFC 4 (19 January 2017) clarified the definition of “personal information” under the Privacy Act.
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Of international concern in both the political and business spheres are the privacy issues relating to social media, information and communications technology and identity security. At a national level recent examples of data breaches include the Commonwealth Bank where customer backup data –an estimated 20 million customer accounts –was “lost in transit”; HR firm “PageUp” affecting major businesses AMP, Telstra and Coles, as well as at least two universities, Melbourne and Macquarie (as reported in Sydney Morning Herald 9-10 June 2018).
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But of worldwide interest are the issues surrounding Facebook’s treatment of data and, in particular, its sale of information to Cambridge Analytica that might have been used to influence the 2016 US presidential election. In Australia the OAIC has opened an investigation into Facebook: Today I have opened a formal investigation into Facebook, following confirmation from Facebook that the information of over 300,000 Australian users may have been acquired and used without authorisation. The investigation will consider whether Facebook has breached the Privacy Act 1988 (Privacy Act). Given the global nature of this matter, the OAIC will confer with regulatory authorities internationally. All organisations that are covered by the Privacy Act have obligations in relation to the personal information that they hold. This includes taking reasonable steps to ensure that personal information is held securely, and ensuring that customers are adequately notified about the collection and handling of their personal information. This is a timely reminder to all organisations of the value of good privacy practice to Australians. Organisations should regularly and proactively assess their information- handling practices to ensure that they are both compliant with privacy laws and in keeping with community expectations. [If anyone has concerns about how their personal information has been collected or managed they can, in the first instance, contact Facebook directly and if not satisfied with their response they can contact the OAIC at www.oaic.gov.au or on 1300 363 992.] Statement from the now Australian Information Commissioner and Privacy Commissioner Ms Angelene Falk, 5 April 2018.
IN CONTEXT
Redressing privacy breaches through the breach of confidence action A celebrity is a person who works hard all his life to become well known, and then wears dark glasses to avoid being recognized. Fred Allen.
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[15.110] In the case of Wilson v Ferguson [2015] WASC 15, compensation of $48,404 was awarded to the plaintiff for breach of confidence. Mitchell J held at [1]-[2]: This case involves a claim by the plaintiff against the defendant alleging breach of confidence. The issue raised is how an Australian court exercising equitable jurisdiction should respond to the publication by a jilted exlover, to a broad audience via the internet, of explicit images of a former partner which had been confidentially shared between the sexual partners during their relationship. In this case I am satisfied that such a publication occurred in breach of an equitable obligation of confidence owed by the defendant to the plaintiff. The appropriate
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Chapter 15 Privacy
relief for the breach of that obligation in the present circumstances is the grant of an injunction prohibiting further publication of the images and an award of equitable compensation. The equitable compensation should include an award to compensate the plaintiff, so far as money can, for the humiliation, anxiety and distress which has resulted from the defendant’s publication of the images, in breach of the obligation of confidence he owed to her.
Subsequently, in another state the Crimes Amendment (Intimate Images) Act 2017 (NSW) amended the Crimes Act 1900 (NSW) to make it an offence to record or distribute intimate images without consent.
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15.3 RECOMMENDATIONS FOR A STATUTORY PRIVACY ACTION [15.120] The failure of the common law to develop a tort of privacy will be of academic interest only if the government adopts the recommendations of the Australian Law Reform Commission (ALRC) to legislate a statutory cause of action. The ALRC 2008 Report recommended that federal law should provide for a private cause of action where an individual has suffered a serious invasion of privacy in circumstances in which the person had a reasonable expectation of privacy. Courts should be empowered to tailor appropriate remedies, such as an order for damage, an injunction or an apology. The ALRC’s recommendation sets a high bar for plaintiffs, having due regard to the importance of freedom of expression and other rights and interests. The ALRC 2008 Report recommended that federal legislation create a statutory cause of action for a serious invasion of privacy, including in circumstances in which: • there has been an interference with an individual’s home or family life; • an individual has been subjected to unauthorised surveillance; • an individual’s correspondence or private communication has been interfered with; or • sensitive facts about an individual’s private life have been disclosed. The cause of action should apply only where the individual had a reasonable expectation of privacy; and the act or conduct complained of is highly offensive to a reasonable person of ordinary sensibilities. In addition, the court would be required to consider whether the public interest in maintaining the claimant’s privacy outweighs other matters of public interest (including the interest in informing the public about matters of public concern and the interest in allowing freedom of expression). Courts should be empowered to tailor appropriate remedies, such as orders for damages, injunctions or apologies. [15.130] In 2013, the ALRC was given narrower terms of reference for an inquiry into Serious Invasions of Privacy in the Digital Era. In its 2013 issues paper (IP 43) the ALRC stated that as submissions to previous inquiries had advanced a number of reasons why a statutory cause of action was favoured or opposed, it was not useful to reopen the issue. The ALRC saw its core task as one of designing a tort to deal with serious invasions of privacy in the digital era.
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IN CONTEXT
The ALRC’s proposed statutory privacy action You have dished me up, like a savoury omelette, to gratify the appetite of the reading rabble for gossip. Thomas Love Peacock.
[15.140] In its 2014 Report (ALRC, Serious Invasions of Privacy in the Digital Era, Report No 123), the ALRC provided the detailed legal design of a statutory civil cause of action for serious invasion of privacy to be located in a new Commonwealth Act in addition to making other recommendations that would strengthen people’s privacy in the digital era. In relation to the proposed new tort the ALRC recommended that: • Two types of invasion: the plaintiff must prove that her or his privacy was invaded by an intrusion upon seclusion, such as by physically intruding into the plaintiff’s private space or by watching, listening to or recording the plaintiff’s private activities or private affairs or by misuse of private information (includes untrue information, but only if the information would be private if it were true), such as by collecting or disclosing private information about the plaintiff. • Reasonable expectation of privacy: actionable only where a person in the position of the plaintiff would have had a reasonable expectation of privacy, in all of the circumstances. The court may consider, among other things: (a) the nature of the private information, including whether it relates to intimate or family matters, health or medical matters, or financial matters; (b) the means used to obtain the private information or to intrude upon seclusion, including the use of any device or technology;
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(c) the place where the intrusion occurred, such as in the plaintiff’s home; (d) the purpose of the misuse, disclosure or intrusion; (e) how the private information was held or communicated, such as in private correspondence or a personal diary; (f) whether and to what extent the private information was already in the public domain; (g) the relevant attributes of the plaintiff, including the plaintiff’s age, occupation and cultural background; and (h) the conduct of the plaintiff, including whether the plaintiff invited publicity or manifested a desire for privacy. • Fault: confined to intentional or reckless invasions of privacy. It should not extend to negligent invasions of privacy, and should not attract strict liability. • Seriousness and proof of damage: a plaintiff would have an action under the new tort only where the invasion of privacy was “serious”, having regard, among other things, to the degree of any offence, distress or harm to dignity that the invasion of privacy was likely to cause to a person of ordinary sensibilities in the position of the plaintiff; and whether the defendant was motivated by malice or knew the invasion of privacy was likely to offend, distress or harm the dignity of the plaintiff. • Balancing privacy with other interests: for the plaintiff to have a cause of action, the court must be satisfied that the public interest in privacy outweighs any countervailing public interest. A separate public interest defence would therefore be unnecessary. 678
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Chapter 15 Privacy
The Act should include the following list of countervailing public interest matters which a court may consider, along with any other relevant public interest matter: 1. freedom of expression, including political communication and artistic expression; 2. freedom of the media, particularly to responsibly investigate and report matters of public concern and importance; 3. the proper administration of government; 4. open justice;
5. public health and safety;
6. national security; and 7. the prevention and detection of crime and fraud. • Forums, limitations and other matters: Federal, State and Territory courts should have jurisdiction to hear an action for serious invasion of privacy under the Act. Consideration should also be given to giving jurisdiction to appropriate State and Territory tribunals. The new tort should only be actionable by natural living people and a person should not be able to bring an action under the new tort after the earlier of one year from the date on which the plaintiff became aware of the invasion of privacy; or three years from the date on which the invasion of privacy occurred.
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• Defences and exemptions include that the defendant’s conduct was required or authorised by law; the conduct was incidental to the exercise of a lawful right of defence of persons or property; necessity; consent; absolute privilege and for publication of public documents; and the fair report of proceedings of public concern. The Act should also provide for an exemption for children and young persons. • Remedies and costs: courts may award damages, including damages for emotional distress and may award exemplary damages in exceptional circumstances. • Surveillance devices: The Commonwealth Government should enact technology neutral surveillance legislation to replace existing State and Territory surveillance device laws. Alternative causes of action • Breach of confidence actions for misuse of private information: If a statutory cause of action for serious invasion of privacy is not enacted, appropriate federal, State, and Territory legislation should be amended to provide that, in an action for breach of confidence that concerns a serious invasion of privacy by the misuse, publication or disclosure of private information, the court may award compensation for the plaintiff’s emotional distress. • Harassment: If a statutory cause of action for serious invasion of privacy is not enacted, State and Territory governments should enact uniform legislation creating a tort of harassment. • Extend the Privacy Commissioner’s powers so that the Commissioner may investigate complaints about serious invasions of privacy and make appropriate declarations that would require referral to a court for enforcement.
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Business and the Law The right to freedom of expression is the bedrock of our liberty. Without it, none of our other cherished rights could have been talked or written into existence. But no freedom is absolute and all rights carry responsibilities. Freedom of expression is not the freedom to bully, to intimidate, to intrude where there is no public interest, or to corrupt public bodies with secret bungs. Ian McEwan.
[15.150] The ALRC Commissioner for its 2014 Inquiry, Professor Barbara McDonald, has stated (ALRC Media Release (3 September 2014)) that: The ALRC has designed a remedy for invasions of privacy that are serious, committed intentionally or recklessly and that cannot be justified as being in the public interest –for example, posting sexually explicit photos of someone on the internet without their permission or making public someone’s medical records. The recommendations in the Report also recognise that while privacy is a fundamental right that is worthy of legal protection, this right must also be balanced with other rights, such as the right to freedom of expression and the freedom of the media to investigate and report on matters of public importance. The recommendations, taken together, would better protect people’s privacy in the digital environment, while protecting and fostering freedom of speech and other public interests. I consider that this Report will provide a significant contribution to the understanding of the law in relation to privacy and its sophisticated analysis will play a distinct role in the development of the common law and statutory protections of privacy.
The ALRC’s recommendations for a privacy action have not been welcomed by media organisations who argue that it would infringe and hinder investigative journalism and potentially freedom of expression.
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Invasion of privacy has also been an ongoing law reform issue for the States. In 2015 the NSW Legislative Council’s Standing Committee on Law and Justice also announced an Inquiry into Remedies for the Serious Invasion of Privacy in New South Wales.
Right to Know: Privacy Editorial, Sydney Morning Herald (13 August 2008).
[15.160] Most people take pride in their house.
But since Google posted pictures of everyone’s house on a website for anyone to call up, there’s been unease as well. Some pictures show whose car is parked outside, who is working in the garden when they are on a sickie, and so on. At least Google hasn’t got video monitors permanently on as police now have in city centres. But something like that may come. The [then] latest Law Reform Commission deliberation on privacy is therefore well-timed for an era when information science can collect, store and disseminate a vast amount of data that previously would have overwhelmed any attempt at a general surveillance system. The commission’s proposals for more comprehensive rules for personal data exchanges are entirely welcome. Its massive report is a valuable exploration of this brave new world and its implications for individual privacy.
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But in venturing into the perceived invasion of personal privacy, and recommending a legal remedy, the commission is on dangerous ground. Its report says it is not motivated so much by the chase of celebrities by the popular media, in which there is hypocrisy on all sides –the target, whose publicity agent may have advised the best place for a stake-out, the paparazzi professing to be agents of public interest, and the reader avidly soaking up the details. The commission sympathises more with individuals worried by images from secret surveillance or personal records broadcast on the internet out of malice. As the commission points out, case law against invasion of privacy is creeping into our jurisdiction anyway by judicial extension of the law of tort. By contrast, the United States and Canada have legislated to this effect. Britain has extended breach of confidence law to cover misuse of private information. Of course there are criminal
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Chapter 15 Privacy
penalties for those who tap telecommunications, open mail, or receive stolen medical records. But the Australian commission wants to give direct redress to those hurt by the disclosure. It says it wants to “set the bar high” and limit legal recourse to “egregious” breaches of privacy. Although well- intentioned, this is fraught with risk to freedom of
inquiry and expression –already seriously limited by defamation law. However framed to protect ordinary people, it will end up as another legal weapon in the hands of the rich to keep legitimate investigators –including journalists and all kinds of civil society activists –from looking too closely at matters of genuine public interest.
15.4 THE FEDERAL PRIVACY LAWS The Privacy Act 1988 (Cth)
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[15.170] The history of specific legal measures to protect privacy in Australia reaches back into the early 1970s. The first regulatory agency to have responsibility for privacy issues, the New South Wales Privacy Committee, was established in 1974. In 1976 the ALRC began working on a major national report on privacy, which was released in 1983 (ALRC, Privacy, Report No 22 (1983)).
You can resist an invading army; you cannot resist an idea whose time has come. Victor Hugo.
The first federal privacy law was the Privacy Act 1988 (Cth). It was initially to be introduced alongside the proposed Australia Card, the national identity card that was abandoned after an extraordinary negative public reaction. The Privacy Act 1988 (Cth) originally applied only to public sector enterprises but was extended in 2001 to the private sector. Since Australia is a party to the International Covenant on Civil and Political Rights (1966), the English text of which is set out in Sch 2 to the Australian Human Rights Commission Act 1986 (Cth), it was obligated to adopt legislation to give effect to the right of persons not to be subjected to arbitrary or unlawful interference with their privacy, family, home or correspondence – the Privacy Act 1988 (Cth) was intended to implement this obligation. Also, Australia is a member of the Organisation for Economic Co-operation and Development (OECD), and the Privacy Act 1988 (Cth) was based around a set of principles, formulated from the OECD, Guidelines on the Protection of Privacy and Transborder Flows of Personal Data (1980), covering issues such as the collection, use, security, disclosure, retention and destruction of personal information.
Objects of the Act [15.180] The objects of the Act, as expressed in s 2A, are: (a) to promote the protection of the privacy of individuals; and (b) to recognise that the protection of the privacy of individuals is balanced with the interests of entities in carrying out their functions or activities; and (c) to provide the basis for nationally consistent regulation of privacy and the handling of personal information; and
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Business and the Law (d) to promote responsible and transparent handling of personal information by entities; and (e) to facilitate an efficient credit reporting system while ensuring that the privacy of individuals is respected; and (f)
to facilitate the free flow of information across national borders while ensuring that the privacy of individuals is respected; and
(g) to provide a means for individuals to complain about an alleged interference with their privacy; and (h) to implement Australia’s international obligation in relation to privacy.
Privacy regime reforms
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I hate to spread rumours, but what else can one do with them? Amanda Lear.
[15.190] Significant changes to the privacy regime were recommended by the 2,700 page ALRC Report, For Your Information, ALRC 2008. On 12 March 2014 the Privacy Amendment (Enhancing Privacy Protection) Act 2012 (Cth) came into effect. It implemented many significant reforms that had been recommended by the ALRC, including the unification of the public sector Information Privacy Principles (IPPs) and the private sector National Privacy Principles (NPPs) into a single set of privacy principles, the Australian Privacy Principles (APPs), that regulate the handling of personal information by Australian government agencies and most private sector organisations. The APPs create the standards, rights and obligations for collecting, handling, holding, accessing, using, disclosing and correcting personal information. The amended Privacy Act also introduces a new Part IIIA which allows for more comprehensive credit reporting for consumer credit. It improves privacy protection and creates new provisions on privacy codes and the Privacy (Credit Reporting) Code 2014. The Australian Information Commissioner has a stronger role and increased powers to resolve complaints, use external dispute resolution services, conduct investigations and promote compliance. On 13 October 2015 a data retention scheme commenced for providers of telecommunications services in Australia, who are required to comply with the data retention provisions in Pt 5-1A of the Telecommunications (Interception and Access) Act 1979 (Cth) (TIA Act). They will also have obligations under the Privacy Act.
The Australian Privacy Principles Law is not an exact science. The object of law reform is continuous adjustment rather than the achievement of perfection. Lord Hailsham.
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[15.200] From 12 March 2014 the Privacy Act has applied a unified set of 13 Australian Privacy Principles (APPs) to replace the previous 11 IPPs that applied to most Commonwealth and State agencies and the 10 NPPs that applied to a private sector privacy regime. The APPs are set out in Sch 1 to the Privacy Act and are supplemented by Guidelines issued by the Australian Information Commissioner. The APPs set down the principles which organisations covered by the legislation are obliged to implement, in relation to handling personal information. In general terms, an act or practice will be an interference with the privacy of an individual if it breaches an APP. However, they are not prescriptive, so each APP entity must apply these principles in accordance with their organisation.
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Chapter 15 Privacy
IN CONTEXT
Australian Privacy Principles [15.210] APP 1 –Open and transparent management of personal information Ensures that APP entities manage personal information in an open and transparent way. This includes having a clearly expressed and up to date APP privacy policy that is freely available. APP 2 –Anonymity and pseudonymity Requires APP entities to give individuals the option of not identifying themselves, or of using a pseudonym. Limited exceptions apply. APP 3 –Collection of solicited personal information Outlines when an APP entity can collect personal information that is solicited. It applies higher standards to the collection of “sensitive” information that requires the individual’s consent. APP 4 –Dealing with unsolicited personal information Outlines how APP entities must deal with unsolicited personal information.
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APP 5 –Notification of the collection of personal information Outlines when and in what circumstances an APP entity that collects personal information must notify an individual of certain matters. APP 6 –Use or disclosure of personal information Outlines the circumstances in which an APP entity may use or disclose personal information that it holds that is for the purpose for which it was disclosed. APP 7 –Direct marketing An organisation may only use or disclose personal information for direct marketing purposes if certain conditions are met. APP 8 –Cross-border disclosure of personal information Outlines the steps an APP entity must take to protect personal information before it is disclosed overseas. APP 9 –Adoption, use or disclosure of government-related identifiers Outlines the limited circumstances when an organisation may adopt a government-related identifier of an individual as its own identifier, or use or disclose a government-related identifier of an individual. APP 10 –Quality of personal information An APP entity must take reasonable steps to ensure the personal information it collects is accurate, up to date and complete. An entity must also take reasonable steps to ensure the personal information it uses or discloses is accurate, up to date, complete and relevant, having regard to the purpose of the use or disclosure.
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APP 11 –Security of personal information An APP entity must take reasonable steps to protect personal information it holds from misuse, interference and loss, and from unauthorised access, modification or disclosure. An entity has obligations to destroy or de-identify personal information in certain circumstances. APP 12 –Access to personal information Outlines an APP entity’s obligations when an individual requests to be given access to personal information held about them by the entity. This includes a requirement to provide access unless a specific exception applies. APP 13 –Correction of personal information Outlines an APP entity’s obligations in relation to correcting the personal information it holds about individuals. Examples of data breaches that could be included: Commonwealth Bank where data was “lost in transit”; and also the major data breach at HR firm “PageUp” that affected major businesses AMP, Telstra and Coles, as well as at least 2 universities (Melbourne and Macquarie (as reported in SMH June 9-10, 2018). For more information about the APPs go to https://www.oaic.gov.au/resources/agencies- and-organisations/app-guidelines/APP_guidelines_complete_version_2_March_2018.pdf.
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Relying on the government to protect your privacy is like asking a peeping tom to install your window blinds. John Perry Barlow.
IN CONTEXT
The Information Lifecycle [15.220]
OAIC, Applying Privacy Law http://www.oaic.gov.au/privacy/privacy-resources/privacy-guides/
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Chapter 15 Privacy
Application of the Privacy Act 1988 (Cth) [15.230] The Privacy Act originally applied only to public sector enterprises but was extended in 2001 to the private sector. The Act now applies to most Australian Government agencies, all private sector and not-for-profit organisations with an annual turnover of more than $3 million, all private health service providers and some small businesses (collectively called “APP entities”).
Key updates [15.240] Since the Privacy Amendment (Notifiable Data Breaches) Act 2017(Cth) commenced on 22 February 2018, certain organisations and business that are subject to the Privacy Act, including Australian Government agencies, businesses and not-for-profit organisations with an annual turnover of $3 million or more, credit reporting bodies, health service providers and Tax File Number recipients are required to investigate and notify the OAIC and affected individuals of any “eligible data breaches”. Although “eligible data breach” is not defined in the Act, the OAIC provides the following guidance, “A data breach is eligible if it is likely to result in serious harm to any of the individuals to whom the information relates.
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An eligible data breach arises when the following three criteria are satisfied: 1.
there is unauthorised access to or unauthorised disclosure of personal information, or a loss of personal information, that an entity holds (see, What is a “data breach”?)
2.
this is likely to result in serious harm to one or more individuals (see, Is serious harm likely?), and
3.
the entity has not been able to prevent the likely risk of serious harm with remedial action (see, Preventing serious harm with remedial action).”
https://www.oaic.gov.au/privacy-law/privacy-act/notifiable-data-breaches-scheme/ identifying-eligible-data-breaches. [An example provided by the Office of the Australian Information Commissioner (OIAC) would include the information disclosed in the Ashley Madison data breach in 2015. See https://www.oaic.gov.au/privacy-law/commissioner-initiated-investigation-reports/ ashley-madison.] [15.250] The Australian Government Agencies Privacy Code that commenced on 1 July 2018 requires all Australian government agencies (except for Ministers) and healthcare service providers to implement the Code “that sets out specific requirements and key.
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Exemptions Small business [15.260] Small business operators (those with a turnover of less than $3 million a year) are exempt from the operation of the Act. Small businesses do not need to comply with the APPs unless they are handling personal information and/or are: • a private sector health service provider; • trading in personal information (eg buying or selling a mailing list); • related to a business that is not a small business; • credit reporting bodies; • contracted serviced providers for a Commonwealth contract.
IN CONTEXT
Removing the small business exemption [15.270] The ALRC 2008 Report recommended that the small business exception be
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removed; that is that small businesses with an annual turnover of less than $3 million which are currently exempted from the Privacy Act (except in limited circumstances) be made subject to the privacy laws. In Serious Invasions of Privacy in the Digital Era, Report No 123 (2014) the ALRC considered “that the small business exemption should be given further consideration, particularly given the growth of digital communications and the digital economy since 2008. The ALRC acknowledges that simply removing the small business exemption would increase compliance costs for small businesses. However, options other than simply removing the exemption are available”: at [16.55].
Related bodies corporate [15.280] There is a partial exemption for the collection or disclosure of personal information by a body corporate from or to a related bodies corporate: related companies may share non-sensitive personal information but they must otherwise comply with all the other privacy principles in the handling of that information.
Individuals in non-business capacity [15.290] The Act and the APPs do not apply for the purposes of, or in connection with, an individual’s personal, family or household affairs.
I’m all in favour of free expression provided it’s kept rigidly under control. Alan Bennett.
Media [15.300] The Act provides an exemption for acts or practices engaged in by a media organisation in the course of journalism. 686
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Chapter 15 Privacy
State Government bodies [15.310] Entities which are state or territory authorities or prescribed instrumentalities are not “organisations” and are exempt from the coverage of the APPs (s 6C) but not states have privacy laws covering state and local government bodies. In Waters v Transport for NSW [2018] NSWCATAD 40 the NSW Civil and Administrative Tribunal decided that the state government agency had contravened the state’s Privacy and Protection Act 1998 (NSW), Information Protection Principle 1 in collecting travel data (Opal Card) that was linked to personal data and so prevented anonymous travel.
Political acts and practices [15.330] The Act exempts registered political parties from the operation of the legislation altogether by excluding them from the definition of “organisation”. It also exempts members of parliament, parliamentary volunteers and local government councillors if the act is for any purpose in connection with an election, a referendum or the participation by the political representative in another aspect of the political process.
Employment
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[15.340] Acts or practices in relation to employee records of an individual are exempt if the act or practice directly relates to a current or former employment relationship between the employer and the individual.
Information subject to the Privacy Act [15.350] The Privacy Act covers personal information and sensitive personal information. Personal information is information or an opinion that can identify a person. This includes information on a person’s name, signature, date of birth, gender, residential address, telephone number, medical records, bank account details and commentary or opinion about a person. Sensitive information is information about an individual’s health (including predictive genetic information) racial or ethnic origin, political opinions, membership of a political association, membership of a professional or trade association, membership of a trade union, religious beliefs or affiliations, philosophical beliefs, sexual orientation or practices, criminal record, or biometric information that is to be used for certain purposes and biometric templates. Other Acts may provide that an act or practice is an interference with the privacy of an individual (s 13). For example, see the Healthcare Identifiers Act 2010 (Cth); the Anti- Money Laundering and Counter-Terrorism Financing Act 2006 (Cth); and the Personal Property Securities Act 2009 (Cth). Part IIIA of the Privacy Act that regulates consumer credit reporting in Australia is supported by the “Privacy Regulation 2013” and the “Privacy (Credit Reporting) Code 2014”.
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Compliance [15.360] APP entities, including agencies and organisations, can comply by developing and having approved, and complying with, their own privacy code which meets the standards of the Act. Organisations that do not have their own code must otherwise comply with the APPs set out in the Act. The Association of Market and Social Research Organisations’ Privacy (Market and Social Research) Code 2014 was the first to be registered by the office of the Australian Privacy Commissioner. It sets out how that industry will apply APPs. AMSRO members are required to comply with the Code in relation to the collection, retention, use, disclosure and destruction of personal information in market and social research. [15.370] As stated in [15.250], from 2018 the Australian Government Agencies Privacy Code now requires agencies to: • have a privacy management plan; • appoint a Privacy Officer, or Privacy Officers, and ensure that particular Privacy Officer functions are undertaken; • appoint a senior official as a Privacy Champion to provide cultural leadership and promote the value of personal information, and ensure that the Privacy Champion functions are undertaken;
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• undertake a written Privacy Impact Assessment (PIA) for all “high privacy risk” projects or initiatives that involve new or changed ways of handling personal information; • keep a register of all PIAs conducted and publish this register, or a version of the register, on their websites; • take steps to enhance internal privacy capability, including by providing appropriate privacy education or training in staff induction programs, and annually to all staff who have access to personal information. Agencies will still need to take other steps under APP 1.2 to ensure compliance with all the APPs. The Code is flexible and scalable, taking into account an agency’s size, and the sensitivity and amount of personal information it handles.
Enforcement [15.380] The Office of the Australian Information Commissioner (OAIC) can take regulatory and enforcement action to encourage and ensure compliance with privacy obligations. We must protect our Citizens’ privacy –the bulwark of personal liberty, the safeguard of individual creativity. Bill Clinton.
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The OAIC’s Privacy Regulatory Action Policy (June 2015) explains its approach. One of the OAIC’s key roles is to investigate complaints made by individuals, about alleged interferences with privacy. Under s 35A of the Privacy Act, the Commissioner may recognise an external dispute resolution (EDR) scheme to handle particular privacy-related complaints. Generally, the OAIC will seek to work in partnership with recognised EDR schemes, with a view to achieving consistent and efficient regulatory outcomes. The OAIC will seek to implement open communication practices to ensure information and experience is shared
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Chapter 15 Privacy
between the OAIC and the schemes, and that clear procedures are established to enable information about complaints to be transmitted.
IN CONTEXT
Privacy breach investigation: Department of Immigration and Border Protection [15.390] On 21 February 2014, the Australian Information Commissioner opened an own
motion investigation into the Department of Immigration and Border Protection (DIBP) following a media report that a database containing the personal information of approximately 10,000 asylum seekers was available on DIBP’s website. DIBP confirmed this was the case. The investigation … focused on whether DIBP had reasonable security safeguards in place to protect the asylum seekers’ information, and whether DIBP had disclosed the information in accordance with the Privacy Act 1988 (Cth).
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After considering the facts of the case, submissions from DIBP, and the relevant provisions of the Privacy Act, the Commissioner came to the view that DIBP had breached the Privacy Act by failing to put in place reasonable security safeguards to protect the personal information it held against loss, unauthorised access, use, modification or disclosure and against other misuse. The Commissioner also found that DIBP had unlawfully disclosed personal information. http://www.oaic.gov.au/privacy/applying-privacy-law CII reports Department of Immigration and Border Protection: Own motion investigation report
Complaint handling [15.400] An individual or representative group of individuals (representative complaint) may complain to the Commissioner about an act or practice that may be an interference with the privacy of the individual or those individuals. Whether an APP entity has committed an act that breaches an individual’s privacy will be determined by reference to the Australian Privacy Principles: an act or practice breaches an APP if it is contrary to, or inconsistent with, that principle. Where an entity is bound by a registered APP code, an act or practice by that entity will breach a registered APP code if it is contrary to, or inconsistent with, the code. Generally the OAIC must attempt to conciliate a complaint. According to the OAIC’s Privacy Regulatory Action Policy there are three possible steps in the complaint process: 1.
An individual should make a complaint in writing to a respondent entity and allow the entity a reasonable time to respond.
2.
An individual who is not satisfied with the response or outcome from the entity may complain to a recognised EDR scheme of which the entity is a member (if any).
3.
An individual who is not satisfied with the outcome of the EDR process may complain to the OAIC. The OAIC will consider whether to accept the complaint or to decline to investigate under s 41 of the Privacy Act.
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You already have zero privacy. Get over it. Scott G McNealy (CEO of Sun Microsystems Inc).
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[15.410] The Commissioner’s enforcement powers range from less serious to more serious regulatory action, and include powers to: • accept an enforceable undertaking (s 33E); • bring proceedings to enforce an enforceable undertaking (s 33F); • make a determination (s 52); • bring proceedings to enforce a determination (ss 55A and 62); • report to the Minister in certain circumstances following a Commissioner initiated investigation, monitoring activity or assessment (ss 30 and 32); • seek an injunction including before, during or after an investigation or the exercise of another regulatory power (s 98); and • apply to the court for a civil penalty order in certain cases of serious or repeated infringements (s 80W).
“EZ” and “EY” [2015] AICmr 23 [15.420] Mr Z lodged a complaint with the Office of the Australian Information Commissioner that Dr Y had
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interfered with his privacy by disclosing personal information to a third party. The background as set out in the determination was as follows: Dr Y is a medical practitioner who works within a medical centre. Mr Z was a patient of Dr Y. During November 2006, Mr Z contacted his local police station to report harassment and damage to his property as part of an ongoing neighbourhood dispute. Sergeant X attended Mr Z’s address along with another police officer to investigate Mr Z’s complaints. Sergeant X reported that Mr Z explained his concerns to him in a “highly excited and at times paranoid fashion”. Sergeant X reported that Mr Z admitted to suffering “Post Traumatic Stress Disorder, Anxiety Disorder, [and] severe back and knee pain”. Sergeant X later called Dr Y, as Mr Z’s treating doctor. Dr Y was unavailable and the clinic transferred Sergeant X’s call to another doctor (Dr A) within the clinic. Dr A noted in Mr Z’s medical records that Sergeant X “rang … concerned [Mr Z] is psychotic and acting strangely”. Several days later, Sergeant X called Dr Y. and asked her whether, in her opinion, Mr Z “was psychotic”. Dr Y advised Sergeant X that “it was possible but further assessment was needed”.
Dr Y’s disclosure was held to contravene privacy principles (in this case the National Privacy Principles, which have since been replaced by the Australian Privacy Principles). The complaint was substantiated and an order made for Dr Y to personally apologies in writing to Mr Z, and to pay Mr Z $6,500 for the loss caused by the interference with Mr Z’s privacy.
Other Federal Privacy Laws [15.430] Since [the introduction of the Privacy Act in] 1988, a range of other legislation has also been enacted to protect various aspects of privacy within the jurisdiction [, including]: • The Telecommunications Act 1997 (Cth) contains a number of provisions in Part 13 that deal with personal information held by carriers, carriage service providers, ISPs and others who must protect the confidentiality of information, some of which comes within the scope of the Privacy Act, such as sensitive information. 690
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Chapter 15 Privacy
• The Telecommunications (Interception and Access) Act 1979 (Cth). • The OAIC and the Australian Media and Communications Authority (ACMA) each have a role in registering and/ or regulating privacy matters relating to telecommunications. • The Spam Act 2000 (Cth) that “prohibits the sending of unsolicited commercial electronic messages –known as spam –with an Australian link”. • Do Not Call Register Act 2006 (Cth). The Do Not Call Register which “is a secure database where individuals and organisations can register, check or remove their Australian telephone, mobile and fax numbers to opt out of receiving most unsolicited telemarketing calls and faxes”. Both are regulated by ACMA. • Surveillance legislation is at [15.460].
15.5 AUSTRALIAN STATE AND TERRITORY PRIVACY LAWS [15.440] Currently, all States and Territories have developed privacy regimes for their public sectors. For example, The Territory Privacy Principles in the Information Privacy Act 2014 (ACT) apply to ACT public sector agencies. The ALRC 2008 Report recommended a unified national approach (at p 112):
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Commonwealth, State and Territory governments should establish an inter-governmental cooperative scheme, under which the States and Territories will agree to enact legislation to regulate the handling of personal information in each State’s and Territory’s public sector by adopting the key elements of the Privacy Act.
15.6 SURVEILLANCE [15.450] In 2008 the ALRC also recommended that a new Commonwealth surveillance law be enacted to replace existing State and Territory laws, to ensure consistency of surveillance laws throughout Australia that culminated in its Serious Invasions of Privacy in the Digital Era, Report No 123 (2014).
IN CONTEXT
Surveillance devices [15.460] The 2014 ALRC recommendations on surveillance devices are: Recommendation 14-1 The Commonwealth Government should enact surveillance legislation to replace existing State and Territory surveillance device laws. Recommendation 14-2 Surveillance legislation should be technology neutral. It should regulate surveillance through the use of listening devices, optical devices, tracking devices, data surveillance devices and other devices and systems.
Law-abiding citizens value privacy. Terrorists require invisibility. The two are not the same, and they should not be confused. Richard Perle.
Recommendation 14-3 The Commonwealth Government should consider consolidating telecommunications surveillance laws with the new Commonwealth surveillance legislation.
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Recommendation 14-4 Surveillance legislation should not contain a defence or exception for participant monitoring. Recommendation 14-5 Surveillance legislation should provide a defence for responsible journalism relating to matters of public concern and importance. Recommendation 14-6 Workplace surveillance laws should be made uniform throughout Australia. Recommendation 14-7 Surveillance legislation should provide that a court may order remedial relief, including compensation, for a person subjected to unlawful surveillance. Recommendation 14-8 State and Territory governments should give jurisdiction to appropriate courts and tribunals to hear complaints about the installation and use of surveillance devices that can monitor neighbours on residential property. Australian Law Reform Commission, Serious Invasions of Privacy in the Digital Era, Report No 123 (2014)
15.7 INTERNATIONAL DATA PRIVACY LAW
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[15.470] From 25 May 2018 international and Australian websites have updated their privacy policies to comply with changes EU data privacy laws, the General Data Protection Regulation (GDPR). In relation to cross-border data flows, Australian organisations that have an online presence in the EU must comply with the GDPR. Effectively, this Regulation complements Australian requirements under APP8 that outlines the steps an APP entity must take to protect personal information before it is disclosed overseas. However, Australian organisations should note that the GDPR is more broadly applied and impacts all Australians organisations not only those that must comply with the Privacy Act. From a consumer’s perspective, these regulations give EU residents more control over their personal information with new tools; and it requires organisations to more clearly explain how they are going to use personal information from the outset.
QUESTIONS
692
1.
“Privacy is an overrated and unrealistic ideal today. Anyone who expects privacy in our digital, technological, interconnected age must be from another planet.”
Discuss this proposition.
2.
Consider and assess the arguments for and against the recommendation of the ALRC that the Privacy Act 1988 (Cth) should be amended to introduce a new tort to redress serious invasions of privacy.
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Chapter 15 Privacy
3.
If a new statutory tort of serious invasion of privacy is introduced should it include a public interest defence for the media?
4.
How can the law balance a right of publicity for celebrities entitling them to profit from their notoriety with a right to privacy?
WEB REFERENCES The Office of the Federal Privacy Commission https://www.oaic.gov.au Australian Law Reform Commission http://www.alrc.gov.au
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693
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16
16
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International Business Simone Lockhart THE BUSINESS CONTEXT The rapid growth of international trade poses challenges for the regulation of international business. This chapter examines strategies for international business operations and the procedures devised by the world’s commercial community for the regulation of international trade.
16.1 GLOBALISATION AND INTERNATIONAL TRADE ........................................................................................ 696 16.2 THE WORLD TRADE ORGANISATION ............................................................................................................. 698 [16.30] Introduction .................................................................................................................................................. 698 [16.35]
The WTO’s multilateral trading agreements ......................................................................................... 699
[16.50]
Amending the WTO’s Agreements ......................................................................................................... 700
[16.60]
The WTO’s dispute settlement system ................................................................................................... 701
[16.70]
The WTO’s Functions and structure ........................................................................................................ 702
16.3 REGIONAL TRADE AGREEMENTS .................................................................................................................... 704 [16.100] Introduction .................................................................................................................................................. 704 [16.110]
Australia’s current FTAs ............................................................................................................................ 704
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16.4 STRATEGIES FOR INTERNATIONAL BUSINESS OPERATIONS ................................................................ 708 [16.150] Introduction .................................................................................................................................................. 708 [16.160]
Direct sales/exporting ................................................................................................................................ 709
[16.170]
Intermediary arrangements: Distributors and agents ......................................................................... 709
[16.180] Licensing ....................................................................................................................................................... 710 [16.190] Franchising ................................................................................................................................................... 710 [16.200]
Branch offices, subsidiaries and foreign acquisitions .......................................................................... 711
[16.210]
Joint ventures ............................................................................................................................................... 711
[16.220]
Strategic alliances ........................................................................................................................................ 712
16.5 INTERNATIONAL SALE OF GOODS .................................................................................................................. 712 [16.230] Introduction .................................................................................................................................................. 712 [16.240]
The United Nations Convention on Contracts for the International Sale of Goods ...................... 713
16.6 INTERNATIONAL TRADE FINANCING ............................................................................................................. 717 [16.280]
Payment in advance .................................................................................................................................... 718
[16.290]
Documentary bills of exchange ............................................................................................................... 718
[16.300]
Documentary letters of credit ................................................................................................................... 719
16.7 INTERNATIONAL IP PROTECTION ................................................................................................................... 719
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16.8 INTERNATIONAL COMMERCIAL DISPUTE RESOLUTION ....................................................................... 722
16.1 GLOBALISATION AND INTERNATIONAL TRADE Globalisation is a process, or a series of processes, which create and consolidate a unified world economy, a single ecological system and a complex and dynamic network of communications that covers the world. The world, thus, is interdependent and becoming ever more de-territorialised. Geographical, social and political boundaries definitely do not disappear but they are eroding. G Duffield and U Suthersanen, Global Intellectual Property Law (Edward Elgar, 2008).
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[16.10] The globalisation of business, which has become particularly apparent in recent decades, has experienced exponential growth. There are a variety of reasons for this including the decline in barriers to the free flow of goods, services and capital and rapid advances in communications and transportation technologies. Long-term economic growth, including in Australia, has also contributed significantly. The “global village” now embraces the “global market”. This process of globalization has led to a growing integration and interdependency of the economies of individual countries. From that interdependence a demand for the further reduction of trade barriers has flowed –to allow the actual transfer of goods and services –and calls for harmonisation and mutual recognition of laws to simplify the administration of those transfers. The movement towards an international legal code gained momentum in 1998, when there was a proposal to homogenise all commercial law across the Organisation for Economic Cooperation and Development (OECD). The proposal was known as the Multilateral Agreement on Investment (MAI) and originated in the OECD. The proposal, and its demise, is described by David James in these terms (Business Review Weekly (27 October 2000, p 108): On the face of it, what was proposed was the ceding of democratic control over commercial law to an international body. Signatories to the MAI would agree that, apart from some predetermined exemptions, they would adhere to an OECD-wide regime of commercial law. The intention was to replace the raft of bilateral treaties with a single treaty that would form the
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Chapter 16 International Business basis of a global system of commercial law. Described as a necessary step in “deregulating” trade, it was, in fact, an attempt to establish a single regulatory regime. The MAI collapsed when the United States realised that it, too, would be subject to the treaty’s strictures. US negotiators responded by seeking to have all US federal, state and local law made exempt, a move that naturally spelt the end of the agreement. Since then, there has been a proliferation of bilateral and multilateral treaties to facilitate cross-border investments.
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Following the collapse of the MAI, initiatives continue to be proposed through the World Trade Organization (WTO) to bring about a set of common commercial laws for world trade. The problem faced now, and previously by the MAI, is that a global approach involves the fundamental weakening of important democratic structures –it involves a concession of power from the local authority to the global. In recent years a level of discontent with certain aspects of globalization has become apparent. In 2016 two significant world political events occurred –the United Kingdom voting to leave the European Union (“Brexit”) and the election of Donald Trump to the presidency of the United States (who, promptly after his inauguration in January 2017, formally withdrew the United States from the 12 country Trans-Pacific Partnership agreement, which had been painstakingly negotiated under the Obama administration). The world is currently witnessing an escalation of trade tensions among some major global trading partners, with related threats of retaliatory tariff wars, as well as the renegotiation of established trade agreements such as the North Amercian Free Trade Agreement, between Canada, Mexico and the United States, which came into force in 1994 (NAFTA) and criticism of the WTO. These developments have raised important questions about the future direction of global trade, the most suitable form of global trade instruments, and the most effective response of the global institutions which support and foster global trade to the challenges facing our interconnected global economy.
IN CONTEXT
Implementing the Global Trade Rules [16.20] The rising trade tensions of recent months have grabbed the headlines — and rightly so. But what you don’t often hear about is how well the global trading system has performed over the years. You could argue that global trade governance has actually been the quietest success story of the post-war era. It’s important to remember what we could stand to lose if the current tensions lead to an unmanageable escalation of tit-for-tat trade policy actions. The multilateral trading system, as embodied in the World Trade Organization (WTO), has been very effectively doing the job that it was created to do for many years. It has secured a foundation on which countries can base their economic planning with confidence – so much so that countries sometimes appear to take the stability and predictability of the trading system for granted in their economic planning … Imagine, however, if we were suddenly presented with a scenario where the system started to falter. If tariff levels were no longer bound at the historically low levels we see today, if we could not rely on members honouring their services commitments, or if the system of settling trade disputes was to erode, the consequences would be dramatic.
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“Free trade is what economists call a positive sum game; it is a policy under which all nations win. The Trump administration, in contrast, appears to see trade as a zero- sum game in which there are winers and losers”. Hill and Hult, International Business: Competing in the Global Marketplace (12th ed, 2018) p 160.
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If, for example, tariffs returned to the levels before the multilateral trading system was created we would see trade flows fall by 60 per cent, while the global economy would contract by 2.4 per cent. That’s even bigger than the contraction after the 2008 crisis – the biggest crisis we’ve seen in the past 80 years. It’s an extreme example, but shows just how important the trading system is. Despite the tensions between major trading partners, trade is actually performing very well and helping to drive the global economic recovery. Global merchandise trade grew at a rate of 4.7 per cent in 2017 – the strongest performance since 2011. With economic cycles between China, the United States and the European Union re-synchronising in a way that we have not seen for a decade, this growth could be expected to continue. The estimate is that world merchandise trade volumes will grow by 4.4 per cent in 2018, and around 4 per cent in 2019. This outlook is good news. It means that trade is playing its part in supporting growth, development and job creation. But of course all of this could be at risk if the tensions that we have been seeing continue to escalate. The global economy is profoundly interconnected today, and this multiplies the complications that trade-restrictive actions can cause. Two-thirds of world trade now occurs through global value chains. As the economist Richard Baldwin argues, erecting trade barriers in today’s economy is like building a wall in the middle of a factory. And in an interconnected economy, the effects of any shocks to the trading system would likely be globalised, reaching far beyond those countries that are directly involved. In this scenario everyone would be affected, and poor countries would stand to lose the most. Global cooperation will be essential in easing these tensions and safeguarding the strong growth that we are seeing today. The WTO, which was created as a forum for members to find ways to cooperate and hold each other to account, will play its proper role in this process. Indeed, we have done so before. It can be argued that without the WTO, a wave of protectionist measures would have been stirred up by the 2008 crisis, significantly worsening the economic effects of that downturn. While the multilateral trading system is important, it must also be continually strengthened and improved so that it can meet the demands of a rapidly changing and evolving global economy –and in recent years WTO members have succeeded in delivering a number of important reforms. … … Cooperation on trade, through the WTO, is fundamental to the global economy as we know it today. This cooperation is a precious resource – and in the years to come I will be working to ensure that we see more of it, not less.
It is possible to address the negative consequences of liberalising trade without destroying the global trade system, which has brought so much prosperity to the world. Minouche Shafik, director of the London School of Economics
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Quoted by Heather Long and Steven Mufson, Australian Financial Review (3 June 2018)
Roberto Azevêdo, the Director-General of the World Trade Organization (24 June 2018 EastAsiaForum)
16.2 THE WORLD TRADE ORGANISATION Introduction [16.30] The WTO is the principal international organization for the management of international trade. The WTO was established on 1 January 1995 as the successor to the 698
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Chapter 16 International Business
General Agreement on Tariffs and Trade (GATT 1947), which was set up in the wake of World War II by 23 governments, including Australia, to foster a stable, rules-based trading system. GATT took provisional effect on 1 January 1948 and established specific rules regarding tariff reductions and the removal of non-tariff barriers. From 1948, successive rounds of trade negotiations extended the body of rules relating to international trade and improved market access through tariff reductions. The WTO emerged from the 1986-1994 Uruguay Round of GATT negotiations. As at September 2018, the WTO has 164 members, following the accession of Liberia on 14 July 2016, and Afghanistan on 29 July 2016.
The WTO’s multilateral trading agreements
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[16.35] The WTO provides a forum for governments to negotiate trade agreements and to settle trade disputes and it operates the global system of trade rules. At the core of the system are the WTO’s multilateral trading agreements. The agreements comprise the Marrakesh agreement which established the WTO (WTO Agreement) and its annexes including the General Agreement on Tariffs and Trade (GATT 1994), the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property rights (TRIPS), which are negotiated and signed by all WTO members and ratified in their domestic parliaments. The WTO agreements cover goods, services and intellectual property (IP) and set out the important trade rights and obligations of all the WTO members. These negotiated agreements are often called the WTO’s trade rules. As the WTO puts it:- These documents provide the legal ground- rules for international commerce. They are essentially contracts, binding governments to keep their trade policies within agreed limits. Although negotiated and signed by governments, the goal is to help producers of goods and services, exporters, and importers conduct their business, while allowing governments to meet social and environmental objectives. “Understanding the WTO. Basics. What is the WTO?” http://www.wto.org
The WTO agreements are complex legal documents which cover a wide range of subject matters (including agriculture, textiles and clothing, banking and telecommunications, food sanitation and IP) and incorporate several fundamental principles including that of “trade without discrimination” –a country should not discriminate between its trading partners (giving them equally “Most Favoured Nation” status) and a country should not discriminate between its own and foreign products and services (giving others the same treatment as one’s own nationals –“National Treatment”).
The multilateral trading system at the beginning of the 21st century is the most remarkable achievement in institutionalised global economic cooperation that there has ever been. Martin Wolf (2001).
IN CONTEXT
Why “most-favoured”? [16.38] This sounds like a contradiction. It suggests special treatment, but in the WTO it actually means non-discrimination –treating virtually everyone equally.
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Business and the Law If you care about growth and innovation; if you care about jobs and the real incomes of the middle-class; if you care about poverty reduction and greater economic fairness; if you do care about all these things, you need to be serious about fostering global trade. Christine Lagarde, Managing Director, IMF (23 April 2015).
This is what happens. Each member treats all the other members equally as “most-favoured” trading partners. If a country improves the benefits that it gives to one trading partner, it has to give the same “best” treatment to all the other WTO members so that they all remain “most-favoured”. … In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners –whether rich or poor, weak or strong. WTO, “Understanding the WTO – Principles of the Trading System: Trade without Discrimination” (http://www.wto.org)
Donald Trump Says He will Pull Out of WTO ‘If They Don’t Shape Up’
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John Micklethwait, Margaret Talev and Jennifer Jacobs, Australian Financial Review (31 August 2018)
[16.40] President Donald Trump said he would pull out of the World Trade Organisation if it doesn’t treat the US better, continuing his criticism of a cornerstone of the international trading system. “If they don’t shape up, I would withdraw from the WTO,” Mr Trump said … in an Oval Office interview with Bloomberg News. He said the agreement establishing the body “was the single worst trade deal ever made”. A US withdrawal from the WTO potentially would be far more significant for the global economy than even Mr Trump’s growing trade war with China, undermining the post-World War II system that the US helped build. Mr Trump said last month that the US is at a big disadvantage from being treated “very badly” by the WTO for many years and that the Geneva-based body needs to “change their ways”.
US Trade Representative Robert Lighthizer has said allowing China into the WTO in 2001 was a mistake. He has long called for the US to take a more aggressive approach to the WTO, arguing that it was incapable of dealing with a non-market economy such as China. Mr Lighthizer has accused the WTO dispute- settlement system of interfering with US sovereignty, particularly on anti-dumping cases. The US has been blocking the appointment of judges to the WTO’s appeals body, raising the possibility that it could cease to function in the coming years. In the Oval Office interview, Mr Trump said at the WTO “we rarely won a lawsuit except for last year”. “In the last year, we’re starting to win a lot,” he added. “You know why? Because they know if we don’t, I’m out of there.” …
Amending the WTO’s Agreements [16.50] The WTO agreements can be renegotiated and new agreements can be added. Changes take place primarily through “rounds” of multilateral negotiations, involving all WTO members. Decisions are made on a consensus basis, and all members must agree to the proposals before they are adopted. Further, the separate agreements and commitments 700
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Chapter 16 International Business
negotiated as part of a round are considered as a whole and indivisible package –a “single undertaking” approach where “nothing is agreed until everything is agreed”. Failure to achieve a consensus at the WTO’s 10th Ministerial Conference in Nairobi in December 2015 (MC10) on the long-standing multilateral trade negotiations under the framework of the Doha Round (initially launched in November 2001) reignited debate regarding the merits of the single undertaking approach, leading the Australian Department of Foreign Affairs and Trade (DFAT) to conclude: … the [Doha] Round is effectively over. Australia has argued that new approaches are necessary if we are to achieve meaningful outcomes on the outstanding Doha issues. (https://dfat. gov.au/trade/organisations/wto/Pages/doha-round.aspx)
The WTO’s dispute settlement system
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[16.60] Trade relations often involve conflicting interests. If countries think their rights under the WTO Agreements are being infringed, they may bring disputes to the WTO. The framework for the WTO’s internal dispute settlement system is set out in the WTO’s “Understanding on the Rules and Procedures Governing the Settlement of Disputes” (usually referred to as the Dispute Settlement Understanding “DSU”). The WTO describes its dispute settlement system as “the central pillar of the multilateral trading system, and the WTO’s unique contribution to the stability of the global economy”. (WTO, “Understanding the WTO: Settling disputes: A unique contribution” (http:// www.wto.org)). The DSU aims to provide a fast, efficient, dependable and rule-oriented system to resolve disputes between WTO members. The WTO states its “priority is to settle disputes, through consultations if possible”. The dispute settlement system provides for alternative dispute resolution methods (consultations, good offices, conciliation and mediation, and arbitration) as well as judicial style processes with panels and appellate bodies. The Dispute Settlement Body “DSB” is responsible for the administration of the rules and procedures of the DSU. The WTO describes its dispute settlement process (WTO, “Introduction to the WTO dispute settlement system: Para 1.3 Functions, objectives and key features of the dispute settlement system” (http://www.wto.org)): When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy! President Donald J Trump on twitter (2 March 2018).
Typically, a dispute arises when one WTO Member adopts a trade policy measure that one or more other Members consider to be inconsistent with the obligations set out in the WTO Agreement. In such a case, any Member that feels aggrieved is entitled to invoke the procedures and provisions of the dispute settlement system in order to challenge that measure. If the parties to the dispute do not manage to reach a mutually agreed solution, the complainant is guaranteed a rules-based procedure in which the merits of its claims will be examined by an independent body (panels and the Appellate Body). If the complainant prevails, the desired outcome is to secure the withdrawal of the measure found to be inconsistent with the WTO Agreement. Compensation and countermeasures (the suspension of obligations) are available only as secondary and temporary responses to a contravention of the WTO Agreement (Article 3.7 of the DSU). Thus, the dispute settlement system provides a mechanism through which WTO Members can ensure that their rights under the WTO Agreement can be enforced. This system is equally
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Business and the Law important from the perspective of the respondent whose measure is under challenge, since it provides a forum for the respondent to defend itself if it disagrees with the claims raised by the complainant. In this way, the dispute settlement system serves to preserve the Members’ rights and obligations under the WTO Agreement (Article 3.2 of the DSU). The rulings of the bodies involved (the DSB, the Appellate Body, panels and arbitrations) are intended to reflect and correctly apply the rights and obligations as they are set out in the WTO Agreement. They must not change the WTO law that is applicable between the parties or, in the words of the DSU, add to or diminish the rights and obligations provided in the WTO Agreements (Articles 3.2 and 19.2 of the DSU).
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The system’s overriding purpose is to help trade flow as freely as possible – so long as there are no undesirable side effects –because this is important for stimulating economic growth and employment and supporting the integration of developing countries into the international trading system. “Understanding the WTO” in WTO Annual Report (2018) p 10.
For example, in January 2018 Australia launched formal WTO consultations against Canada in relation to Canada’s restrictions on the sale of imported wine in Canadian grocery stores, measures which Australia argues are inconsistent with Canada’s WTO obligations and unfairly restrict Australia’s wine trade. The move aimed to give Australian wines equal access to the Canadian market and it was the first time since 2003 that Australia had initiated formal WTO action. Unsatisfied with Canada’s response to these concerns, on 15 August 2018, Australia escalated the matter and requested the WTO establish a panel to resolve the dispute.
The WTO’s Functions and structure [16.70] The WTO describes its functions in the following terms (WTO, “The WTO in brief: Part 2” (http://www.wto.org)): The WTO’s overriding objective is to help trade flow smoothly, freely, fairly and predictably. It does this by: • administering trade agreements • acting as a forum for trade negotiations • settling trade disputes • reviewing national trade policies • assisting developing countries in trade policy issues, through technical assistance and training programmes • cooperating with other international organisations.
The WTO describes its structure in the following terms (“Whose WTO is it anyway?” (www.wto.org)). An organization structure diagram is also provided by the WTO “Understanding the WTO The Organisation” (www.wto.org)) The WTO is run by its member governments. All major decisions are made by the membership as a whole, either by ministers (who meet at least once every two years) or by their ambassadors or delegates (who meet regularly in Geneva). Decisions are normally taken by consensus; power is not delegated to a board of directors or the organization’s head … Countries make their decisions through various councils and committees, whose membership consists of all WTO members.
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Chapter 16 International Business
Committees on:
Ministerial Conference
Trade and Environment Trade and Development Sub-Committee on Least-Developed Countries Regional Trade Agreements Balance of Payments Restrictions Budget, Finance and Administration Working parties on: Accession Working groups on: Trade, debt and finance Trade and technology transfer
General Council meeting as
General Council meeting as
Dispute Settlement Body
Trade Policy Review Body
General Council
Inactive
Appellate Body
Relationship between Trade and Investment Interaction between Trade and Competition Policy Transparency in Government Procurement Plurilaterals:
Plurilateral: Information Technology Agreement Committee
Dispute settlement panels
Council for Trade in Goods
Council for Trade-Related Aspects of Intellectual Property Rights
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Committees on: Market Access Agriculture Sanitary and Phytosanitary Measures Technical Barriers to Trade Subsidies and Countervalling Measures Anti-Dumping Practicses Customs Valuation Rules of Origin Import Licensing Trade-Related Investment Measures Safeguards Trade Facilitation
Council for Trade in Services
Trade in Civil Aircraft Committee Government Procurement Committee
Trade Negotiations Committee
Committees on:
Doha Development Agenda:
Trade in Financial Services Specific Commitments
Trade Negotiations Committee and its bodies
Working party on: Domestic Regulation General Agreement on Trade in Services Rules
Working party on:
Special sessions of: Services Council/TRIPS Council/ Dispute Settlement Body/Agriculture Committeee and Cotton Sub.Committee/ Trade and Development Committee/ Trade and Environment Committee Negotiating groups on: Market Access Rules
State Trading Enterprises
The WTO’s top-level decision-making body is the Ministerial Conference which meets at least once every two years. The most recent Ministerial Conference (MC11) was held in Buenos Aires in December 2017. The next Ministerial Conference (MC12) will be held in Kazakhstan in June 2020. As the WTO explains Day to day work in between Ministerial Conferences is handled by the General Council (normally ambassadors and heads of delegation in Geneva, but sometimes officials sent from members’ capitals) which meets several times a year in Geneva. The General Council also meets under different terms of reference, as the Trade Policy Review Body and the Dispute Settlement Body, to analyse members’ trade policies and to oversee procedures for settling disputes between members. At the next level, three more councils, each responsible for the workings of the WTO agreements dealing with their respective areas of trade, report to the General Council: • The Council for Trade in Goods (Goods Council)
We’re going to make America great again for everyone, greater than ever before. President Elect Donald J Trump in Monessen, PA (28 June 2016).
• The Council for Trade in Services (Services Council) • The Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS Council)
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“In a so-called trade war, driven by reciprocal increases of import tariffs, nobody wins, one generally finds losers on both sides”, Christine Lagarde, Managing Director, IMF (7 March 2018).
The WTO acknowledges that RTAs encourage closer economic integration among participating members and may contribute to members’ economic growth policies … However, … RTAs cannot be a substitute for the multilateral trading system as many key issues – such as trade facilitation, services liberalization, and farming and fisheries subsidies –can only be tackled broadly and efficiently through the WTO. Furthermore, a multilateral system ensures the participation of the smallest and most vulnerable countries and helps support the integration of developing countries into global value chains. WTO Briefing Note: Regional Trade agreements, Tenth WTO Ministerial Conference, Nairobi, 2015 (http://www.wto.org).
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Two more subsidiary bodies dealing with the plurilateral agreements (which are not signed by all WTO members) keep the General Council informed of their activities regularly. Each of the higher level councils has subsidiary bodies.
16.3 REGIONAL TRADE AGREEMENTS Introduction [16.100] In the WTO, regional trade agreements (RTAs) are defined as reciprocal trade agreements between two or more partners, not necessarily belonging to the same region. They include free trade agreements (FTAs) and customs unions. In a customs union parties to the agreement eliminate tariffs and other trade barriers between themselves and also maintain a common external tariff against non-parties. In a free trade agreement parties agree to eliminate tariffs and other trade barriers between themselves, but each country maintains its own tariff policy against non-parties. Normally, establishing a RTA would signify a departure from a fundamental principle of the multilateral trading system of non-discrimination –equal treatment for all WTO members (“most favoured nation”). Meaning, for example, that when a member grants a trading partner a special preference such as a lower tariff, it has to do the same for all WTO members. However, provided that certain specific conditions are met, RTAs are explicitly allowed for under the WTO rules. In particular, the arrangements should help trade move more freely among the countries in the group without barriers being raised on trade with the outside world (“Regionalism: Friends or rivals?” (http://www.wto.org)).
Australia’s current FTAs [16.110] Although there is ongoing debate as to whether RTAs contribute to or detract from the multilateral WTO’s system, there has been a recent proliferation of FTAs at the bilateral and regional level across the world, primarily due to the lack of progress in multilateral forums, particularly in the sensitive areas of agriculture, services, investment and IP. Australia currently has 10 FTAs in force, with countries or groups of countries, these being: New Zealand, Singapore, the United States, Thailand, Chile, the Association of South East Asian Nations (ASEAN) (with New Zealand), Malaysia, Korea, Japan and China. Australia concluded a further four FTAs in 2017/18 (two plurilateral and two bilateral); however, they will not take effect until they have been officially ratified by each country using its own domestic processes (which vary between signatory countries). • The Comprehensive and Progressive Agreement for Trans- Pacific Partnership (TPP-11) signed on 8 March 2018 by 11 countries (representing 13.5% of the world economy): Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, Peru, New Zealand, Singapore and Vietnam. On 31 October 2018 Australia became the sixth nation to ratify the TPP-11, joining Canada, Japan, Mexico, New Zealand
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Chapter 16 International Business
and Singapore. This means that the TPP-11 will enter into force on 30 December 2018. The TPP-11 is a separate treaty that incorporates (with limited exceptions), by reference, the provisions of the original Trans-Pacific Partnership (TPP) Agreement. The TPP Agreement was the 12-nation trade deal which included the United States signed under former US President Barack Obama on 4 February 2016 but never ratified by Congress. On 23 January 2017 the newly elected United States President Donald Trump signed an executive order formally withdrawing the United States as a signatory to the TPP trade deal. See “In Context”. • Pacific Agreement on Closer Economic Relations (PACER) Plus signed on 14 June 2017 by Australia, New Zealand and eight Pacific Island countries –Cook Islands, Kiribati, Nauru, Niue, Samoa, Solomon Islands, Tonga and Tuvalu. • Peru-Australia Free Trade Agreement (PAFTA) signed on 12 February 2018. • Indonesia-Australia Comprehensive Economic Partnership Agreement On 31 August 2018 DFAT announced the substantive conclusion of negotiations on the IA-CEPA (which were launched in 2010).
As anyone who has been involved in FTA negotiations knows, getting a FTA over the line is never easy. Compromise is required by parties to the agreement and in the end, agreements are a package of carefully balanced interests. John Brumby, National President of the Australia China Business Council, quoted in the AFR “China Hits Back on Labors’ free trade attack” (17 July 2015).
DFAT has advised that Australia is currently negotiating a further eight FTAs: • Australia-European Union Free Trade Agreement • Australia-Gulf Cooperation Council (GCC) Free Trade Agreement Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
• Australia-Hong Kong Free Trade Agreement • Australia-India Comprehensive Economic Cooperation Agreement • Environmental Goods Agreement • Pacific Alliance Free Trade Agreement • Regional Comprehensive Economic Partnership • Trade in Services Agreement For more information on the current negotiations, see: https://dfat.gov.au/trade/agreements/Pages/trade-agreements.aspx DFAT reports that Australia’s FTA negotiations are increasingly focussed on the so-called ‘behind the border’ issues: A range of factors such as standards, professional qualifications, intellectual property rights and competition policies in trading partner countries may impact heavily on Australian companies exporting to those markets. Such barriers are more of a problem for businesses than ‘border measures’ such as tariffs and quota restrictions which have been the focus of trade negotiations traditionally but which have become relatively less important over time as average tariff levels have fallen.
http://www.dfat.org.au: “Frequently asked questions on FTAs”.
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As the Chinese saying goes, it takes 10 years to sharpen a sword, so we are very glad to see that after nearly 10 years of negotiation our two sides have announced this substantive conclusion to the bilateral FTA negotiation. This [ChAFTA] will provide a bigger market, more favourable conditions and better institutional support for our cooperation. Chinese President Xi Jinping, 18 November 2014 in ABC news “Free trade agreement Trade Minister Andrew Robb defends Australia’s deal with China”.
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Australia, 10 Other Asia Pacfic Nations Sign CPTPP Trade Deal Without US Dave Sherwood and Felipe Iturrieta, Australian Financial Review (9 March 2018)
[16.120] Eleven countries including Australia, Japan and Canada signed a landmark Asia-Pacific trade agreement without the US in what one minister called a powerful signal against protectionism and trade wars.
The 11 remaining nations completed a revised trade pact in January. That agreement will become effective when at least six member nations have completed domestic procedures to ratify it, possibly before the end of the year.
The deal came as President Donald Trump announced his plan impose tariffs on steel and aluminium imports, a move that other nations and the International Monetary Fund warned it might start a global trade war.
"We are very hopeful like others that we will see the CP TPP coming into effect about the end of the year or shortly thereafter," said Trade Minister Steve Ciobo.
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The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will reduce tariffs in countries that together amount to more than 13 per cent of the global economy –a total of $US10 trillion ($12.8 trillion) in gross domestic product. With the United States, it would have represented 40 per cent.
… The revised agreement eliminates some requirements of the original TPP demanded by US negotiators, including rules to ramp up intellectual property protection of pharmaceuticals. Governments and activists of other member nations worry the changes will raise the costs of medicine.
"Today, we can proudly conclude this process, sending a strong message to the international community that open markets, economic integration and international cooperation are the best tools for creating economic opportunities and prosperity," said Chilean President Michelle Bachelet …
The final version of the agreement was released in New Zealand on Feb. 21. The member countries are Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.
The original 12-member agreement, known as the Trans- Pacific Partnership (TPP), was thrown into limbo early last year when Trump withdrew from the deal three days after his inauguration. He said the move was aimed at protecting US jobs.
"We’re proud … to show the world that progressive trade is the way forward, that fair, balanced, and principled trade is the way forward, and that putting citizens first is the way forward for the world when it comes to trade," Canadian Trade Minister François- Phillippe Champagne said.
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Chapter 16 International Business
AUSTRALIA’S TRADE AND INVESTMENT WITH TPP-11 COUNTRIES IN 2016–17 BRUNEI DARUSSALAM, CANADA, CHILE, JAPAN, MALAYSIA, MEXICO, NEW ZEALAND, PERU, SINGAPORE AND VIETNAM THE TPP-11 COUNTRIES REPRESENT
13.5% of the world economy (valued at US$10.2 trillion)
AUSTRALIA-TPP-11TRADE
15.3% of world trade (valued at US$4.8 trillion)
› TOTAL EXPORTS – $87.9 billion › TOTAL IMPORTS – $76.1 billion › TOTAL TWO-WAY TRADE – $164 billion (22.3% of all Australian trade)
6.8% of world population (495 million people)
TOP 5 AUSTRALIA’S EXPORTS TO TPP-11 COUNTRIES
TOP 5 AUSTRALIA’S IMPORTS FROM TPP-11 COUNTRIES
1 Coal – $16.8 billion 2 Liquified natural gas – $14.1 billion
2 Personal travel, excluding education – $8.9 billion
1 Refined petroleum – $9.3 billion
3 Personal travel, excluding education – $5.7 billion
3 Passenger motor vehicles – $7.6 billion
4 Iron ores & concentrates – $5.4 billion
4 Transport services – $4.3 billion
5 Education related travel services – $4.1 billion
4 Crude petroleum – $4.0 billion
AUSTRALIA-TPP-11 INVESTMENT › In 2016 the total stock of foreign investment in Australia (valued at approximately $424 million) from TPP-11 countries was 13.3% › In 2016 the total stock of Australian foreign investment (valued at $339 million) in TPP-11 countries was 15.6%
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The source of the Infographic is DFAT.
PRESIDENTIAL MEMORANDA https://www.whitehouse.gov/presidential-actions/presidential-memorandum-regarding-withdrawal-united-states-trans-pacific-partnership-negotiations-agreement/
Presidential Memorandum from Donald J Trump Regarding Withdrawal of the United States from the Trans- Pacific Partnership Negotiations and Agreement ECONOMY & JOBS | Issued on: January 23, 2017 ✶ ✶ ✶ It is the policy of my Administration to represent the American people and their financial well- being in all negotations, particularly the American worker, and to create fair and economically beneficial trade deals that serve their interests. Additionally, in order to ensure these outcomes, it is the intention of my Administration to deal directly with individual countries on a one-on-one (or bilateral) basis in negotiating future trade deals. Trade with other nations is, and always will be, of paramount importance to my Administration and to me, as President of the United States.
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Trade negotiators live in the real world and in the real world objectives must be balanced by sensitivities … The history books of free trade are filled with agreements that successfully balanced ambition with sensitivities and exclusions. Robert Zoellick, former US Trade Representative, quoted in the AFR “US trade deal fails to impress economists” (4 July 2015).
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Based on these principles, and by the authority vested in me as President by the Constitution and the laws of the United States of America, I hereby direct you to withdraw the United States as a signatory to the Trans-Pacific Partnership (TPP), to permanently withdraw the United States from TPP negotiations, and to begin pursuing, wherever possible, bilateral trade negotiations to promote American industry, protect American workers, and raise American wages. You are directed to provide written notification to the Parties and to the Depository of the TPP, as appropriate, that the United States withdraws as a signatory of the TPP and withdraws from the TPP negotiating process. You are authorized and directed to publish this memorandum in the Federal Register. Donald J Trump
In Context
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[16.140] Increasing protectionist tendencies
provide us with a clear incentive and opportunity to express our strong support for the multilateral trading system. International trade and open markets are necessary to spread growth impulses globally, to allow for global value chains to operate efficiently and to create decent job and consumption opportunities on a broad scale. We will continue to work towards improving and strengthening the rules-based multilateral trading system and its role in global trade. The WTO is essential
for new growth, employment and predictability of international trade relations and continues to play a central role in the fight in addressing the trade challenges of today. Joint press release of 11 June 2018 in Berlin: IMF Managing Director, OECD Secretary General, ILO Director General, WTO Director General, World Bank CEO, AfDB President and Federal Chancellor of Germany: https://www.bundeskanzlerin.de/ C ontent/ E N/ P ressemitteilungen/ B PA / 2 0 1 8 / 2 0 1 8 - 0 6 - 1 1 - m e r k e l - t r i f f t - internationale-wirtschaftsorganisationen_en.html
16.4 STRATEGIES FOR INTERNATIONAL BUSINESS OPERATIONS “The essence of strategy is choosing what not to do.” Michael Porter, “What is Strategy?” in Harvard Business Review (November 1996) p 70.
Introduction [16.150] The organisation that wants to expand its business beyond its domestic operations must make certain fundamental strategic decisions: which foreign markets to enter, the timing of entry into those markets and the scale and most appropriate mode of entry. There are a number of entry modes available for international expansion including: • direct sales/exporting; • intermediary arrangements: distributors and agents; • licensing; • franchising;
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Chapter 16 International Business
• branch offices, subsidiaries and foreign acquisitions; • joint ventures; and • strategic alliances. Hill and Hult, International Business: Competing in the Global Marketplace (12th ed, McGraw- Hill Education, 2018), p 432, note that: Each of these options has advantages and disadvantages. The magnitude of the advantages and disadvantages associated with each entry mode is determined by a number of factors, including logistics, costs, trade barriers, political risks, economic risks, business risks, costs, and firm strategy. The optimal entry mode varies by situation, depending on these factors. Thus, whereas some firms may best serve a given market by exporting, other firms may better serve the same market by setting up a new wholly owned subsidiary or by acquiring an established enterprise.
The overriding factor, of course, is the regulatory environment that will specify whether and on what conditions and pursuant to which structure the foreign investment may be made.
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Direct sales/exporting [16.160] An exporter may sell directly to customers in an overseas market. In fact, as Hill and Hult point out (International Business: Competing in the Global Marketplace (12th ed, McGraw-Hill Education, 2018, p 439), “many manufacturing firms begin their global expansion as exporters and only later switch to another mode for serving a foreign market”. Exporting avoids the infrastructure costs of establishing manufacturing operations in the host country and has the advantages of centralised production with significant potential for economies of scale from global sales volume. Possible disadvantages of exporting include high transport costs and tariff barriers which may make exporting uneconomical.
Intermediary arrangements: Distributors and agents [16.170] As an alternative to exporting, a manufacturing firm which does not want a physical presence in an overseas market may use intermediaries in the host country to market and distribute the product. Intermediaries have a number of descriptive titles – distributor, agent, representative –but in law the intermediary is either an agent or a reseller (or distributor, to use the more common commercial description). The disadvantage of this mode of entry is that despite contractual obligations, an organization does not have complete control over marketing and sales in the market.
No nation was ever ruined by trade. Benjamin Franklin, 1774.
The main difference between a distributor and an agent is that an agent sells the goods on behalf of the exporter, bringing into effect a contract of sale between exporter and customer, while a distributor buys from the exporter and sells to local customers in the overseas country on her or his own account. Distributors will take their profit from the difference between the price at which they bought the goods from the supplier, and the price which they will ask from the customer. Agents, on the other hand, obtain their income by way of a commission paid to them by the exporter and based on the sales made by the agent. Another difference between a distributor and an agent is that, in the case of the distributor, property in the goods which they buy from the exporter/supplier
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passes to them and is subsequently passed to their customer when they finally sell the goods. In other words, they own the goods from the time they pay the exporter/supplier for them until they sell them. The agent, however, does not own the goods; it merely has possession of them from the time it receives them from the exporter, until it hands them over to the buyer.
Licensing
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[16.180] Licensing is a common strategy for commercialising IP. It is a contractual arrangement under which the owner of IP (the licensor) grants to another party (the licensee) the right to use that IP in a particular place, for a particular time, for a particular price and subject to whatever other provisions –quality controls, improvements, confidentiality and so on –are agreed upon. In return, the licensor receives a royalty fee from the licensee. Firms are increasingly using licensing as a strategy for international business operation, for reasons clearly explained here (Pryles M, Waincymer J and David M, International Trade Law (Law Book Company, 1996)): By granting to a licensee the right to exploit the patent in the foreign country in return for royalty payments, the licensor saves itself the trouble and expense of manufacturing and marketing goods in an unknown environment, while harnessing the local knowledge, business contacts and expertise of the foreign licensee. By selling licences rather than products, the licensor can concentrate its commercial efforts on the production of technology in its home country, without the need to market the products of that technology. The licensee, on the other hand, can benefit from a developed and tested technological process without having to invest in research and development. For these reasons, licensing agreements are often used as a means of transferring the benefits of technology from developed to developing countries.
Franchising I learned a long time ago, a bad deal is far worse than no deal at all, … and the Obama Trans-Pacific Partnership and fast track are a bad, bad deal for American businesses, for workers, for taxpayers. It’s a huge set of handouts for a few insiders that don’t even care about our great, great America. President-elect Donald J Trump (November 2015).
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[16.190] Franchising, which is discussed in detail in Chapter 14 is a more sophisticated form of licensing which, in its business format mode, is characterised by the franchisor granting to the franchisee not only the right to use the franchisor’s intangible property, usually trademarks, but also the right to use an entire business format in accordance with which the franchisee must carry on its business. Standardisation, consistency and uniformity across all aspects of the business is the key to business format franchising. Business format franchising is characterized by an ongoing business relationship between the franchisor and the franchisee. As with licensing, the franchisor typically receives a royalty payment, which amounts to some percentage of the franchisee’s revenue. Over the last two decades there has been a dramatic increase in the internationalisation of franchising which provides an effective and efficient vehicle for business expansion. Franchising is currently practised in almost every region of the world and has extended its influence to virtually all consumer goods and services and to many businesses and quasi-professional services. The most common commercial vehicles for international expansion of franchise systems are: • direct franchising (through the franchisee in the home country granting franchises in the host country, or through development agreements with a local entrepreneur to open outlets in the host country or through the establishment of a branch office or foreign subsidiary); and
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Chapter 16 International Business
• master franchising under which the franchisor appoints an entrepreneur in the host country who sub-franchises the system in that country.
Branch offices, subsidiaries and foreign acquisitions [16.200] An exporter may determine that an intermediary –agent, distributor or licensee –cannot demonstrate sufficient dedication to the product and that a greater local commitment is necessary. Establishing a wholly owned subsidiary provides an organization with tight control over its operations in a particular foreign country or network of countries; however, it is the most costly method of servicing a foreign market in terms of capital investment. Establishing a wholly owned subsidiary can be achieved by either setting up a completely new operation in that country (a “greenfield venture”) or by acquiring an established local firm in that country.
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Joint ventures [16.210] The organisation that requires a greater degree of control over, or commitment to, its operations conducted through an intermediary in an offshore jurisdiction or who faces commercial, legal or regulatory obstacles to starting up or acquiring a subsidiary in a foreign country will frequently solve these obstacles through a joint venture with a local partner. An intermediary’s commitment may be less than the exporter may have expected and controls exercised through a contract are limited to the terms negotiated and enshrined in the agreement. A subsidiary may not be a viable option because of commercial obstacles (which may include the unavailability of a suitable company for acquisition or the inefficiency and cost of establishing a subsidiary) and legal or regulatory obstacles (primarily restrictive foreign investment laws which may limit or prohibit the acquisition or establishment of subsidiaries in that country: a restriction often found in the laws of developing and newly industrialised countries). In these circumstances a joint venture is the usual mode of entry.
From Montreal to Munich to Melbourne, the world is too large and filled with too many diverse people and firms for any single marketing strategy to satisfy everyone. David L Kurtz.
Although the term “joint venture” is widely used it does not refer to any particular type of structure. Schmitthoff describes a joint venture as a common undertaking created by two or more participants for a specific purpose, usually of a commercial nature. The common undertaking formed by the participants may be carried on in various legal forms and does not necessarily result in the creation of a separate legal entity (see Murray C, Holloway D and Timson-Hunt D, Schmitthoff’s The Law and Practice of International Trade (12th ed, Sweet & Maxwell, 2012, p 4). Most common are equity ventures and contractual or cooperative ventures. In an equity venture the common object is carried out in a corporate form with respective interests in the joint venture determined by the party’s equity shareholding. In a contractual or cooperative venture no separate corporate legal entity is created and the details of the joint venture will depend on the terms of the joint venture contract through which it is established. In a joint venture the parties work together sharing risks, rewards and control of the operation. Joint ventures offer a number of advantages. They offer a great deal of flexibility in what they do and how they operate and they can usually be adapted to meet the commercial, regulatory and legal needs of the parties. Other advantages include the possibility of achieving the critical mass needed to compete in the marketplace of the
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importing country. The advantage of access to the local knowledge of the joint venturer helps avoid barriers caused by cultural differences and unfamiliar business customs and practices. A joint venturer may well make the difference between whether or not a party has any problems obtaining financing facilities from the banks in the overseas country. The main advantage of a joint venture is the sharing of risk that is lowered for both parties. The greater the complementary skills and resources of the participants, the greater is the potential for success. Joint ventures nevertheless have disadvantages, in particular the weakness in decision making caused by the sharing of management responsibilities. Joint ventures can be difficult to manage because of the differing goals and degrees of control of the participants. Other disadvantages include possible issues stemming from cultural differences and geographic distances, problems repatriating profits and difficulties selecting an appropriate joint venturer.
Strategic alliances
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If you make believe that ten guys in pin- striped suits are back in kindergarten class playing with building blocks, you’ll get a rough idea of what life in a corporation is like. Lee Iacocca.
[16.220] Hill and Hult describe strategic alliances as cooperative agreements between potential or actual competitors for various strategic purposes. The term is not a term of art, and strategic alliances encompass formal joint ventures, in which two or more firms have equity stakes, through to short-term contractual agreements in which two companies agree to cooperate on a particular task (such as developing a new product). Recent decades have seen a large rise in the number of strategic alliances: Hill and Hult, International Business: Competing in the Global Marketplace (12th ed, McGraw-Hill Education, 2018, p 450). The essence of a strategic alliance is cooperation in a limited form in return for a share of profits arising out of the alliance. The risks are limited to the areas of mutual cooperation, as are the potential rewards. Strategic alliances have a number of strategic commercial advantages –they may facilitate entry into a foreign market, allow the sharing of fixed costs and associated risks in developing new products or processes, bring together complementary skills and assets that neither company could easily develop on its own and help a firm establish technological standards for the industry that will benefit the firm. Strategic alliances also have a number of potentially significant disadvantages (such as alliance partners giving away technological know-how and market access to the other partner), however, these potential disadvantages can be reduced if partner selection, alliance structure and management of the alliance are carefully addressed.
16.5 INTERNATIONAL SALE OF GOODS Introduction [16.230] The contract for the sale of goods is not only the most common legal transaction within Australia and other similar economies, but is also the most common instrument for international trade. An international business transaction incorporates a number of elements –sale, financing and carriage –which are beyond the scope of this chapter. However, the sale of goods component of the international transaction operates in a similar manner to the Australian sale of goods legislation. 712
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Chapter 16 International Business
The United Nations Convention on Contracts for the International Sale of Goods [16.240] A decade of negotiations throughout the 1970s resulted in the United Nations Convention on Contracts for the International Sale of Goods being adopted in Vienna in 1980 (CISG; the Vienna Convention). The United Nations Commission on International Trade Law (UNICTRAL) states that the purpose of the Vienna Convention is to provide a modern, uniform and fair regime for contracts for the international sale of goods. The Vienna Convention is in force in all Australian jurisdictions (under the Sale of Goods (Vienna Convention) Acts) which were enacted throughout Australia in 1986 and 1987. Most of Australia’s major trading partners have become parties to the Convention. As November 2018, the UNICTRAL website identifies 89 States as parties to the Vienna Convention. The State of Palestine is the most recent state to ratify the Convention, having acceded to it on 29 December 2017.
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Where an international contract for the sale of goods is entered into between parties in countries which are members of the Vienna Convention, that law governs their contract. In other cases, the parties must specify in a “choice of law” clause which country’s laws govern the transaction –an often difficult negotiating point because each party will want its own country’s laws to govern the relationship. Under the Vienna Convention, the parties retain a large degree of freedom to substitute their own agreement for standard provisions or vary the effect of any of the provisions of the Convention. The Vienna Convention is complemented by the United Nations Convention on the Use of Electronic Communications in International Contracts (2005), which is an enabling treaty whose effect is to establish the requirements for functional equivalence between electronic and traditional written form. This summary of the major features of contracts under the Vienna Convention is extracted from Kennedy, “The Vienna Convention: An international trap for local players” (1997) 71 Law Institute Journal 47 at 50: … The Convention is self-inclusive, so it must be dealt with by express exclusion or else by proper consideration. If it is not excluded and if the contract falls under the umbrella of the Convention, then to the extent that individual clauses in the contract do not contradict the Convention it forms part of your contract.
There have been many definitions of hell, but for the English the best definition is that it is a place where the Germans are the police, the Swedish are the comedians, the Italians are the defence force, Frenchmen dig the roads, the Belgians are the pop singers, the Spanish run the railways, the Turks cook the food, the Irish are the waiters, the Greeks run the government, and the common language is Dutch. David Frost.
Application The aims of the Convention are to: • bring uniformity to the rules which govern contracts for international sale of goods; • remove legal barriers in international trade; and • promote the development of international trade. It applies, first, if both parties to the contract are from countries which have ratified the Convention (“contracting states”) and, second, when the rules of private international law lead to the application of the law of a contracting state …
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Business and the Law It is important to note that many of Australia’s trading partners have accepted the Convention. Notably, the United Kingdom has deliberately opted out (it has instead adopted the Hague Sale of Goods Convention). As it says, the Convention applies to “goods”. It does not apply to sales of goods bought for personal use, sales by auction, stocks, shares, investment securities, negotiable instruments, money, ships, hovercraft, vessels, aircraft or electricity, but it applies to everything else bought and sold between parties whose businesses are in contracting states. Effect on contracts … Part 2 of the Convention is entitled “Formation of the Contract”. It establishes: • when a proposal constitutes an offer; • what constitutes a sufficiently definite proposal; • when a proposal is an invitation to make an offer; The most destructive economic prejudice is trade protectionism. Christine Lagarde, Managing Director, IMF (23 April 2015).
• when an offer is effective; • when an offer may be withdrawn; • when an offer can and cannot be revoked; • what constitutes acceptance; • when an acceptance becomes effective or is not effective (acceptance can be indicated by the performance of an act established by usage); • what constitutes a counter-offer and what does not; • the commencement point for time-based offers; • the effect of last day of offer term falling on a non-business day;
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• late acceptance; • withdrawal of acceptance; and • conclusion of contract. Obligations In order to convey a feeling of this Part … included [is] part of an article by by Glower W Jones, “Impact of the Vienna Convention in drafting international sales contracts”, International Business Lawyer, (September 1992)” as follows: Generally the obligations of buyers are relatively simple. The buyer must pay the price of the goods and take delivery of them (Article 53). This is the essential obligation, although the Convention proceeds to provide other requirements for the buyer to fill gaps where the parties may not have specified terms such as weight of the goods (Article 56), place of payment (Article 57), time of payment, (Article 58) and other details for taking delivery, and remedies for breach of contract by the buyer. The weight of the performance is substantially on the seller, as is the traditional position, to assure that the goods meet the order. It is in this area where the condition and quality of the goods are regulated by the Convention. For the seller, the critical issue is what complies with proper performance. Do the goods meet the required quality and purpose? The obligation of the seller is to deliver goods which are of the quality, quantity and the description required by the contract (Article 35). The goods must be packaged as required by the contract. Unless agreed otherwise, the Vienna Convention prescribes specific requirements in order for goods to conform to the contract. Goods do not conform to the contract unless they are fit for the purposes for which goods of the same descriptions would ordinarily be used (Article 35(2) (a)). If made known to the seller at the time of the contract, goods are to be fit for the particular purpose, expressly or impliedly made known to the seller, except in situations where the buyer 714
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Chapter 16 International Business did not rely on the seller’s skill and judgment or where it was unreasonable for him to do so (Article 35(2)(b)). Goods must have the qualities which the seller held out to the buyer as a sample or model (Article 35(2)(c)). The buyer may not rely upon these required qualities if he knew or could not have been unaware of lack of conformity at the time of the contract (Article 35(3).). The Convention deals with the time when conformity is required. The seller is liable only until the risk passes to the buyer that the goods conform to the Convention requirements, even though lack of conformity becomes apparent only after that time unless there is a guarantee for a period of time which the goods will remain fit for ordinary purposes or for some particular purpose or will retain specific qualities or characteristics (Article 36). Damages for breach of contract include the loss, including lost profit, suffered as a consequence of the breach, but may not exceed the loss which the party in breach foresaw or should have foreseen at the time of the contract (Article 74). The duty to mitigate damages in the case of breach is specified by the Convention, requiring that a party who relies on breach of contract take measures that are reasonable under the circumstances to mitigate the loss (Article 77). While not called force majeure, the Convention provides exemptions from performance based on frustration of contract concepts and excuses liability for performance when a party is unable to perform due to an impediment beyond his control that he could not reasonably be expected to have taken into account at the time of the contract, or to have avoided or overcome it or its consequences (Article 79). The Convention also recognises the concept of the common law implied duty not to prevent performance of the other party. A party may not take advantage of the failure of the other party to perform if that failure was caused by an act or omission of the first party (Article 80).
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Incoterms® rules 2010 [16.250] International sale of goods contracts are facilitated by the use of the Incoterms® rules which provide internationally accepted definitions and rules of interpretation for the most common commercial terms used in contracts for the sale of goods that need to be transported. The Incoterms® rules clarify the obligations, costs and risks undertaken by each party in the delivery of the goods. The Incoterms® rules are created and published by the International Chamber of Commerce (ICC) and are revised from time to time to represent contemporary commercial practice. The most recent revision is the Incoterms® 2010 rules which came into effect on 1 January 2011. See “In Context”. The Incoterms® 2010 revision contains 11 rules which are presented in two distinct classes: (a)
rules that can be used irrespective of the mode of transport selected and irrespective of whether one or more than one mode of transport is used and
(b)
rules for sea and inland waterway transport, which should only be used for maritime transport.
IN CONTEXT
Incoterms® rules 2010 [16.260] The ICC website contains short descriptions of the various trade terms contained in the Incoterms® 2010 rules. These should be read in the context of the full official text of the
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Incoterms® 2010 rules which is available from the ICC Business Bookstore: (http://www. store.iccwbo.org/incoterms-2010). 1. Trade deals should not be rushed to meet political objectives because their impact can last decades. Industry wants a balanced and comprehensive agreement so the extra time should be used to ensure this happens. Innes Wilcox, AIG Chief Executive (2015).
Rules for any mode or modes of transport • EXW Ex Works “Ex Works” means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (ie, works, factory, warehouse, etc). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable. • FCA Free Carrier “Free Carrier” means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point. • CPT Carriage Paid To “Carriage Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. • CIP Carriage And Insurance Paid To
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“Carriage And Insurance Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements. • DAT Delivered At Terminal “Delivered At Terminal” means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination. • DAP Delivered At Place “Delivered At Place” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.
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Chapter 16 International Business
• DDP Delivered Duty Paid “Delivered Duty Paid” means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities. 2.
Rules for Sea and Inland Waterway Transport [should only be used for maritime transport] • FAS Free Alongside Ship “Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (eg, on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards. • FOB Free On Board “Free On Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.
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• CFR Cost and Freight “Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. • CIF Cost, Insurance and Freight “Cost, Insurance and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.
16.6 INTERNATIONAL TRADE FINANCING [16.270] A typical export transaction involving an Australian supplier of goods involves complex legal relationships. Apart from the sale itself, there are aspects of carriage,
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The further he went West the more convinced he felt that the Wise Men came from the East. Sydney Smith.
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insurance, compliance with industrial and revenue regulations, and provision for payment. The nature of the physical transaction implies that there will usually be a period in which one party is offering credit to the other. Most frequently that credit will be supplied by the manufacturer/vendor of goods to the purchaser, who may not pay until the goods are delivered to it. One of the risks borne by the vendor during this period is that of an adverse currency movement. The risk of the buyer defaulting, or of a significant change in the laws of the country of the buyers, should also be addressed.
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Instruments for financing exports and imports have developed over many years to deal with an inherent problem in international trade –a lack of trust that occurs when one party must put faith in an unfamiliar party. Each party faces different risks in an import/export transaction –one party is concerned about the risks of transporting the goods before receiving payment and the other party is concerned about paying for the goods before receiving them. Accordingly, each party requires something different from the way the trade financing is structured. As Hill and Hult put it (International Business: Competing in the Global Marketplace (12th ed, McGraw-Hill Education, 2018, p 473): Firms engaged in international trade have to trust someone they may never have seen, who lives in a different country, who speaks a different language, who abides by (or does not abide by) a different legal system, and who would be very difficult to track down if he or she defaults on an obligation … Neither party to the exchange completely trusts the other. This lack of trust is exacerbated by the distance between the two parties –in space, language, and culture –and by the problems of using an underdeveloped international legal system to enforce contractual obligations. … Unless there is some way of establishing trust between the parties, the transaction might never occur. The problem is solved by using a third party trusted by both –normally a reputable bank –to act as an intermediary.
The principal methods of ensuring payment for exported goods include the following: • payment in advance; • documentary bills of exchange; and • documentary letters of credit.
Payment in advance We have to recognise that Australia and Australians have always … needed outside capital to develop the great projects in the great country we have. Andrew Forrest, Chairman, Fortescue Metals Group.
[16.280] This, of course, is the preferred option of the vendor, but one which in practice may be difficult to negotiate with the purchaser.
Documentary bills of exchange [16.290] A bill of exchange is the instrument normally used to effect payment. It is defined in s 8 of the Bills of Exchange Act 1909 (Cth) as: An unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person, or to bearer.
This simple bill of exchange will, in a typical export transaction, be accompanied by a set of documents, generally a bill of lading which proves shipment of the goods, an invoice for the goods and a certificate of insurance. It is then known as a documentary bill of exchange. 718
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Chapter 16 International Business
The procedure requires the seller to draw a bill of exchange on the buyer for payment, either at sight (immediately) or upon the expiration of a term. The bill is normally delivered by the seller to its bank which will in due course present it to the buyer for acceptance, in the case of a term bill, or for payment, in the case of a sight bill. If a term bill is presented for acceptance by the buyer, the bank may be instructed to deliver the documents to the buyer on acceptance or to deliver the documents on payment at the expiration of the term. The seller’s bank will frequently arrange collection through its agency in the country of the purchaser. An advantage of a bill of exchange is that it may be discounted so that, for example, the seller’s bank may make immediate payment of a discounted amount to the seller and then wait to recover full payment from the buyer upon maturity of the bill.
Documentary letters of credit
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[16.300] Letters of credit are the most common method of payment for goods in the export trade and have been described in English courts as “the life blood of international commerce” (Schmitthoff, The Law and Practice of International Trade (12th ed, Sweet & Maxwell, 2012,) p 190). While there are various types of letters of credit, essentially a letter of credit is a document issued by the buyer’s bank in favour of the seller. The buyer will instruct its bank (the issuing bank) as to times of payment and the documents to be obtained prior to payment. It will be usual for the seller to submit a bill of exchange, with relevant documents, to the issuing bank which, when the buyer’s instructions to it have been satisfied, will pay the seller. The buyer’s account with the issuing bank will be debited with the relevant amount and the buyer will take possession of the documents and, through them, the goods. As Schmitthoff points out (at p 190): The documentary character of this type of bankers’ credit, as used in international trade, cannot be over-emphasised. The paying bank is prepared to pay the exporter because it holds the documents as collateral security and, if necessary, can have recourse to the issuing bank, which in turn can have recourse to the buyer as instructing customer.
Banking practice relating to letters of credit is standardised by the Uniform Customs and Practice for Documentary Credits (UCP), which are a set of rules issued by the ICC, which aims to simplify dealings in letters of credit. Schmitthoff (at p 191) notes that after more than 80 years of effort and periodic revision, the UCP now have almost universal effect. The current version, UCP 600, took effect on 1 July 2007. The UCP only apply if the parties have expressly incorporated them into their contract and parties are free to exclude the operation of specific provisions.
16.7 INTERNATIONAL IP PROTECTION [16.310] IP is a vital part of international trade. The WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which came into effect on 1 January 1995, is the most comprehensive international treaty governing the recognitition, protection, administration and enforcement of IP rights. As the WTO puts it “TRIPS is an attempt
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Intellectual property plays an increasingly vital role in global trade and economic development. Globalisation of trade means that intangible informational resources are now produced, exchanged and consumed anywhere and everywhere defying jurisdictional borders. G Duffield and U Suthersanen, Global Intellectual Property Law (Edward Elgar, 2008).
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Business and the Law Intellectual property is important, but the appropriate intellectual property regime for a developing country is different from that for an advanced industrial country. The TRIPS scheme failed to recognize this. In fact, intellectual property should never have been included in a trade agreement in the first place, at least partly because its regulation is demonstrably beyond the competency of trade negotiators. Joseph Stiglitz.
to narrow the gaps in the ways IP rights are protected and enforced around the world and to bring them under common international rules” (www.wto.org, “IP Protection and Enforcement. Origins”). TRIPS sets out a number of general principles and the minimum IP standards with which WTO member nations must comply in respect of the IP rights covered by the Agreement: • Copyright and related rights; • Trademarks, including service marks; • Geographical indications; • Industrial designs; • Patents; • Layout-designs (topographies) of integrated circuits; and • Undisclosed information, including trade secrets. On 23 January 2017 an amendment to the TRIPS Agreement entered into force ensuring developing countries a secure legal route to affordable medicines under WTO rules. It is the first time a multilateral WTO accord has been amended. The WTO describes it this way:
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The amendment eases poorer WTO members’ access to medicines by allowing generic versions of patented medicines to be produced under compulsory licences (ie without the consent of the patent owner) exclusively for export to countries that cannot manufacture the needed medicine themselves.(www.wto.org/trips)
WTO members determine themselves how best to implement these minimum IP standards set out in TRIPS into their domestic legislation and may chose to implement more extensive protection provided it does not conflict with the provisions of the Agreement (TRIPS, Art 1.1). Existing obligations under other major IP conventions, including the Paris Convention for the Protection of Industrial Property (Paris Convention) and Berne Convention for the Protection of Literary and Artistic Works (Berne Convention), are incorporated in TRIPS by way of reference and additional obligations imposed on WTO members where the pre-existing conventions were seen as being inadequate (TRIPS Arts 2.1 and 9.1). TRIPS acknowledges that IP protection is not an end in itself but is aimed at broader public policy objectives. The general scope of TRIPS and its significance is outlined by DFAT as follows (https://dfat.gov.au/trade/organisations/wto/intellectual-property/Pages/ intellectual-property). Many rich countries used weak IPR protection in their early stages of industrialization to develop local technological bases, increasing protection as they approached the leaders. S Lall (2003).
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TRIPS supports the contribution of IP systems to economic growth through trade and investment by: • establishing minimum standards for IP rights protection in the national systems of WTO members • prescribing agreed mechanisms for administration and enforcement of IP rights • creating a transparency mechanism –each WTO member is required to provide details of their national IP laws and systems, and to answer questions about their IP systems
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Chapter 16 International Business
• creating a predictable, rules-based system for the settlement of disputes about trade- related IP issues between WTO members • allowing for mechanisms that ensure that national IP systems support widely accepted public policy objectives, such as stamping out unfair competition, facilitating transfer of technology and promoting environmental protection. Some RTAs (including those to which Australia is a participant) have provided, or are seeking to provide, more stringent protections than the minimum IP standards set by TRIPS.
Intellectual Property: The Big Risk in US-China Ties John Edwards, The Interpreter, The Lowy Institute (20 March 2018).
[16.320] It may be chaotic and confused, but the Trump administration is not entirely nuts. Expected to slam China with heavy penalties for appropriating the intellectual property of US businesses, the administration instead appears to be stopping short of a fundamental injury to the world’s biggest bilateral trading relationship.
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Even so, the developing dispute over intellectual property is now a big risk to US–China economic ties, one that if mishandled has the capacity to hurt the growth of world trade. According to background briefings given by administration officials to the media last week, President Donald Trump will soon announce a US $30-billion penalty on China’s exports to the US in reprisal for what the administration will claim is the cost of Chinese appropriation of US businesses’ intellectual property. In most contexts, $30 billion is a very large amount; however, it is less than 6% of China’s annual exports to the US. Depending on the time frame and method of application, the actual cost may be mitigated. Imposed as, say, a 20% tariff on $30 billion of China’s US exports, the cost could come down to something closer to $6 billion, shared between Chinese exporters and US consumers. The action will be proposed in response to an adverse finding in an investigation under Section 301 of the US Trade Act, initiated in August by the US Special Trade Representative Robert Lighthizer. Much depends on the plausibility of the 301 report, which is delivered as an outcome of the investigation. The official brief for the USTR investigation was to examine:
any of China’s laws, policies, practices, or actions that may be unreasonable or discriminatory and that may be harming American intellectual property rights, innovation, or technology development. It was, to say the least, a very wide brief. The further the report goes beyond actual offences to World Trade Organization rules, the less support the US will receive from the rest of the world. The 301 report will likely argue that China has engaged in deliberate, large- scale appropriation of intellectual property from the US. It will allege that Chinese Government authorities, private businesses, and state- owned enterprises have participated in co-option of intellectual property. It will claim that there has been a systematic campaign to target technologies, including robotics, artificial intelligence, and advanced communications. And it will assert that some of these technologies have defence applications, so their importance is not only commercial but also strategic. The 301 report will probably claim that Chinese corporations and government authorities have used standard commercial means to transfer technology, including commercial licensing agreements, but also less legitimate and less obvious means to which US and other advanced economies should be more alert. These include direct offshore investment in early- stage Western technology businesses; direct offshore investment in mature Western technology businesses; and “involuntary” knowledge transfers required by Chinese authorities as part of the price of access to China’s vast and rapidly growing consumption and investment market. The 301 document may also accuse Chinese authorities of engaging in cybertheft of intellectual secrets and actual commercial espionage, citing cases that arose during previous administrations.
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Most of this is old stuff. With varying levels of annoyance and plausibility, the US has been complaining of theft of intellectual property by China for three decades. It was once an argument over DVDs and fake designer handbags, watches, and jeans. Under successive administrations the argument moved on as China moved up the technology curve. Nor is the US complaint unique to China. Further back, the US was accustomed to similar disputes with Japan and South Korea. Even today, US officials sometimes portray France as a close second to China in intellectual property wickedness. As recently as May 2014, former US Secretary of Defense Robert Gates said:
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[there] are probably a dozen or 15 countries that steal our technology … in terms of the most capable, next to the Chinese, are the French –and they’ve been doing it a long time. Rhetorically enlivened by the Trump administration, the US stance on intellectual property will meet very little dissent in Washington. It will be backed by Republicans and Democrats alike, free-traders and protectionists. Once upon a time, US corporations would have lobbied against strong action on China. Perhaps disappointed by their experience in China, perhaps cowed by greater anti-China sentiment as that country has asserted itself in the world, US business is now on the side of sterner action –particularly regarding intellectual property transfers.
China will certainly respond with sanctions on US exports to China, which over the last decade have grown twice as fast as China’s exports to the US. But China, like Europe, will be wary of escalating the dispute with the US. It will continue to look to the long game. Tangled in this coming dispute are much bigger issues for the US, China, and the rest of the world. One is the extent to which the US may wish to obstruct China’s declared intention of becoming a leading competitor in high- technology industries. Another is the extent to which the US wishes to frame trade disputes with China as those between a “liberal international order” created and sustained by the US and a state-directed transactional and opportunistic challenge by China. In its disputes over intellectual property and China’s adherence to WTO undertakings in 2001, the US will be seeking allies. These include Australia, but the major ally the US needs is Europe. The administration appears prepared to refer some aspects of the intellectual property case to the WTO, long portrayed by Trump as the centre of anti-US iniquity in global trade disputes. To find allies, the administration is evidently now prepared to do what was previously unthinkable. But European support will not be forthcoming unless the US gives ground on its steel and aluminium tariffs due to become effective on Friday.
16.8 INTERNATIONAL COMMERCIAL DISPUTE RESOLUTION [16.330] International commercial disputes are settled through four major means: • consultation or negotiation; • conciliation or mediation; • arbitration; and • litigation.
I have two rules – never do business with any country that has green in its flag or where they don’t wear overcoats. Sir Benjamin Slade, company director.
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Occasionally countries resort to economic sanctions or “trade wars”, but military force as a means to resolving a commercial dispute is, fortunately, rare today. Each means of dispute resolution has its own advantages and disadvantages and the parties should choose the procedure most suitable for their purposes. This requires consideration of a number of issues including the court’s jurisdiction over foreign parties, international conventions and institutions, applicable domestic legislative regimes for international litigation and arbitration, the likelihood of enforcement as well as other cross-cultural considerations.
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Chapter 16 International Business
Disputes are usually best resolved by informal mechanisms of negotiation or mediation, but if they fail it may be necessary to arbitrate or litigate despite their very real disadvantages of time, cost and damage to the business relationship.
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• Consultation and negotiation refer to an informal and unstructured process under which the parties resolve their dispute by direct contact and exchange of opinions. This is the most common method of dispute resolution both domestically and internationally. It will lead to a negotiated settlement (which is legally binding only if the parties want it to be) or, if unsuccessful, to another, more formal method of dispute resolution. There is no set procedure. The process is initiated and controlled by the parties themselves and is based on continuing cooperation. If this does not exist, a more formal system of resolution is necessary. The obvious advantage of consultation and negotiation are continuing cooperation and savings in time and money. • Conciliation and mediation refer to a process of third-party dispute settlement where procedural rules are very flexible or do not exist at all. It is, in effect, a structured form of negotiation involving an independent third-party conciliator or mediator who is not empowered to make a decision and who simply endeavours to assist the parties to reach a settlement, or who may make a recommendation or report at the end of the process. Conciliation and mediation are particularly valuable for settling disputes between parties involved in a long-term continuing relationship as they negotiate a win-win solution that preserves their relationship rather than the imposed resolution of a court or arbitration tribunal. International mediation has been facilitated by the development of rules that parties may adopt for the conduct of their dispute resolution process (see, for example, the UNCITRAL Conciliation Rules). • Arbitration involves the use of an impartial and competent person as a referee to arbitrate a dispute. It is characterised by flexibility and the freedom of the disputing parties to choose the forum, rules and arbitrator. In practice parties usually choose a seat of arbitration that is neutral as concerns the parties and which has a legal framework that is conducive to arbitration. Arbitration is private, relatively speedy (in comparison to litigation) and there is a lesser likelihood of, or opportunity for, an appeal from an arbitral tribunal than from a court. Arbitration is becoming an increasingly popular alternative to traditional court litigation for resolving international commercial disputes because of the greater ease of enforcing arbitration awards (pursuant to the procedures set out in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (New York Convention)). In addition, the wide use in international contracts of clauses incorporating ICC or UNCITRAL arbitration rules has created a large degree of uniformity in the international arbitration process. This has led to greater efficiency and the avoidance of “conflict of laws” problems that can arise between unrelated domestic legal systems. • Litigation is the traditional means of dispute resolution. It involves the use of a court of law for settling a dispute and is characterised by the formality of the procedures under which the court conducts its business and the power of the court, backed by the sanctions of the state, to enforce its decisions. If the parties to an international commercial contract cannot resolve a dispute informally or if arbitration is not provided for in the contract or agreed upon when the dispute arises, litigation will be the
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only option. Indeed, in some cases litigation will be the preferred option, for example, when an injunction is required (eg, to prevent removal of assets from the jurisdiction when a debt is owed) or to resolve important and complex legal rather than factual issues. There is no system of international commercial litigation but simply the settlement of international commercial disputes by domestic courts. This raises important questions of the governing law, the appropriate jurisdiction and the enforcement of foreign judgments. Litigation is slow, costly, formal and win-lose thus being detrimental to business relationships, however, it has the advantage that there is no need to obtain the consent of the other party for submitting a dispute to the court.
QUESTIONS 1.
Why was the WTO established and how effective is it?
2.
What are regional free trade agreements and how do they impact on the system of multilateral trade regulation established by the WTO?
3.
Outline the general scope of TRIPS and its importance in international business.
4.
Discuss the relative advantages and disadvantages of the processes available for international commercial dispute resolution.
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WEB REFERENCES Department of Foreign Affairs and Trade http://www.dfat.gov.au International Chamber of Commerce http://www.iccwbo.org Productivity Commission http://www.pc.gov.au United Nations Commission on International Trade Law http://www.uncitral.org United Nations Conference on Trade and Development http://www.unctad.org World Trade Organization http://www.wto.org
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17
17
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Business Failure Graham Raffell THE BUSINESS CONTEXT Students of business and law should understand and be able to identify the processes and types of business cessation and the legal obligations that play a role in either the termination of a business entity following its failure or its rehabilitation from critical care. Those who control companies should also understand the implications of their fiduciary duty under the Corporations Act 2001 (Cth) to prevent companies from engaging in insolvent trading.
17.1 CESSATION OF BUSINESS .................................................................................................................................... 726 17.2 PERSONAL INSOLVENCY (BANKRUPTCY) ...................................................................................................... 727 [17.40]
Meaning of insolvent .................................................................................................................................. 727
[17.50]
Bankruptcy Act 1966 (Cth) ......................................................................................................................... 727
[17.60]
Bankruptcy administration ........................................................................................................................ 728
[17.70]
The occasion of bankruptcy ....................................................................................................................... 728
[17.80]
Acts of bankruptcy ...................................................................................................................................... 729
[17.100]
Distribution of the bankrupt’s estate ...................................................................................................... 729
[17.130]
Property available in the bankruptcy ...................................................................................................... 730
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[17.160]
Relation back and avoidance of certain transactions ........................................................................... 731
[17.190]
Personal impact of bankruptcy ................................................................................................................. 732
[17.200]
Release from bankruptcy ........................................................................................................................... 732
17.3 ALTERNATIVES TO BANKRUPTCY ..................................................................................................................... 732 [17.220]
Part IX Debt agreements ............................................................................................................................ 732
[17.230]
Part X Personal insolvency agreements .................................................................................................. 733
17.4 CORPORATE INSOLVENCY .................................................................................................................................. 733 [17.250]
Cross-border insolvency ............................................................................................................................ 733
[17.260]
Winding up/liquidation ............................................................................................................................. 733
[17.340]
Professional standards ............................................................................................................................... 736
[17.360]
Avoidance of pre-liquidation transactions ............................................................................................. 736
[17.380]
Insolvent trading by directors ................................................................................................................... 737
[17.400] Priorities ........................................................................................................................................................ 738 17.5 ALTERNATIVES TO LIQUIDATION ..................................................................................................................... 738 [17.410] Receivership ................................................................................................................................................. 738 [17.460]
Schemes of arrangement ........................................................................................................................... 740
[17.480]
Voluntary administration ........................................................................................................................... 741
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17.1 CESSATION OF BUSINESS [17.10] This chapter is concerned with cessation of a business through the legal paths of personal insolvency (known as bankruptcy) and corporate insolvency (known as liquidation or winding up), and the rescue regimes that are alternatives to them. The cessation of insolvent partnerships and sole traders is governed by the Bankruptcy Act 1966 (Cth). At the end of the process, the individuals previously conducting the business as partners or sole traders still exist. Companies are governed by the Corporations Act 2001 (Cth) when they are solvent and until they are wound up, through insolvency or otherwise. When the liquidation has been completed, the company ceases to exist. Money isn’t everything; usually it isn’t enough. Anon.
Subject to those essential differences the laws of personal and corporate insolvency are similar. In the United States the word “bankruptcy” is applied to both. Australian insolvency law however is based on the English model, which has traditionally concentrated on the rights of creditors, whereas American law, with its “Chapter 11” procedure, has been directed more towards the rehabilitation of the debtor. [17.20] An inherent aspect of a business failing is that there are not enough assets available to pay the debts owed by the business. The United Nations Commission on International Trade Law (UNCITRAL) lists the key objectives of an effective and efficient insolvency law as follows in its Legislative Guide on Insolvency Law:
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1.
Provision of certainty in the market to promote economic stability and growth
2.
Maximising the value of the assets
3.
Striking a balance between reorganisation and liquidation
4.
Ensuring equitable treatment of similarly situated creditors
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Chapter 17 Business Failure
5.
Providing for timely, efficient and impartial resolution of insolvency
6.
Preservation of the insolvent estate to allow equitable distribution to creditors
7.
Providing for a procedure that is transparent and predictable and contains incentives for gathering and dispensing information
8.
Recognising existing creditors’ rights and establishing clear rules for ranking of priority claims
9.
Establishing a framework for cross-border insolvency.
[17.30] Australian insolvency legislation is regularly reviewed and refined to give effect to these policy objectives. Business failure triggers procedures designed to protect creditors, employees and others, and to prevent the debtor behaving fraudulently or conferring unfair advantages on particular creditors. The only general review of insolvency law in Australia to date, Australian Law Reform Commission, “General Insolvency Inquiry”, Report No. 45 (1988) (the “Harmer Report”) states in its introduction: A significant part of contemporary commerce is conducted by persons who have more credit than money. Individuals and business organisations engage in commerce in this way, as do agencies of government and even nations. Central to modern commerce is the ability to honour the promise to pay (whether from assets or income) in the future … Inevitably however, for some, the promise to pay cannot be honoured. It is then that insolvency law becomes of critical concern.
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Having noted the broad analogy between personal and corporate insolvency, this chapter will now examine the steps to be taken and the consequences of business failure according to each.
17.2 PERSONAL INSOLVENCY (BANKRUPTCY) Meaning of insolvent [17.40] In the law, insolvency describes the situation when there is (Sandell v Porter [1966] HCA 28 at [15] per Barwick CJ): … an inability to pay debts as they fall due … But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realisation, by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court.
If you owe the bank $100, that’s your problem. If you owe the bank $100 million, that’s the bank’s problem. J Paul Getty.
Bankruptcy Act 1966 (Cth) [17.50] Personal insolvency, also called bankruptcy, is a mechanism for protecting insolvent individual traders from harassment by their creditors. It also ensures the greatest return to creditors from the identification, sale and equitable distribution of
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the bankrupt’s assets and property. Bankruptcy is governed by the Bankruptcy Act 1966 (Cth). Provided the bankrupt person complies with the Act during the bankruptcy, he or she is able, generally after three years, to secure release from bankruptcy and from the debts which caused it. That is, the Act allows for the possibility of a fresh start for bankrupts. The Act is reformed periodically to address issues that may have arisen in a particular bankruptcy, the implications of a court decision or the unintended consequences of other legislation. For example in 1992 amendments, known as the “Skase amendments”, were introduced to combat the propensity of failed entrepreneurs to seek refuge offshore. (Christopher Skase had decamped to Majorca after the collapse of the Qintex group of companies.) The 1992 amendments tightened the administration of bankrupt estates and instituted a requirement for the bankrupt to obtain court approval for overseas travel. The Bankruptcy and Family Law Legislation Amendment Act 2005 (Cth) addresses the conflict which often occurs between the rights of creditors in a bankruptcy and the rights of a non-bankrupt spouse and the children of a marriage under the Family Law Act 1975 (Cth). The Family Law Amendment (De Facto Financial Matters and Other Measures) Act 2008 (Cth) introduced a comparable regime for de facto (including same-sex) couples. The Family Court of Australia has jurisdiction in bankruptcy to deal with this legislation.
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Bankruptcy administration [Bankruptcy is] a means of ensuring fairness amongst the creditors of the bankrupt inter se and to afford the bankrupt the prospect of a new start after discharge, that would be beneficial for the bankrupt personally, consequently for the family of the bankrupt, and also for society and the economy more generally. Coventry v Charter Pacific Corp [2005] HCA 67 at [118] per Kirby J.
[17.60] The Inspector-General in Bankruptcy administers the Act through an agency attached to the Commonwealth Attorney-General’s Department called the Australian Financial Security Authority (AFSA). The Official Trustee in Bankruptcy takes charge of the bankrupt’s assets and administers the bankrupt estate unless a private registered trustee is appointed. A private trustee will often be appointed in larger bankruptcies where creditors agree to permit the trustee to spend money pursuing assets of the bankrupt and tracing recent dealings. The progress of all individual bankruptcies is recorded on the freely accessible National Personal Insolvency Index (NPII) database, which is maintained by AFSA. The Official Receiver has administrative and supervisory responsibilities to assist the Official Trustee. The conduct and remuneration of private trustees are closely monitored by the Inspector General and the court under the Insolvency Practice Schedule (Bankruptcy), Schedule 2 to the Act, and the Insolvency Practice Rules made thereunder. The Schedule also provides for the appointment of committees of inspection, representatives of creditors, to oversee and assist the conduct of the administration. This legislative structure was introduced by the Insolvency Law Reform Act 2016 (Cth).
The occasion of bankruptcy [17.70] An individual becomes bankrupt in one of two ways: either voluntarily by way of a debtor’s petition, or involuntarily as a result of a court order (known as a sequestration order) granted in response to a creditor’s petition. The bankrupt’s assets vest in either 728
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Chapter 17 Business Failure
the Official Trustee in Bankruptcy, or a trustee privately appointed for the purpose, who then realises and distributes the bankrupt’s assets among the creditors. Any surplus is returned to the debtor. The actual point in time when the individual becomes bankrupt is the point at which the Official Receiver accepts the debtor’s petition or the court makes a sequestration order.
Acts of bankruptcy
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[17.80] Before a court will declare a person bankrupt on a creditor’s petition, the creditor must show that the debtor has committed an act of bankruptcy in the six months preceding the lodgement of the creditor’s petition. Section 40 of the Bankruptcy Act specifies those events which constitute acts of bankruptcy. They include the debtor absconding to avoid creditors, taking steps by which bankruptcy is conceded or having a court judgment enforced against his or her property. But the act of bankruptcy most commonly relied on is a debtor’s failure to comply with a bankruptcy notice (under s 40(1)(g) of the Act). A creditor, who is owed money and has a judgment entered by a court for the amount owed, arranges for the Official Receiver to issue a bankruptcy notice calling for payment of the money. The debtor’s failure to pay constitutes an act of bankruptcy. Great care must be exercised in the preparation of a bankruptcy notice as inaccuracy, especially as to the amount owing, can render the notice invalid. However an application to the court under s 306 of the Act can save a bankruptcy notice from being deemed invalid if the defect relates to something the court determines was only a formal defect or irregularity unless substantial injustice has been caused. [17.90] If the court is satisfied that the grounds for declaring a debtor bankrupt are established it will make a sequestration order against the debtor’s estate. The debtor becomes a bankrupt. A statement of affairs of the bankrupt estate is then prepared and a meeting of creditors is called if requested. The creditors may seek the appointment of a different trustee and may appoint a committee of inspection to assist the trustee.
Distribution of the bankrupt’s estate [17.100] Priority is given to the payment of specified debts as set out in s 109 of the Act, including some moneys due to employees. When the bankrupt employer’s assets do not even cover the employee entitlements, under the Fair Entitlements Guarantee Act 2012 (Cth), the government may pay the employee in which event it becomes substituted as a creditor in the bankruptcy. Bankruptcy does not affect any security held by a creditor so that a secured creditor is entitled to enforce the security and then claim on the estate, as an ordinary unsecured creditor, for any balance owing provided, in the case of personal (as opposed to real) property, the security has been “perfected” (usually by registration) under the Personal Property Securities Act 2009 (Cth) (see Chapter 9 on this legislation generally).
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[17.110] Debtor’s Petition and Creditor’s Petition: A Comparison Debtor’s petition Voluntary Bankruptcy Commenced by debtor No debt minimum No act of bankruptcy required to be proven Must provide a statement of affairs (summary of debtor’s financial circumstances) with petition If petition accepted bankruptcy is automatic
Creditor’s petition Involuntary bankruptcy Commenced by creditor(s) Debt owed must be at least $5,000 Act of bankruptcy in the preceding six months required to be proven Proof of debtor’s insolvency required
Sequestration order granted or declined
[17.120] In order to establish their entitlement to share in the bankrupt’s estate, creditors must lodge a proof of debt setting out the relevant details of their claim. The trustee will then distribute the estate rateably among the creditors.
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Property available in the bankruptcy Capitalism without bankruptcy is like Christianity without Hell. Frank Borman.
[17.130] When appraising the bankrupt’s property available for payment of the debts, it must be remembered that “property” does not necessarily include all of the debtor’s property nor is it confined to property owned by the bankrupt at the date of bankruptcy. The “date of bankruptcy” is the date of either the sequestration order for a creditor’s petition, or for a debtor’s petition, the date the Official Receiver endorses her or his acceptance of the petition. Note that the “date of bankruptcy” is not the same date as the “commencement of bankruptcy”; this is explained at [17.160] under the doctrine of relation back.
Sarina v The Council of the Shire of Wollondilly [1980] FCA 138 [17.140] In a series of disputes and litigation between the parties, an amount of $2,289 remained owing by Mr Sarina to the Council under a costs order made in the Supreme Court. The Council petitioned for his bankruptcy but Mr Sarina still refused to pay. Section 52(2) of the Bankruptcy Act 1966 (Cth) provides as follows:
“(2) If the Court … is satisfied by the debtor – (a) that he or she is able to pay his or her debts … it may dismiss the petition.”
Mr Sarina relied on this provision. He said he was capable of paying this and all his other debts that is he was solvent, and he was entitled in a bankruptcy court to refuse to pay. Deane J agreed and dismissed the petition ([1980] FCA 66). On appeal the Full Court of the Federal Court upheld the decision. An argument that the word “able” in s 52(2) (a) should be read to mean “willing and able” was rejected. 730
Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-23 21:45:57.
Chapter 17 Business Failure The case underlines the principle that bankruptcy proceedings should not be used as a debt recovery procedure (although they often are). There were other enforcement procedures available to the Council in the Supreme Court.
[17.150] Under the Bankruptcy Act, what constitutes property available includes, but is not confined to: • all property owned by the bankrupt at the commencement of the bankruptcy (including his or her home): s 116(1)(a); • all property acquired by the bankrupt after the commencement of the bankruptcy and before discharge: s 116(1)(a);
Bankruptcy is a legal proceeding in which you put your money in your pants pocket and give your coat to your creditors. Joey Adams.
• where the bankrupt has discretionary powers in respect of property which may be exercised in the bankrupt’s favour, any property so controlled: s 116(1)(b); and • generally speaking, choses in action (rights of action) other than personal injury actions. Some property is not available to the creditors under s 116. This includes property held in trust, some personal and household property, a car under a certain value and superannuation funds, although the trustee can now claw back superannuation contributions prior to bankruptcy designed to defeat creditors: ss 128B and 128C.
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Relation back and avoidance of certain transactions [17.160] In the bankruptcy regime, the property available for distribution to creditors may be increased by the doctrine of relation back. That doctrine deems a debtor’s bankruptcy to have commenced at the time of the commission of the earliest act of bankruptcy within the six months immediately prior to the presentation of a creditor’s or debtor’s petition: s 115. The doctrine of relation back thus causes assets that may have been disposed of within that period to form part of the bankrupt estate. In the words of Lukin J in Re K B Docker (1938) 10 ABC 198 at 245: From the time the bankruptcy commences all the property of the bankrupt in theory belongs to the trustee of the estate. Every payment of money, every transfer of property made by the bankrupt is an alienation of property that belongs, not to him, but to his trustee. Every such transaction is, therefore, liable when the debtor becomes a bankrupt, to be set aside.
[17.170] Another form of relation back relates to the trustee’s rights to reverse the effect of preference payments and other pre-bankruptcy transactions. Broadly speaking transactions entered into in good faith and in the ordinary course of business are not affected by either form of relation back: s 123. A transfer of property for less than full value or a payment of money by the bankrupt within the two years prior to the commencement of bankruptcy may be set aside: s 120. Any such assignment made more than two years but less than five years prior to the commencement of the bankruptcy may also be set aside as void, unless the bankrupt was solvent at the time of the transaction: s 120(3). [17.180] Section 122 relates to preferences. Generally speaking any payment made by a bankrupt within six months prior to the date of bankruptcy which has the effect of giving
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preference to one creditor over the other creditors is voidable. The preferred creditor must rank pari passu (on an equal footing) with all the other unsecured creditors in the bankruptcy. Any disposition made at any time with the intention of placing assets beyond the reach of creditors can be set aside by a bankruptcy trustee: s 121.
Personal impact of bankruptcy [17.190] The consequences of being a bankrupt at a personal level include the following: • The bankrupt must deliver to the trustee all books of account and other relevant documents and must assist the trustee in the administration of the bankrupt estate • Bankrupts are expected to make contributions to the estate from their on-going income; this is mandatory once their income reaches a certain level • The trustee can retain counsel to examine the bankrupt publicly before a Federal Circuit Court registrar; the bankrupt must also attend creditors’ meetings and answer any questions from creditors. • Restrictions in the Bankruptcy Act and the Corporations Act 2001 (Cth) make it very difficult for a bankrupt to run a business or act as a director or manager of a company.
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[17.200] Bankruptcy ultimately comes to an end. That end is reached automatically after three years, unless an objection is lodged by the trustee with the Official Receiver upon one of the grounds set out in s 149D of the Bankruptcy Act. The effect of discharge is to release the bankrupt from the bankruptcy itself and from the debts which caused it. But the bankrupt must continue to assist the trustee in the finalisation of the bankrupt estate: s 152.
17.3 ALTERNATIVES TO BANKRUPTCY [17.210] The advantages of an agreement made outside bankruptcy are that the debtor avoids both the stigma and the ramifications of bankruptcy. The alternatives are found in Parts IX and X.
Part IX Debt agreements [17.220] An insolvent debtor may avoid formal bankruptcy by proposing to the Official Receiver a debt agreement that is accepted by the majority of his or her creditors in value. The debt agreement must meet the criteria set out in s 185C(2) including containing a repayment schedule that is realistic and sustainable. To be eligible to contemplate a debt agreement, a debtor must not: • have been bankrupt, utilised a debt agreement or given an authority under s 188 in the past 10 years; • have after-tax income of more than $85,012; • have unsecured debts of more than $113,349; 732
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Chapter 17 Business Failure
• have property that would be divisible among creditors if the debtor were bankrupt valued at more than $113,349. Once it is in place, the debt agreement is recorded on the NPII.
Part X Personal insolvency agreements [17.230] Part X of the Act (ss 187-232) offers another alternative to bankruptcy whereby a person in financial difficulty may make a binding agreement with creditors to deal with outstanding debts. The procedure commences with the signing of an authority under s 188 authorising a registered trustee, a solicitor or the Official Trustee to call a meeting of creditors and take control of the debtor’s property. The advantages of a Part X personal insolvency agreement (if accepted by the creditors) are that it gives the debtor an opportunity to trade out of financial difficulties and provides a flexible approach to dealing with debt for both the debtor and the creditors.
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17.4 CORPORATE INSOLVENCY [17.240] The Australian Parliament and courts have made it clear that the directors of a company must not continue trading and incurring debts when it is insolvent. A company in financial difficulty, and its creditors, have various options under the Corporations Act 2001 (Cth). The choice of the option to be pursued will depend on the gravity of the financial distress, the prospect of recovery, the strategic objectives of the directors, the co- operation of the creditors and whether or not creditors hold security for the debts owed by the company. The nature of charges issued by companies to secure repayment of debt is discussed in Chapter 9.
Cross-border insolvency [17.250] Cross-border insolvency is an increasingly significant aspect of business failure. The twenty-first century company is likely to trade and thus to own assets and incur liabilities in Australia and overseas. The Cross-Border Insolvency Act 2008 (Cth) has been enacted to give effect to the UNCITRAL’s Model Law on Cross-Border Insolvency (1997), which has been adopted by 43 states including Great Britain, Japan, Singapore and the United States. The Act: • encourages co-operation between courts and insolvency practitioners in different jurisdictions; • clarifies the rights of foreign creditors to participate in Australian insolvency proceedings; and • allows for the co-ordination of insolvency proceedings across jurisdictions.
Winding up/liquidation
The Act … seeks to achieve a balance between the public interest in creditors of an insolvent being paid rateably from the property of the insolvent and the public interest, as well as the private interest of the debtor, in the debtor not being reduced to a mendicant. ASIC v Forge (2003) 133 FCR 487 at 488 per Branson and Stone JJ.
[17.260] “Winding up” or “liquidation” are terms used to describe the same process. The terms historically had some distinctions but are now synonymous and used inter-changeably. Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-23 21:45:57.
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Voluntary winding up [17.270] A voluntary winding up may be classified as either: • a members’ voluntary winding up; or • a creditors’ voluntary winding up. The difference between the two types of winding up relates to whether or not the directors are able to make a declaration of solvency. Members’ voluntary winding up Failure is the opportunity to begin again more intelligently. Henry Ford.
[17.280] A members’ voluntary winding up is commenced by a special resolution passed by the company under s 491 of the Corporations Act. The members at a general meeting appoint a liquidator under s 495 if the company is solvent. The necessary declaration of solvency is made after an inquiry into the affairs of the company, and if the directors have formed the opinion that all debts will be paid in full within 12 months of the resolution. Section 494 imposes severe penalties on directors who make a declaration of solvency without reasonable grounds. Creditors’ voluntary winding up
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[17.290] There will be a creditors’ winding up if the directors cannot make a declaration of solvency or if during the members’ winding up the liquidator discovers that the company cannot in fact pay all the debts. In such a situation, the liquidator must immediately call a creditors’ meeting. The creditors may vote to change the liquidator from the person appointed by the members or to continue with the member-appointed liquidator (s 497). Another way in which a company can cease to exist voluntarily is by applying for de-registration, or allowing the Australian Securities & Investments Commission (ASIC) to de-register it administratively, under Part 5.1 of the Act
Compulsory liquidation [17.300] The court-ordered compulsory liquidation requires the plaintiff (the person who applies to the court) to specify a ground (reason) for placing the company into liquidation. The persons who can apply to the court for a compulsory liquidation order are listed in s 462 as being: • the company; • a creditor; • a contributory (essentially a shareholder); • a liquidator (including a provisional liquidator ie someone appointed as a liquidator temporarily in matters of urgency to maintain the status quo); • ASIC; or • Australian Prudential Regulation Authority (APRA). ASIC also has the power itself to order a winding up but this is rare: s 489EA. 734
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Chapter 17 Business Failure
Grounds [17.310] The grounds for applying to the court for an order for compulsory liquidation are stated in s 461 and are as follows: • company passes a special resolution for winding up by the court; • company did not commence business within one year of registration or suspends business for one year; • company has no members; • the affairs of the company are being conducted in a way which is oppressive, unfair, unjust or otherwise against the interests of its members; • ASIC has prepared a report that the company should be wound up; or • the court is of the opinion that it is just and equitable that the company should be wound up. However the most common ground for an application to wind up a company is insolvency for failure to comply with a statutory demand for a debt of at least $2,000. The Act provides that once a statutory demand has been made for the debt, if it is not paid, then a rebuttable presumption of insolvency is created: s 459C.
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Disputing the debt [17.320] The debtor company’s ability to dispute the debt and have the demand set aside for technical errors are limited. A company has 21 days to pay the debt or to apply to the court to have the demand set aside if the substantiated amount is less than $2,000, or if the demand is defective and there would be a “substantial injustice”. Although the procedure for issuing a statutory demand is clear, it is often quite difficult for a creditor to know whether late or part payment of an amount owing is evidence of insolvency, a cash flow problem or simply an instance of a slow payer who may have calculated that the debt to the creditor is incurring interest at a lesser rate than other available sources of credit (see R Schaeffer, “Just Because I Haven’t Paid You, It Doesn’t Mean I’m Insolvent” (2007) 8(4) Insolvency Law Bulletin 51). Discretion of the court: “Just and equitable”
Bankruptcy [ie Liquidation] is the belief that the souls of a corporate entity, the equity holders, do not just vanish when their corporeal form dies. Rather, they learn from the mistakes of a previous incarnation and can once again live on the earth in corporate form. True, they may suffer for the sins of previous incarnations and have trouble raising venture capital, but such is the karmic burden. With luck, some day a corporation may achieve enlightenment and reach a plane of eternal bliss and nirvana –the Fortune 500. In Re Gary Aircraft Corp 698F 2d 775 (1983) per Goldberg J. The seeds of every company’s demise are contained in its business plan. Fred Adler, Company Director.
[17.330] As already noted, under s 461(1)(k) the court retains a residual discretion to order the winding up of any company on the ground that it is “just and equitable” to do so. This ground was relied on in Re Dalkeith Investments Pty Ltd (1984) 9 ACLR 247, where there was an atmosphere of animosity following the marital separation of the company’s chairman (Mr Smith) from his director-wife. Smith was late for a general meeting, at which various resolutions were passed in his absence. The resolutions had the effect of diluting his shareholding or forcing him to invest more money in the company whose shareholders were hostile to his interests. The court decided not to wind up the company, but the unfairly prejudicial conduct against Smith entitled him to have his shares purchased at an appropriate value. The majority of compulsory liquidations will be based on insolvency. The most controversial ground for winding up is often under the court’s residual “just and equitable” power. There is an overlap between the oppressive or unfairly prejudicial ground in s 461
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and s 233 which provides for various other forms of relief which can be available to an oppressed minority of shareholders. Liquidators appointed by the court are officers of the court and are bound by a number of special duties. ASIC must be informed of the appointment of a liquidator and all company documents must include the words “in liquidation” after the company name (s 541). Liquidators also have a number of reporting duties to the members (the company’s shareholders), creditors and ASIC.
Professional standards It used to be said that two fires and a bankruptcy could set you up for life. It can now be said that one long trial and a royal commission will ensure the lawyer fame and fortune. Willard Estey J, Supreme Court of Canada.
[17.340] A company that is required to comply with Accounting Standard AASB 101.25 must assess whether the entity is able to continue as a “going concern”. It is important to be aware that a company, including a public company, may be insolvent for the purposes of the Corporations Act but may still legitimately be categorised as a going concern under Australian Auditing Standard 570 if the managers of the company have satisfied the auditors that going-concern status requirements have been satisfactorily addressed. They may satisfy auditors if for example an investor has agreed to inject sufficient capital into the company to enable it to continue trading. Because the cash injection is due in the future, the auditors determine how reliable the prediction is and proceed with the audit accordingly.
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As soon as an auditor determines that accounts cannot be prepared on a going-concern basis, then the accounts have to be prepared on a liquidity basis. This means the accounts are prepared as if all assets were to be sold in a “fire sale”, rather than being valued on historic book value. Public companies are required to be audited but proprietary companies are not required to be audited in order to comply with the Corporations Act or with Accounting Standards. However, this does not absolve a company’s directors from the responsibility of knowing about the entity’s financial status. They may be required to represent that their entity is solvent to meet the requirements of other legislation. Hence, it is important to be aware of the differing triggers and measures of insolvency in accounting and law. [17.350] Insolvency practitioners (including liquidators) must comply with a Code of Professional Practice. A copy of this Code can be found on the website of the Australian Restructuring Insolvency and Turnaround Association (ARITA): http://www.arita.com. au/about-us/arita-publications.
Avoidance of pre-liquidation transactions [17.360] Liquidators have powers to avoid certain types of transactions. These powers are mainly contained in s 588FE of the Corporations Act, which allows for certain transactions to be declared void if they are “insolvent transactions” and: • the transaction occurred within the last six months before the winding up commenced; • the transaction was an “uncommercial transaction” (ie a reasonable person in the company’s position would not have entered into such a transaction) within the last two years before the winding up commenced; 736
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Chapter 17 Business Failure
• the transaction was with a related entity to the company, within the last four years; • the transaction was entered into so as to interfere with the rights of creditors within the last 10 years; • it was an unfair loan (extortionate interest or charges) to the company at any time prior to winding up; • it was an unreasonable director-related transaction within the last four years. Insolvent transactions are defined as “unfair preferences” or uncommercial transactions that cause the company to become insolvent or which occur while the company is insolvent. An unfair preference is defined as a transaction (typically a cash payment) with a creditor which puts the creditor in a better position than the creditor would have been in, if left simply to rank pari passu (on an equal footing) with all the other (unsecured) creditors.
My problem lies in reconciling my gross habits with my net income. Errol Flynn.
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[17.370] ASIC investigates “phoenix” companies where directors leave one company insolvent and then start another company in the same or a similar business. In late 2017 the Government announced proposals to deal with phoenix companies. In the meantime ASIC has the power to disqualify a person from acting as a director for five years if the person was a director of two companies which were wound up in insolvency within seven years: s 206F.
Insolvent trading by directors [17.380] The Corporations Act imposes a duty on directors to prevent insolvent trading. Under s 588G, a director will incur liability if debts are incurred by the company at a time when there were reasonable grounds for “suspecting” that the company is insolvent. This is an objective test and the judge will decide whether a reasonable person in a like position would have continued to trade. If s 588G applies, the director can be personally liable for the debts (ss 588M, 588R) and can be the subject of a civil penalty order (s 1317E), disqualification from acting as a director (s 206C) and criminal prosecution if the conduct was dishonest (s 588(3)). Under s 588V, holding companies can be held liable for the debts of their subsidiaries if they engaged in insolvent trading. [17.390] There is a defence to insolvent trading in s 588H. It states that directors need to have had reasonable grounds to expect that the company was solvent at the time or that a competent and reliable subordinate was monitoring the position. A leading case is Commonwealth Bank v Eise & Friedrich (1991) 6 ACSR 1, where the honorary chairman was held liable for $97 million for insolvent trading even though there was no question of dishonesty. There is also now a “safe harbour” defence under s 588GA, available to a director who has developed a course of action reasonably likely to lead to a better outcome for the company than the appointment of an administrator or liquidator –ideally in consultation with an appropriately qualified professional, one would expect.
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Priorities [17.400] One of the most difficult areas for a liquidator of an insolvent company is the order of payments to creditors. Section 556 sets out the order for the ranking of payments between secured, priority unsecured and general unsecured creditors. The priority of secured creditors is determined subject to the Personal Property Securities Act 2009 (Cth) (see [16.100] above). It provides that a charge over a company’s assets will only be valid, as against a liquidator (ie rank ahead of the unsecured creditors) if it was registered under the Act at the time when the winding up commenced. Otherwise, within each class of debt, all creditors rank equally as prescribed by s 555. This is the pari passu principle. Thus, if there are insufficient assets for a particular class, each creditor must be paid proportionally which is expressed as “cents in the dollar” of debt. To open a shop is easy; the difficult thing is to keep it open. Chinese proverb.
Priority among the unsecured creditors is given to liquidator’s fees and other costs of administering the insolvency. Employees have some priority for relatively small amounts of unpaid entitlements. When the company in liquidation’s assets do not even cover the employee entitlements, under the Fair Entitlements Guarantee Act 2012 (Cth) the government may pay the employee, in which event it becomes substituted as a creditor in the liquidation. Part 8.8A of the Corporations Act deals with transactions by the company or its officers intended to defeat employee entitlements.
17.5 ALTERNATIVES TO LIQUIDATION Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Receivership [17.410] A receiver may be appointed by a court but is usually appointed by a creditor secured by a charge, to take control of the assets charged. The receivership may take one of two forms: either the appointment of a receiver for a specific asset, or the appointment of a “receiver and manager” who has control over all assets. This is governed by Part 5.2 of the Corporations Act. The company entering receivership must be served with notice of the appointment of a receiver and ASIC must be notified. The receivership is also published in the Commonwealth Gazette. Furthermore, the directors and company secretary must make a report on the affairs of the company to the receivers within 14 days of the notice of receivership being served.
Receiver and receiver and manager [17.420] There is a difference between the appointment of a receiver and the appointment of a receiver and manager. The receiver is responsible to the creditor that has appointed it to realise enough of the asset(s) subject to the charge to repay the secured debt. The receiver and manager (more often appointed under a floating charge and covering all the assets) has the power to manage the company’s affairs, must be aware of all creditors and must be careful not to damage any of the assets that are not covered by the security. The distinction was clearly drawn over a century ago by Sir George Jessel MR when he said in Re Manchester & Milford Railway Co (1880) 14 Ch D 645 at 653: 738
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Chapter 17 Business Failure “A receiver” is a term which was well known in the Court of Chancery, as meaning a person who receives rents or other income paying ascertained outgoings, but who does not, if I may say so, manage the property in the sense of buying or selling or anything of that kind … We were most familiar with the distinction in the case of a partnership. If a receiver was appointed of partnership assets, the trade stopped immediately. He collected all debts, sold the stock-in-trade and other assets, and then under the order of the court, the debts of the concern were liquidated and the balance divided. If it was desired to continue the trade at all, it was necessary to appoint a manager or a receiver and manager … He could buy and sell and carry on the trade. So that there was a well-known distinction between the two. The receiver merely took the income, and paid necessary outgoings, and the manager carried on the trade or business in the way I have mentioned.
Appointment [17.430] The appointment of a receiver may be made either by the court, on an application from creditors, or privately, where the creditor directly appoints a receiver under the security document. The security document (a debenture or a mortgage) is the contract that provides for the fixed and/or floating charge.
Powers and duties [17.440] Receivers have a number of powers and duties that are set out in s 420 of the Act, and following sections. These include the power to:
ASDA Dairies Ltd (in receivership) which is to be sold as a going concern. This well-established and profitable business … NZ Herald (2 September 1995).
• enter into possession and take control of property; Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
• lease, let, hire, or dispose of property; • borrow money on security of property; • convert property to money; • execute any document, bring or defend any legal proceedings in the name of the company; and • make or defend an application for the winding up of the company. Under s 422, the receiver has an obligation to report to ASIC any misconduct by the company in receivership. Moreover, at common law, the receiver has a duty to act in good faith: Downsview Nominees Ltd v First City Corp Ltd (1992) 11 ACLC 3101. The deed of appointment of a receiver is crucial and it sets out what action a receiver may and may not take while in possession of the relevant assets. The receiver and manager replaces the company’s existing management and owes a duty to inform ASIC if the previous management is suspected of any form of misconduct. If a receiver is unsure what decisions to make, he or she may apply to the court for directions.
The effect of receivership [17.450] The fact that a receiver has been appointed to the corporate assets does not unseat the board of directors. Their powers of management will clearly be severely curtailed, however, where the receiver exercises powers of management. It is important to note that during receivership the directors must still comply with the various administrative and other obligations imposed upon them by the Corporations Act. The practical
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effect of receivership was described by Justice Street of the NSW Supreme Court in Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd [1969] 2 NSWR 782 at 790 as follows:
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Wealth is not without its advantages, and the case to the contrary, although it has often been made, has never proved widely persuasive. J K Galbraith, The Affluent Society (Mentor Books, 1958).
Receivership and management may well dominate exclusively a company’s affairs in its dealings and relations with the outside world. But it does not permeate the company’s internal domestic structure. That structure continues to exist notwithstanding that the directors no longer have authority to exercise their ordinary business-management functions. A valid receivership and management will ordinarily supersede, but not destroy, the company’s own organs through which it conducts its affairs. The capacity of those organs to function bears a direct inverse relationship to the validity and scope of the receivership and management.
A receiver appointed by a creditor, although generally an agent of the company and thus owing duties to it, has the principal duty and function of protecting the interests of those who appointed him or her. However, in acting to further creditors’ interests there is a duty not to recklessly sacrifice the interests of the company itself. It follows that a receiver must exercise reasonable care in ensuring that a proper price is paid for assets sold. If, as sometimes happens, a liquidator is appointed (in the interests of unsecured creditors) as well as a receiver, the receiver ceases to be the agent of the company; this role is then assumed by the liquidator.
The order sought [court appointment of a receiver] … was one with extremely grave consequences for the defendants. Putting to one side a winding up order, which will in the normal course ultimately result in a company’s being given its quietus, we cannot for the moment think of an order of greater consequence to a company than one which … robs it of its own assets and business. Bond Brewing Holdings Ltd v NAB (1990) 8 ACLC 330 at 341 per Kaye, Murphy and Brooking JJ.
Schemes of arrangement [17.460] A scheme of arrangement is a process whereby a number of difficult problems can be resolved at one time. It is an alternative to either a voluntary administration or liquidation of the company, and is carefully controlled by Part 5.1 of the Corporations Act. It can be used for two distinct purposes. First, it can be a special deal with creditors to enter a compromise agreement that is binding on all parties. Second, a scheme may be used as part of a financial reconstruction of the company. Schemes may be put forward as either creditors’ or members’, depending upon the solvency of the company and the proposed outcomes. Under a creditors’ scheme of arrangement, creditors may be given the opportunity to accept a proposed scheme of arrangement and compromise their existing claims, rather than wait for a liquidator to wind up the whole entity. For example, a creditor may be more willing to accept a $500,000 payment immediately, rather than have to wait for an unknown proportion of a million-dollar loan to be repaid at the direction of a liquidator at some uncertain point in the future. The scheme of arrangement that is to be used for a reconstruction by members may involve a variation of the company’s share capital, such as conversion of debt and preference shares into ordinary shares. A members’ scheme may also be used for the transfer of one entity’s assets for the issue of new shares in another entity. This is particularly beneficial to amalgamate a group of companies into a single entity. [17.470] ASIC will examine a proposed scheme prior to the required applications that must be made to the court. The court must first order a creditors’ meeting for the scheme to be fully explained. The scheme must then be approved by 75% in number and value of the parties entitled to vote. Once approved by the members or creditors, the scheme 740
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Chapter 17 Business Failure
must still be put forward to the court for approval. The scheme of arrangement, upon approval by the court, binds all the creditors or members. It is this fact that makes it of use for companies with debt problems, as it will bind all the creditors to a compromise or an arrangement. Schemes of arrangement are relatively slow and costly to implement. There is a lot of detailed documentation that must be provided and the scheme is always subject to court approval under s 411. For insolvent companies, they have in practice been substantially replaced by deeds of company arrangement which can arise from the voluntary administration process introduced into the corporations legislation in 1993; they do not require court approval.
Voluntary administration [17.480] The voluntary administration procedure arose out of the Harmer Report (see [16.30] above) which recommended (p 28-29): the introduction of a new voluntary procedure for insolvent companies which integrated the procedures for the voluntary winding up of a company and a scheme of arrangement. The procedure proposed was designed with the aim that it would be: • capable of swift implementation; • as uncomplicated and inexpensive as possible;
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• flexible, providing alternative forms of dealing with the financial affairs of the company.
[17.490] The introduction of Part 5.3A into the Corporations Act in 1993 established a new procedure for companies in financial difficulty. The law enables the appointment of an administrator (who is a registered liquidator with ASIC) to take control of a company and investigate its affairs so that a recommendation might be made to creditors as to the future of the company. The administrator will determine whether a deed of company arrangement can be executed or whether the company should be wound up. [17.500] Section 435A states that the object of voluntary administration 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.
Appointment of an Administrator [17.510] The administrator may be appointed by directors in which event they should first resolve either that the company is insolvent or is likely to become insolvent (s 436A); by a company’s liquidator or provisional liquidator (s 436B); or by a creditor who is entitled to enforce a charge on the whole or substantially the whole of the company’s property (s 436C). The administrator is deemed to be the company’s agent and thus has a wide range of powers in order to carry on the company’s business.
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As a method of providing a reliable guide to individuals’ behaviour patterns or to future … trends the predictions of an actuary can be only a little more accurate and certainly less entertaining than those of an astrologer. Auty v National Coal Board [1975] 1 WLR 784 at 800-801, per Oliver LJ.
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Business and the Law
Effect of Appointment [17.520] In order to give the administrator time to devise a plan to restructure the company in difficulty, s 440A grants a moratorium on the enforcement of debts during the period of the administration. During this period, the company cannot commence a voluntary winding up and the court will not order a winding up if it is not in the creditors’ interests. The intention is to enable an insolvent company to maximise its chances of trading out of financial difficulties and to maintain itself as a going concern as stated in s 435A. The Federal Court, in Dallinger v Halcha Holdings Pty Ltd (1995) 60 FCR 594, held that there does not have to be a prospect of saving the company from liquidation when the administration commences. A secured creditor will not be able to enforce a charge or take possession of assets without the court’s leave or the written consent of the administrator but this does not apply to a creditor who has a charge over substantially all the company’s property or a secured creditor who commenced enforcement prior to the appointment of the administrator.
Meetings
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[17.530] The Corporations Act imposes various procedural duties on the administrator. Within eight business days of appointment, the administrator must hold the first meeting of creditors to decide whether to appoint a committee of creditors and this meeting may also vote to replace the administrator with someone else. Within five days before or after the end of the “convening period” (usually 25 business days from the commencement of the administration), the administrator must hold a second meeting of creditors at which the administrator’s report on the company and opinion as to its future will be discussed. At that meeting the creditors may resolve: that the company execute a deed of company arrangement; that the administration should end; or that the company be wound up. This meeting may be adjourned but not for more than 45 business days. The voluntary administration procedure is intended to be expeditious and to bring about an early resolution as to the company’s future one way or the other. Part 5.3A is therefore replete with time limits for meetings and other steps. Extensions of time are available but not granted as readily as in many other branches of the law. In Diamond Press Australia Pty Ltd [2001] NSWSC 313, on an application to extend the time for the second meeting of creditors, Barrett J referred to the need to balance the requirement for a speedy and summary administration and the need to accommodate sensible and constructive actions by the administrator designed to maximise the return for creditors.
Deeds of company arrangement [17.540] If a deed of company arrangement is agreed to, it must be executed within 15 business days. All the company creditors, officers, members and the administrator are bound by it (Corporations Act, s 444D). A secured creditor is only bound by the terms of the deed to the extent that the court orders or the creditor agrees. If the creditors decide the company should be wound up the administration is effectively converted into a creditors’ voluntary winding up. 742
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Chapter 17 Business Failure
If the creditors accept a deed of arrangement, an administrator of the deed is appointed, usually the initial administrator. The deed will endeavour to deal with corporate debt in a way that allows continued trading whether by delay, payment, acceptance of a lesser amount or conversion of debt into equity. During the period of the deed’s life, the company will attempt to resolve its difficulties. If it is unsuccessful the company will again proceed from administration to winding up.
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QUESTIONS 1.
The Insolvency Law Reform Act 2016 (Cth) seeks to achieve more harmony between the law and procedure relating to personal bankruptcy and company liquidation. What are the continuing differences between the two?
2.
The Commonwealth Government has further proposals to reform insolvency law which include reducing the standard period of bankruptcy from three years to one year to encourage business enterprise rather than penalising the debtor. What is your opinion of this idea?
3.
What are Pt IX and Pt X agreements under the Bankruptcy Act 1966 (Cth) and how may they benefit both the debtor and the creditors?
4.
Should recipients of sequestration or involuntary bankruptcy face harsher penalties than those who voluntarily claim bankruptcy and avoid further debts? Why or why not?
5.
What provisions have been made for employee entitlements in the case of bankruptcy or insolvency? In the scheme of repayments, where do employees’ entitlements rate? Is this fair?
WEB REFERENCES Australian Financial Security Authority http://www.afsa.gov.au Australian Prudential Regulation Authority http://www.apra.gov.au Australian Restructuring, Insolvency & Turnaround Association http://www.ipaa.com.au Australian Securities and Investments Commission http:// www.asic.gov.au Australian Stock Exchange http://www.asx.com.au Australian Treasury http://www.treasury.gov.au
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743
Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved. Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-23 21:45:57.
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Part 4 BUSINESS, CONSUMERS AND FAIR TRADING
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Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved. Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-19 01:05:32.
18
18
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The Australian Consumer Law Patty Kamvounias THE BUSINESS CONTEXT Since the introduction of the Australian Consumer Law (the ACL) on 1 January 2011, consumer protection has become a particularly significant issue for all Australian businesses and their employees. The era of caveat emptor –let the buyer beware –has been consigned to the history books. On that date a fragmented mishmash of federal, State and Territory consumer protection law was replaced by a single consumer law of national application. This chapter traces the decline of caveat emptor, the rise of the consumer movement and the development of a comprehensive regulatory regime of consumer protection and its enforcement that has been substantially restructured by the ACL. Business in Australia operates in one of the strongest regulatory regimes in the world for consumer protection. It is powerful not only in its scope but also because provisions designed to protect consumers can be enforced by competitors as well as by consumers and the regulatory agencies – furthermore, the law is continuing to evolve and, in some contexts, the protections originally designed for consumers have been extended to small business owners. Civil, criminal and administrative consequences in addition to unwelcome media attention and business disruption provide strong incentives for businesses to develop compliance programs to minimise, if not prevent, the possibility of contravention of the ACL.
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18.1 CONSUMERS, CONSUMERISM AND THE LAW ............................................................................................. 748 [18.10]
The decline of caveat emptor ....................................................................................................................... 748
[18.20]
The rise of consumerism ............................................................................................................................ 749
18.2 THE REGULATORY FRAMEWORK ...................................................................................................................... 753 [18.100]
The role of the common law ...................................................................................................................... 753
[18.110]
The role of legislation ................................................................................................................................. 754
[18.140]
Legislative reform ....................................................................................................................................... 756
18.3 CONSUMER PROTECTION, FAIR TRADING AND COMPETITION ........................................................... 759 [18.200]
Consumer protection and fair trading .................................................................................................... 760
18.4 THE AUSTRALIAN CONSUMER LAW ............................................................................................................... 761 [18.290]
Australian Consumer Law Review .......................................................................................................... 766
18.5 ENFORCEMENT OF THE AUSTRALIAN CONSUMER LAW ........................................................................ 767 [18.370]
Public and private enforcement ............................................................................................................... 774
18.6 THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION ................................................... 775 18.7 ADMINISTRATIVE REMEDIES ............................................................................................................................. 779 [18.460]
Enforceable undertakings ......................................................................................................................... 779
[18.500]
Substantiation notices ................................................................................................................................ 780
[18.520]
Public warning notices ............................................................................................................................... 782
[18.540]
Infringement notices .................................................................................................................................. 783
18.8 OFFENCES .................................................................................................................................................................. 785 18.9 CIVIL REMEDIES ...................................................................................................................................................... 790 Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
[18.630]
Pecuniary penalties ..................................................................................................................................... 790
[18.670] Injunctions .................................................................................................................................................... 794 [18.700] Damages ....................................................................................................................................................... 795 [18.710]
Compensation orders for injured persons and non-party consumers ............................................. 795
18.10 OTHER REMEDIES ................................................................................................................................................... 796 [18.730]
Non-punitive orders ................................................................................................................................... 796
[18.740]
Adverse publicity orders ............................................................................................................................ 797
[18.750]
Disqualification orders ............................................................................................................................... 797
[18.770]
Country of origin representations ........................................................................................................... 799
[18.780]
Remedies relating to guarantees .............................................................................................................. 799
18.1 CONSUMERS, CONSUMERISM AND THE LAW The decline of caveat emptor [18.10] The contemporary marketplace is obviously very different from its nineteenth- century origins, both in the prevailing economic theory and in the transactions that take place in it. The changes in Canada described below have obviously been mirrored in Australia and elsewhere (J S Ziegel, “The Future and Canadian Consumerism” (1973) 51 Canadian Bar Review 191 at 191): From a predominantly agrarian society we have moved into a predominantly urbanised society. The simple wants of yesteryear have been replaced by the modern supermarket with its 748
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Chapter 18 The Australian Consumer Law more than 7500 items. The products of the agrarian society were for the most part uncomplicated, produced or manufactured locally, and buyer and seller dealt with each other on a basis of relative equality. All this too has changed. Modern technology has placed at the disposal of the Canadian consumer a bewildering variety of highly complex products, consumable and non-consumable, many of which were unknown before the war. The notion of the consumer bargaining from a position of equal strength has become a fiction in any but the most attenuated sense. The contract of adhesion has replaced the handshake and a multi-billion dollar credit industry is threatening to make the cash transaction a museum curiosity. The merchant himself has largely become a conduit pipe for goods manufactured and prepackaged often thousands of miles from the place of sale. The “medium is the message” accurately describes the modern salesman as a sophisticated advertising industry first creates the mass consumption markets and then sustains them by claims and images often far removed from reality.
The first major cracks in the doctrine of caveat emptor –let the buyer beware –appeared with the enactment of sale of goods legislation over a century ago. The Sale of Goods Act 1893 (UK) –the model for the sale of goods legislation of the Australian States and Territories – among other things, implied terms into contracts for the sale of goods. Purchasers were protected by the implication of terms to the effect that goods were, for example, of merchantable quality and reasonably fit for their purpose. Although vendors were given the right to exclude the implied terms in certain circumstances, this rudimentary protection nevertheless became known as the “consumers charter”.
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The rise of consumerism [18.20] Consumer protection issues took many years to achieve the level of public recognition and support necessary to sustain a political movement and ultimately to influence the legislators. As with many other public policy issues the efforts of a committed individual provided the catalyst for the development of a powerful movement. Much of the credit lies with Ralph Nader, the US consumer rights activist whose book, Unsafe at Any Speed (Grossman, 1965), documented evidence as to alleged defects affecting safety in certain vehicles manufactured by General Motors. The main boost to the consumer movement came not from the book itself but from the gross over reaction of General Motors, which lost much public confidence in its attempt to destroy Nader’s credibility. The groundswell of public opinion was translated into political action; and politicians, conscious that consumers were an influential constituency, responded accordingly. On 15 March 1962, US President John F Kennedy delivered an address to the US Congress (Special Message to the Congress on Protecting the Consumer Interest (15 March 1962)) setting out his vision of consumer rights that would become the guiding philosophical tenets of the consumer movement:
Consumerism, as a movement of articulate aims, is a recent phenomenon. An anonymous student has described it as “a bandaid on the malignancy of capitalism”. Layton and Holmes Australian Quarterly (No 2) (1974).
Consumers, by definition, include us all. They are the largest economic group in the economy, affecting and affected by almost every public and private economic decision … But they are the only important group in the economy who are not effectively organized, whose views are often not heard. … If consumers are offered inferior products, if prices are exorbitant, if drugs are unsafe or worthless, if the consumer is unable to choose on an informed basis, then his dollar is wasted, his health and safety may be threatened, and the national interest suffers.
President Kennedy’s vision included the following consumer rights: Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-23 21:46:20.
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1.
The right to safety –to be protected against the marketing of goods which are hazardous to health or life. The right to be informed –to be protected against fraudulent, deceitful or grossly misleading information, advertising, labelling or other practices, and to be given the facts needed to make an informed choice. The right to choose –to be assured, wherever possible, access to a variety of products and services at competitive prices; and in those industries in which competition is not workable and Government regulation is substituted, an assurance of satisfactory quality and service at fair prices. The right to be heard –to be assured that consumer interests will receive full and sympathetic consideration in the formulation of Government policy, and fair and expeditious treatment in its administrative tribunals.
2.
3.
4.
IN CONTEXT
World Consumer Rights Day
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[18.30] The significance of this first ever statement on consumer rights by a world leader is recognised by the fact that 15 March is celebrated each year as “World Consumer Rights Day” (WCRD) by Consumers International (CI), an independent “global voice for consumers”. The theme chosen each year for this day highlights an area of concern for consumers everywhere. In recent years, CI has focused on: • Consumer Justice Now! to expose the damage caused by poor or non-existent consumer protection (WCRD 2013) • Fix our Phone Rights! to highlight consumer issues that are undermining the success of mobile phone services (WCRD 2014) • Helping Consumers Choose Healthy Diets to focus on consumers’ rights to healthy food (WCRD 2015) • Antibiotics Off the Menu to call on fast food companies to commit to stop serving meat from animals given antibiotics used in human medicine (WCRD 2016) • Building a Digital World Consumers Can Trust to highlight the opportunities and challenges for consumers in a digital world (WCRD 2017) Consumers do not want to be manipulated, hornswoggled or lied to. They want truth, not just in lending, labelling and packaging, but in everything in the whole, vast, bewildering market place. B Furness, What is Consumerism?
750
• Making Digital Marketplaces Fairer to call for access to fair and secure internet for all, actions against scams and fraud and better consumer protection online (WCRD 2018). http://www.consumersinternational.org
[18.40] Over the years, the consumer movement has built on these basic rights and later generations have asserted further consumer rights including (see http://www.consumersinternational.org): 1.
The right to satisfaction of basic needs –to have access to basic, essential goods and services; adequate food, clothing, shelter, health care, education, public utilities, water and sanitation.
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Chapter 18 The Australian Consumer Law
2.
The right to redress –to receive a fair settlement of just claims, including compensation for misrepresentation, shoddy goods or unsatisfactory services.
3.
The right to consumer education –to acquire knowledge and skills needed to make informed, confident choices about goods and services, while being aware of basic consumer rights and responsibilities and how to act on them.
4.
The right to a healthy environment –to live and work in an environment that is non- threatening to the well-being of present and future generations.
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[18.50] These consumer rights have been incorporated into the United Nations Guidelines on Consumer Protection (UNGCP) to assist consumers, consumer groups and governments achieve and maintain adequate consumer protections. The UNGCP were first adopted in 1985, updated in 1999 and, following extensive consultation, revised by the UN General Assembly in resolution 70/186 of 22 December 2015. A key passage in the revised UNGCP (guideline 5) sets out the legitimate needs which the guidelines are intended to meet as follows: a)
Access by consumers to essential goods and services;
b)
The protection of the vulnerable and disadvantaged consumers;
c)
The protection of consumers from hazards to their health and safety;
d)
The promotion and protection of the economic interests of consumers;
e)
Access by consumers to adequate information to enable them to make informed choices according to individual wishes and needs;
f)
Consumer education, including education on the environmental, social and economic consequences of consumer choice;
g)
Availability of effective consumer dispute resolution and redress;
h)
Freedom to form consumer and other relevant groups or organizations and the opportunity of such organizations to present their views in decision-making processes affecting them;
i)
The promotion of sustainable consumption patterns;
j)
A level of protection for consumers using electronic commerce that is not less than that afforded in other forms of commerce;
k)
The protection of consumer privacy and the global free flow of information.
The revised UNGCP extend their scope to include the provision of goods and services by State-owned enterprises to consumers as well as applying more generally to business- to-consumer transactions (guideline 2) and include new sections on principles for good business practices (guideline 11), national policies for consumer protection (guidelines 14-15), electronic commerce (guidelines 63-65) and financial services (guidelines 66- 68). The UNGCP provide the international benchmark for good practice in consumer protection. The Intergovernmental Group of Experts (IGE) on Consumer Protection Law and Policy, set up under the 2015 revision, monitors the implementation of the guidelines and provides a forum for research, review and assistance to Member States. According to Consumers International (CI), although the UNGCP are not legally binding, their strength
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comes from their adoption by the United Nations General Assembly and the consensus of countries and experts from all over the world.
Consumer Data Right
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ACCC Media Release 82/18, 9 May 2018
[18.60] The Federal Government has committed to implementing a “Consumer Data Right” for Australian consumers. Draft legislation to amend the Competition and Consumer Act 2010 and consequentially amend the Privacy Act 1988 and the Australian Information Commissioner Act 2010 is currently under review. The Treasury Laws Amendment (Consumer Data Right) Bill 2018, will legislate a “Consumer Data Right” to give Australians greater control over their data and empower consumers to choose to share their data only for the purposes they have authorised. The legislation follows the release of the report of the Review into Open Banking in Australia (December 2017). There will be a phased implementation of the “Consumer Data Right” in the banking sector from July 2019 followed by implementation in the energy and telecommunications sectors before being rolled out across the economy on a sector by
The motor vehicle industry faces increasing costs, consumerism, inflation, punitive legislation and intrusions from all levels of government. Consumer protection is both necessary and worthwhile but when it is applied with hysterical fervour it clearly works against consumers to a degree never envisaged by the original legislators. D I Donaldson, President, Chamber of Automotive Industries, 29 August 1975.
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sector basis. The ACCC (Australian Competition and Consumer Commission) will take a lead role in implementation of the “Consumer Data Right” by developing rules and an accreditation scheme, approving technical standards and taking enforcement action to ensure compliance. The ACCC is establishing a dedicated Access to Data Unit and will work closely with the Office of the Australian Information Commissioner, the Data Standards Body and industry. ACCC Chairman Rod Sims has stated that “[t]he introduction of a consumer data right in Australia is a fundamental competitor and consumer reform …This new right will improve consumers’ ability to compare and switch between goods and services on offer. We expect the scheme to encourage competition between service providers, leading not only to better prices for customers but also more innovation of products and services”.
[18.70] In the 1980s, many consumer organisations recognised consumer responsibilities to complement consumer rights, including (see, Consumers International, http:// www.consumersinternational.org): 1.
Critical awareness: consumers must be awakened to be more questioning about the provision of the quality of goods and services.
2.
Involvement or action: consumers must assert themselves and act to ensure they get a fair deal.
3.
Social responsibility: consumers must act with social responsibility, with concern and sensitivity to the impact of their actions on others.
4.
Ecological responsibility: consumers must have a heightened sensitivity to the impact of consumer decisions on the physical environment.
These initiatives are important to ensure consumers are not lulled into a false sense of security that they need not take responsibility for their actions. [18.80] The future for consumer protection in Australia and elsewhere is assured. Consumerism is now a political movement and lawmakers realise that the consumer is a
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Chapter 18 The Australian Consumer Law
legitimate, worthy and demanding subject for protection from the pitfalls of an increasingly complex marketplace. The consumer voice in Australia is most widely represented by CHOICE an independent consumer organization founded in 1959 to protect and empower consumers by providing both information and advocacy services to change laws and business conduct where needed. The media also now takes an active interest in consumer affairs, and consumer protection issues sustain a number of current affairs programs and newspaper and magazine columns. [18.90] Any discussion of the need for consumer protection should be balanced by acknowledging that there is a cost to consumer protection and this cost may ultimately be borne by consumers through higher prices. For example, exhaust emission technology is expensive and increased liability for defective products has to be covered by insurance. Businesses can continue to operate only if such costs can be recovered.
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The question as to the appropriate level of consumer protection is undoubtedly difficult and controversial. It can nevertheless be suggested with confidence that responsibility for consumer protection cannot be delegated exclusively to the legislature. Consumers and businesses have vital roles to play. Consumer protection measures must be supported by initiatives which encourage consumers to be informed, educated and discerning and which encourage business to respond more effectively to consumer needs. Consumer protection measures must also be supported by administrative reforms which enable consumers to gain access to the consumer laws enacted for their protection.
18.2 THE REGULATORY FRAMEWORK The role of the common law [18.100] The development of a comprehensive regulatory framework for consumer protection is obviously beyond the capacity of the common law and, not surprisingly, the contemporary consumer looks primarily to legislation for protection from the excesses of the marketplace. Before the legislative framework is examined it is nevertheless appropriate to acknowledge the contribution made by the common law. In Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 and Donoghue v Stevenson [1932] AC 562, the common law delivered stunning victories to the unhappy consumers of, respectively, defective smoke balls and contaminated ginger beer. The names of Mrs Carlill and Mrs Donoghue will survive for as long as the law of contract and the law of tort are part of our law because of the massive contribution these cases made to the development of the common law. However, it is the underlying principles of these cases (discussed in Chapters 6 and 8, respectively) that are of most interest today.
Advertising is the rattling of a stick inside a swill bucket. George Orwell.
The judicial contribution has, of course, been more profound than these landmark cases and much of the recent development of the law of contract has been driven by the imperative of substance over form –of broad equitable principles of good conscience prevailing over legal artifice, of good faith in contracting prevailing over freedom of contract.
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The judicial contribution has also extended beyond substantive rights to extending the remedies for their contravention. For example, in Jarvis v Swan Tours Ltd [1973] 2 QB 233, the court recognised that in some circumstances damages for injury to feelings can be awarded in a contractual action. Under a statutory regime of consumer protection, the courts, of course, retain a crucial interpretative role. Indeed, with provisions as broad and general as those prohibiting “misleading or deceptive” conduct (Australian Consumer Law (ACL), s 18) or “unconscionable” conduct (ACL, s 21) the role of the courts more closely resembles the traditional role of developing the common law rather than simply interpreting legislation. The source of consumer protection law today is nevertheless almost exclusively statutory.
The role of legislation
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[18.110] Until relatively recently, consumer protection laws in Australia were a complex statutory mix of federal, State and Territory legislation. Traditionally the States and Territories dealt with consumer protection –there being no specific “consumer protection” head of power in the Commonwealth Constitution. The equation changed in 1974 with the enactment of the Trade Practices Act (the TPA) which signalled the dramatic entry of the Commonwealth into this field –a role assumed not only because of the desirability of a uniform national regime but also because of the States’ apparent reluctance to develop a comprehensive protectionary regime appropriate for the late twentieth century.
Especially in the last 15 or 20 years the doctrine of caveat emptor has been eroded to the point that a new doctrine governs the relationship of seller and buyer of goods, namely, caveat venditor. This is especially so in the case of sales to consumers, and reflects the trend of legislative intervention today occasioned, no doubt, by the increasing mass production of goods, advance in technology, extensive advertising campaigns and the creation of mass retail outlets, notably the supermarket and the chain store. Lockhart J, Australian Law News (March 1985).
The justification for the comprehensive consumer protection provisions was spelt out in the Attorney-General’s second reading speech introducing the Trade Practices Bill (Senator the Hon LK Murphy QC, “Senate Parliamentary Debates” (30 July 1974) 60 Hansard 540-541): In consumer transactions unfair practices are widespread. The existing law is still founded on the principle known as caveat emptor –meaning “let the buyer beware”. That principle may have been appropriate for transactions conducted in village markets. It has ceased to be appropriate as a general rule. Now the marketing of goods and services is conducted on an organised basis and by trained business executives. The untrained consumer is no match for the businessman who attempts to persuade the consumer to buy goods or services on terms and conditions suitable to the vendor. The consumer needs protection by the law and this Bill will provide such protection.
[18.120] The key consumer protections in the TPA were found in provisions in the following Parts: • Part IVA Unconscionable Conduct (prohibiting unconscionable conduct “within the meaning of the unwritten law, from time to time, of the States and Territories”: s 51AA; unconscionable conduct in “consumer” transactions: s 51AB; and unconscionable conduct in “business” transactions: s 51AC). • Part V Consumer Protection (dealing with unfair practices: Div 1; pyramid selling: Div 1AAA; country of origin representations: Div 1AA; product safety and product information: Div 1A; conditions and warranties in consumer transactions: Div 2; and actions against manufacturers and importers of goods: Div 2A). • Part VA Liability of manufacturers and importers of goods. 754
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Chapter 18 The Australian Consumer Law
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The main head of power in the Commonwealth Constitution that formed the constitutional basis for the consumer protection provisions of the TPA was the power in s 51(xx) of the Constitution that conferred on the Commonwealth Parliament, the power to make laws for “foreign corporations and trading or financial corporations formed within the limits of the Commonwealth”. This legislative power extends to the power to regulate the trading activities of these types of corporations so includes the power to regulate activities affecting consumers. This is why each of the consumer provisions was prefaced with the words “A corporation …”. In certain circumstances, the application of the consumer protection provisions was extended to individuals by s 6 which utilised other constitutional heads of power such as the interstate trade and commerce power (s 51(i)); the Territories’ power (s 122); and the postal, telegraphic, telephonic and other like services power (s 51(v)). [18.130] The federal legislation cast the net very widely –especially having regard to the predominant role of corporations in distributing goods or services –but gaps undoubtedly remained in relation to for example sole traders or partnerships falling outside the constitutional reach of the Commonwealth. These gaps were filled by the enactment in each State and Territory of Fair Trading Acts which mirrored the unfair practices provisions of Div 1 of Pt V of the TPA. While the federal TPA was the most important piece of legislation, because of its constitutional limitations, it was not the only piece of consumer protection legislation in Australia. The relevant State and Territory legislation being: Fair Trading Act 1992 (ACT); Fair Trading Act 1987 (NSW); Consumer Affairs and Fair Trading Act 1990 (NT); Fair Trading Act 1989 (Qld); Fair Trading Act 1987 (SA); Fair Trading Act 1990 (Tas); Fair Trading Act 1999 (Vic); Fair Trading Act 1987 (WA). This “mirror” State and Territory legislation extended the reach of the unfair practices provisions by directing the prohibitions at “persons” (a formula which includes all legal persons whether individual or corporate). In some cases, the States and Territories included in their Fair Trading legislation consumer protection provisions beyond those located in Div 1 of Pt V of the TPA. All State and Territory Fair Trading legislation prohibited unconscionable consumer contracts and included enforcement and remedies provisions mirroring those found in the TPA. Most jurisdictions enacted product safety and product information provisions which incorporated parts of Div 1A of the TPA. But very few jurisdictions included provisions along the lines of Div 2 (conditions and warranties in consumer transactions) and Div 2A (actions against manufacturers and importers of goods) in their legislation. The Fair Trading Acts of the States and Territories were therefore not exclusive statements of the consumer protection laws of those jurisdictions. Each State and Territory had a Sale of Goods Act as well as a long list of specific legislation dealing with particular aspects of consumer protection such as door-to-door selling and motor vehicle sales. Consumer protection in relation to financial services is covered by the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). Consumer protection law thus became a complex statutory mix of federal, State and Territory legislation and a far from seamless regulatory regime which imposed both cost and inconvenience on both consumers and business. Comparative consumer law tables and charts were commonly included in legal guides and textbooks to assist businesses,
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Where industry or companies can demonstrate that they are fair dinkum about being consumer-responsive and taking care of their fair-trading responsibilities seriously, there would be less need for intervention by governments and regulators. A Fels, Chairman of the Trade Practices Commission, Australian Financial Review (22 October 1993).
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consumers and law students understand consumer law obligations and rights in different jurisdictions in Australia.
Legislative reform [18.140] The need for a national scheme of easily understood consumer protection laws to replace the overlapping and sometimes inconsistent laws which operated at federal, State and Territory level was widely acknowledged. Proposals to reform Australia’s consumer policy framework have a long heritage. The federal Attorney General’s Department noted in “The Justice Statement” (1995) that: As Australia is now a single market for many goods and services, it is difficult to justify the expense associated with local variations in consumer protection laws. Australian consumers believe they should have a fair go wherever they live; they should have access to the same rights and remedies regardless of their location. A uniform law would reduce confusion in cross-border transactions and make it easier for consumer affairs enforcement agencies to cooperate and to educate consumers and business alike.
In its 2008 paper, “Towards a Seamless Economy: Modernising the Regulation of Australian Business”, the Business Council of Australia, commented that:
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Despite the unified image we present to the world, doing business across Australia is made unnecessarily confusing, complex and costly by the inability of governments to make adequate progress in harmonising and rationalising existing regulation.
However, the major impetus for reform was the Productivity Commission’s, Final Report of the Review of Australia’s Consumer Policy Framework published in May 2008 which was highly critical of the then current dysfunctional arrangements. In a comprehensive review of Australia’s consumer policy framework, the Productivity Commission recommended the introduction of a single generic consumer law to apply across all States and Territories. The Commission report found that while Australia’s consumer policy framework had considerable strengths, there were also some significant weaknesses, including: • the division of responsibility between the Commonwealth and State and Territory Governments, which led to variable outcomes for consumers, added costs for business and lack of responsiveness in policy making; and • gaps and inconsistencies in the policy and enforcement tool kit and weaknesses in redress mechanisms for consumers. The buyer needs a hundred eyes, the seller but one. Italian proverb.
The Commission was of the view that these deficiencies made it difficult to respond to rapidly changing consumer markets and meant that the associated costs for consumers and the community would continue to grow. The Commission saw a pressing need to put in place institutional arrangements that are more compatible with the increasingly national nature of Australia’s consumer markets and that would deliver more timely and effective policy change than the current regime. The Commission also considered that a set of clear objectives and supporting principles was required to anchor the future development of consumer policy. The overarching objective should be to improve consumer wellbeing by fostering effective competition and enabling the confident participation of consumers in markets in which both consumers and suppliers can trade fairly and in good faith.
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Chapter 18 The Australian Consumer Law
[18.150] The Productivity Commission’s key recommendations included: • a single national generic consumer law, based on the TPA, which would apply in all Australian States and Territories; • identifying unnecessary or costly consumer regulation that only applies in a few States and Territories, or to one industry, and either removing them or, if justified, introducing nationally consistent rules; • transferring regulation of credit providers and finance brokers to the Australian Government, with the ASIC as the regulator; • national laws to tackle unfair terms in consumer contracts; • a national approach to product safety laws and enforcement; • improved alternative dispute resolution processes and greater scope for regulators to undertake class actions on behalf of consumers; • new redress and enforcement powers for consumer regulators, including the ability to seek redress for non-parties, civil pecuniary penalties, banning orders and substantiation notices; and
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• an enhanced role for the Australian Government in consumer policy development and enforcement. The Commission estimated that the proposed reform package could provide a net gain to the community of between $1.5 billion and $4.5 billion a year. Most of the benefits would come from improving the effectiveness of existing measures and their enforcement, or lowering compliance costs for business. Following the release of this report Australia’s peak intergovernmental forum – the Council of Australian Governments (COAG) –charged the Ministerial Council on Consumer Affairs (MCCA) with developing a package of reforms based on the Productivity Commission’s recommendations. The MCCA is comprised of all Commonwealth, State, Territory and New Zealand Ministers responsible for fair trading and consumer protection laws. [18.160] The MCCA agreed to the following operational objectives to support a national consumer policy: • to ensure that consumers are sufficiently well informed to benefit from and stimulate effective competition;
Advertising befuddles our experience not because advertisers are liars, but precisely because they are not. Advertising fogs our daily lives less from its peculiar lies less than from its peculiar truths. Boorstin, The Image (1962).
• to ensure that goods and services are safe and fit for the purposes for which they are sold; • to prevent practices that are unfair; • to meet the needs of those consumers who are the most vulnerable or are at the greatest disadvantage; • to provide accessible and timely redress where consumer detriment has occurred; and • to promote proportionate, risk-based enforcement. In May 2008, the MCCA announced a commitment to meeting COAG’s deadline for developing enhanced national processes to improve the consumer policy framework, drawing
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on the Commission’s final report. Ministers also agreed to adopt a common overarching objective for Australian consumer policy based on the Commission’s recommendations. [18.170] In July 2009, the Commonwealth, State and Territory governments signed an intergovernmental agreement which provided for the ACL to be introduced as a Schedule to the Competition and Consumer Act 2010 (Cth) (CCA) (the renamed TPA) and for each state and territory to adopt it as a law of its respective jurisdiction so that the same provisions would apply across Australia. It was primarily to address the complications of consumer protection in a federal system that the ACL was introduced. The ACL is a single national law which has allowed the repeal of the disparate state and territory equivalent provisions formerly necessary to ensure a haphazard national coverage for consumer protection given the realities of Australia’s Constitution.
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The Minister in introducing the ACL reforms described the former consumer law framework as a “complex array of 17 national, state and territory generic consumer laws along with provisions scattered throughout many other laws”: Dr Craig Emerson, Second Reading Speech on the Trade Practices Amendment (Australian Consumer Law) Bill (No 2) 2010, 17 March 2010. Whether it is labelling claims made about the honey on your toast or a takeover bid for the company that supplies your milk, the Competition and Consumer Act 2010 influences every business-to-business and business-to- consumer transaction in Australia. Rod Sims, ACCC Chair.
In the Minister’s words, the ACL represents “generational change” in Australia’s consumer laws for the benefit of both consumers and business: [The ACL] introduces reforms designed to make Australia’s markets work better, to improve protection for all consumers and to strip away layers of legislative and regulatory complexity from our laws, saving business time and money and contributing to the delivery of a seamless national economy.
The ACL was introduced in two instalments. The new national unfair contract terms regime, and new penalty, enforcement and consumer redress provisions, came into effect on 1 July 2010 with the balance of the ACL coming into effect on 1 January 2011. It is difficult to exaggerate the impact of the ACL. The ACL creates, for the first time, a single national consumer law. The new regulatory regime for consumer protection in Australia has been described as “the most far-reaching consumer law reforms since the inception of the TPA 35 years ago”. The consumer protection enforcement arsenal has also been substantially strengthened by the introduction in the ACL of significant new enforcement weapons discussed in this chapter. Consistently with the former regulatory scheme, consumer protection laws for financial products and services are located in the ASIC Act rather than the ACL. The introduction of the ACL was accompanied by amendment of the separate legislative framework for the regulation of financial products and services under the ASIC Act, the government being committed to maintaining consistency between generic consumer protection provisions applicable to consumers whether of financial products or otherwise. The ASIC Act deals with such matters as unconscionable conduct, misleading or deceptive conduct and false representations in relation to conduct in trade or commerce in relation to financial services, and establishes ASIC, not the Australian Competition and Consumer Commission (ACCC), as the appropriate regulatory authority. A “financial service” is defined as the provision or supply of a “financial product” that would include banking,
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Chapter 18 The Australian Consumer Law
insurance, investments and superannuation: ASIC Act, s 12BAB. The separate legislative framework for financial products and services has created another level of complexity and been subject to criticism: see Wingecarribee Shire Council v Lehman Brothers Australia Ltd [2012 FAC 1028 discussed in [18.40].
18.3 CONSUMER PROTECTION, FAIR TRADING AND COMPETITION [18.180] On 1 January 2011 the TPA was reborn as the CCA –a new name which better reflects its dual role in relation to competition law and consumer protection. This follows the 1995 change in the name of the statutory authority responsible for administering the legislation from the Trade Practices Commission (the TPC) to the ACCC. Section 2 of the CCA sets out the object of the legislation in the following terms: “to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection”.
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The interrelationship between the “consumer protection” provisions and the “restrictive trade practices” provisions of Pt IV (see Chapter 23) has frequently been discussed. The first Chairman of the TPC, Ron Bannerman, commented in TPC, Annual Report, 1983-1984 at [A 5.6] that: I have always seen consumer protection on the one hand and competition on the other as principles that should be mutually supporting and their administration equally so. If we are thinking about price, quality and service (three fundamentals for consumers), then competition may often be the best way to secure them. If we are thinking more broadly about general standards of living, then the forces that can maintain or improve industry efficiency are vital. Competition is one such force. Consumers not only benefit from competition, they activate it, and one of the purposes of consumer protection law is to ensure they are in a position to do so.
In a speech launching the ACCC’s Compliance and Enforcement Policy (“Priorities”, Speech to Committee for Economic Development of Australia, Sydney (19 February 2015)), the current Chairman of the ACCC, Rod Sims, noted that: Competition law, consumer protection and economic regulation are complementary tools, with the objective of making our market economy work as it should.
IN CONTEXT
Competition and consumer protection [18.190] Competition and consumer protection are different sides of the one coin.
Competition is pursued not as an end in its own right but as the most effective means of protecting the interests of consumers. Consumer protection is directly focused on protecting consumers. However, through providing a “level playing field” for traders in their dealings with consumers, it also encourages fair competition. Competition and consumer protection are complementary components of market regulation, the overall object of which is to remove undesirable practices in trade or commerce. This view is not universally held (K J Cseres, Competition Law and Consumer Protection (Kluwer Law International, 2005)):
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Competition is an important regulator. The Trade Practices Act 1974 (Cth) is there to see that competitive forces are allowed free play. In this respect the Act is not regulatory, but deregulatory, because it encourages competition to stand in place of government regulation and industry restrictions and to compel adjustment in response to changes in technology and industry structures … The consumer protection provisions although regulatory in the sense of prescribing standards of conduct, run parallel to the competition provisions and do not dilute their thrust. It should never be forgotten that competition is itself a prime, perhaps the prime, consumer protection. R M Bannerman, Trade Practices Commission, Annual Report, 1980-1981.
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The assumption that competition law and consumer protection are mutually reinforcing is rarely challenged. The theory seems uncontroversial. However, because a positive interaction between the two is presumed to be self-evident, the frequent conflicts that do in fact arise are often dealt with on an ad hoc basis, with no overarching legal authority. There is a clear need for a detailed and coherent understanding of exactly where the complements and tensions between the two policy areas exist.
Consumer protection and fair trading
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[18.200] Although the generic term consumer protection is generally used to collectively describe the range of legislative initiatives aimed at protecting consumers, the wider term fair trading may more accurately reflect the effect of the statutory regime.
I think also that the legislation is important for the protection of free competition. Indeed, in this very case the very [advertising] campaign was instituted as a defensive weapon against competitive inroads being made by another trader at the time. So far as that aspect is concerned if means that the company which indulges in this kind of conduct attracts by false statements into its showroom those very persons who in the state of free competition are the ones who are available and sought by and might otherwise go to the competitor. Reardon v Morley Ford Pty Ltd [1981] ATPR40-205 at 42,882 per Smithers J.
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Although consumer protection laws directly protect consumers they also protect the competitive process –“sharp practices” disadvantage not only consumers but also those ethical businesses which do not unfairly exploit their superior bargaining power. A code of consumer protection requires businesses to compete on equal terms and enhances price, quality and service competition. The term fair trading probably suggests the link to competition better than the more narrowly focused term consumer protection. Part V of the former TPA was headed “Consumer Protection” but the High Court has held conclusively that the heading provides no general restriction on the scope of the provisions in that Part: Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594. There was no express or implied “consumer restriction” to the scope of the “unfair practices” provisions. The explosion in the litigation involving the former s 52 –the broad and general prohibition of misleading or deceptive conduct –is explained by its enforcement by the business community. The prohibition provides a versatile remedy not only in respect of a range of advertising, design, marketing, labelling, promotional and branding strategies engaged in by competitors but also in relation to pre-contractual representations in negotiations leading to the formation of a contract. There is no reason to expect that the equivalent prohibition in s 18 of the ACL appearing under the heading “General Protections” would not be interpreted in the same manner. Provisions prohibiting misleading conduct and false or misleading representations in trade or commerce are directed at any person whatsoever. The “target” of such conduct or representations does not have to be “a consumer”. Even those provisions in the ACL setting out “consumer guarantees” which are limited by a “consumer” requirement are wider than they may at first appear. Although as originally enacted, the term consumer was defined in a traditional manner as a person acquiring goods or services “of a kind ordinarily used for private use or consumption” and not acquired for the purpose of resupply or in the course of a profession, trade or business, the definition was broadened in 1977 to provide protection for a range of primarily small business transactions by introducing a monetary threshold. A very wide definition of “consumer” has been retained in s 3 of the ACL. A person, including a corporation, is taken to have acquired goods or services as a “consumer” if the goods or services they purchased are priced at $40,000 or less, or, if they cost more than $40,000, if they are
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Chapter 18 The Australian Consumer Law
goods or services of a kind ordinarily acquired for personal domestic household use or consumption, or, if the goods consisted of a vehicle or trailer acquired for use principally in the transport of goods on public road; and if in all cases, the goods are not purchased for either resupply or using them up or transforming them in trade or commerce in the course of a process of production or manufacture, or in the course of repairing, or treating other goods or fixtures on land. In March 2017, the Australian Consumer Law Review proposed that the figure of $40,000 be increased to $100,000 to reflect the effect of inflation since the $40,000 limit was determined and to prevent protections afforded by the legislation being eroded. The Government’s Consultation Regulation Impact Statement (CRIS) –Australian Consumer Law Review: Clarification, simplification and modernisation of the consumer guarantee framework was released in March 2018 to canvas the regulatory options and seek feedback on expanding the definition of “consumer”. The options considered are: 1. Maintain the status quo; 2. Increase the threshold in the definition of consumer from $40,000 to $100,000; and 3. Increase the threshold in the definition of consumer from $40,000 to $100,000 and apply indexation. See Chapter 22 for further discussion of the definition of “consumer” and the “consumer guarantees”.
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18.4 THE AUSTRALIAN CONSUMER LAW [18.210] The ACL came into force on 1 January 2011. At the same time, the Trade Practices Act 1974 (Cth) (TPA) was renamed the Competition and Consumer Act 2010 (Cth) (the CCA). The ACL is found in Sch 2 to the CCA. Part XI of the CCA provides that the ACL applies as a law of the Commonwealth to the conduct of corporations (other than in relation to financial services). By December 2010, all States and Territories had passed legislation applying the ACL as a law of the State and Territory and repealing existing consumer legislation that was being replaced by the ACL. The ACL creates, for the first time, a single national consumer law. It is a national law implemented through the States and the Territories adopting the ACL contained in Sch 2 to the CCA in their own laws. The applicable State and Territory legislation is as follows: Fair Trading (Australian Consumer Law) Amendment Act 2010 (ACT); Fair Trading Act (Australian Consumer Law) Act 2010 (NSW); Consumer Affairs and Fair Trading Amendment (National Uniform Legislation) Act 2010 (NT); Fair Trading (Australian Consumer Law) Act 2010 (Qld); Statues Amendment and Repeal (Australian Consumer Law) Act 2010 (SA); Australian Consumer Law (Tasmania) Act 2010 (Tas); Fair Trading Amendment (Australian Consumer Law) Act 2010 (Vic); Fair Trading Act 2010 (WA). [18.220] The ACL comprises five chapters each of which is outlined below. Chapter 1 Introduction Chapter 2 General Protections Chapter 3 Specific Protections Chapter 4 Offences Chapter 5 Enforcement and Remedies Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-23 21:46:20.
The ACL is a substantive advance on the fragmented statutory consumer law that we had. It takes Australia from the middle ranks to near the top in international standing … It provides clear safeguards for consumers, greater consistency and efficiency for business, and effective enforcement means for the ACCC and State and Territory fair trading agencies. R Sims, Chairman of the ACCC, ACCC News Release 015/12 (10 February 2012).
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Chapter 1: Introduction [18.230] This chapter provides a single set of definitions and interpretative provisions used in the ACL. Key definitions include the definition of “consumer” in s 3 that applies to provisions dealing with consumer guarantees, unsolicited selling and lay-by agreements; and the definitions of “manufacturer” in s 7 and “safety defect in relation to goods” in s 9 that apply to provisions dealing with liability for defective goods. These definitions are discussed in Chapter 22 (Supply of Goods and Services).
Chapter 2: General Protections [18.240] This chapter is comprised of three Parts as follows: Part 2-1 Misleading or deceptive conduct (ss 18-19); Part 2-2 Unconscionable conduct (ss 20-22A); Part 2-3 Unfair contract terms (ss 23-28). The general provisions in these Parts that prohibit conduct in trade or commerce that is misleading or deceptive and unconscionable conduct, and make unfair terms in standard form consumer contracts void, are discussed in detail in Chapter 19 (Misleading or Deceptive Conduct) and Chapter 20 (Unconscionable Conduct and Unfair Contract Terms).
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[18.250] This chapter is comprised of three Parts and a number of Divisions and Subdivisions as follows: Part 3-1 Unfair Practices Div 1 –False or misleading representations etc (ss 29-38) Div 2 –Unsolicited supplies (ss 39-43) Div 3 –Pyramid Schemes (ss 44-46) Div 4 – Pricing (ss 47-48) Div 5 –Other unfair practices (ss 49-50) Part 3-2 Consumer Transactions Div 1 –Consumer guarantees Subdiv A –Guarantees relating to the supply of goods (ss 51-59) Subdiv B –Guarantees relating to the supply of services (ss 60-63) Subdiv C –Guarantees not to be excluded etc by contract (ss 64-64A) Subdiv D – Miscellaneous (ss 65-68) Div 2 –Unsolicited consumer agreements Subdiv A – Introduction (ss 69-72) Subdiv B –Negotiating unsolicited consumer agreements (ss 73-77) 762
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Chapter 18 The Australian Consumer Law
Subdiv C–Requirements for unsolicited consumer agreements (ss 78-81) Subdiv D –Terminating unsolicited consumer agreements (ss 82-88) Subdiv E – Miscellaneous (ss 89-95) Div 3 –Lay-by agreements (ss 96-99) Div 4 – Miscellaneous (ss 100-103) Part 3-3 Safety of consumer goods and product related services Div 1 –Safety standards (ss 104-108) Div 2 –Bans on consumer goods and product related services Subdiv A –Interim bans (ss 109-113) Subdiv B –Permanent bans (ss 114-117) Subdiv C –Compliance with interim bans and permanent bans (ss 118-119) Subdiv D –Temporary exemption from mutual recognition principles (ss 120-121) Div 3 –Recall of consumer goods Subdiv A –Compulsory recall of consumer goods (ss 122-127) Subdiv B –Voluntary recall of consumer goods (s 128)
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Div 4 –Safety warning notices (ss 129-130) Div 5 –Consumer goods, or product related services, associated with death or serious injury or illness (ss 131-132A) Div 6 – Miscellaneous (s 133) Part 3-4 Information Standards (ss 134-137) Part 3-5 Liability of manufacturers for goods with safety defects Div 1 –Actions against manufacturers for goods with safety defects (ss 138-142) Div 2 –Defective goods actions (ss 143-149) Div 3 – Miscellaneous (s 150) The specific forms of conduct prohibited and the specific practices regulated by the provisions in these Parts and Divisions, are discussed in detail in this book in Chapter 21 (Advertising and Sales Promotion) and Chapter 22 (Supply of Goods and Services).
Chapter 4 –Offences [18.260] Part 4-1 Offences relating to unfair practices Div 1 – False or misleading representations etc (ss 151-160) Div 2 –Unsolicited supplies (ss 161-163) Div 3 –Pyramid Schemes (s 164) Div 4 –Pricing (ss 165-166)
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Div 5 –Other unfair practices (ss 167-168) Part 4-2 Offences relating to consumer guarantees Div 1 – Consumer Guarantees (s 169) Div 2 –Unsolicited consumer agreements Subdiv A –Negotiating unsolicited consumer agreements (ss 170-173) Subdiv B –Requirements for unsolicited consumer agreements etc (ss 174-177) Subdiv C –Terminating unsolicited consumer agreements (ss 178-181) Subdiv D –Miscellaneous (ss 182-187) Div 3 –Lay-by agreements (ss 188-191) Div 4 – Miscellaneous (ss 192-193) Part 4-3 Offences relating to safety of consumer goods and product related services Div 1 – Safety standards (ss 194-196) Div 2 –Bans on consumer goods and product related services (ss 197-198) Div 3 –Recall of consumer goods (ss 199-201) Div 4 –Consumer goods, or product related services, associated with death or serious injury or illness (s 202) Part 4-4 Offences relating to information standards (ss 203-204) Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
Part 4-5 Offences relating to substantiation notices (ss 205-206) Part 4-6 Defences (ss 207-211) Part 4-7 Miscellaneous (ss 212-217)
Chapter 5 –Enforcement and remedies [18.270] Part 5-1 Enforcement Div 1 – Undertakings (s 218) Div 2 –Substantiation notices (s 219-222) Div 3 –Public warning notices (s 223) Part 5-2 Remedies Div 1 –Pecuniary penalties (s 224-230) Div 2 –Injunctions (ss 232-235) Div 3 –Damages (ss 236) Div 4 –Compensation orders etc for injured persons and orders for non-party consumers Subdiv A –Compensation orders etc for injured persons (ss 237-238) Subdiv B –Orders for non-party consumers (ss 239-241)
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Chapter 18 The Australian Consumer Law
Subdiv C –Miscellaneous (ss 242-245) Div 5 –Other Remedies (ss 246-250) Div 6 –Defences (ss 251-253) Part 5-3 Country of origin representations (ss 254- 258) Part 5-4 Remedies relating to guarantees Div 1 – Action against suppliers Subdivision A –Actions against suppliers of goods (ss 259-266) Subdivision B –Actions against suppliers of services (ss 267-270) Div 2 –Action for damages against manufacturers of goods (ss 271-273) Div 3 – Miscellaneous (ss 274-277) Part 5-5 Liability of suppliers and credit providers Div 1 –Linked credit contracts (ss 278-286) Div 2 –Non-linked credit contracts (s 287)
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The offences in Ch 4 of the ACL and the enforcement and remedies provisions in Ch 5 are discussed in this chapter.
IN CONTEXT
Educating businesses and consumers about the Australian Consumer Law [18.280] The Australian Consumer Law website was launched on 24 September 2010 – see http://www.consumerlaw.gov.au
This website contains a wealth of information about the ACL and its enforcement including: • the background and implementation of the law; • an overview of the legislation and amendments; • public consultations about the law and the Australian Consumer Law Review; • national ACL projects; • guides to help businesses understand their obligations in relation to consumer guarantees, product safety, sales practices, unfair contract terms and unfair business practices; • guides to compliance and enforcement by the ACCC and the State and Territory consumer protection agencies; • links to other general resources (facts sheets, booklets, videos, industry guides, etc); • resources for businesses and consumers; and • consumer policy development.
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Australian Consumer Law Review [18.290] In July 2015, the Hon Bruce Billson, Minister for Small Business, announced the first review of the ACL since it was introduced on 1 January 2011. The terms of reference indicated the very wide scope of the review that would consider the effectiveness of the current provisions of the ACL and whether the law was sufficiently flexible to respond to new and emerging issues. The review would also consider the administration of the law and the effectiveness of the structures set up under the ACL in supporting a national consumer policy framework. The review, conducted by Consumer Affairs Australia and New Zealand (CAANZ), formally commenced in March 2016 with the release of an “Issues Paper” calling for submissions from all stakeholders, including consumers, businesses, advocacy groups and lawyers to provide feedback on how the national consumer policy framework is operating and what could be improved. This feedback informed the “Interim Report” released in October 2016 that provided a further opportunity for interested parties to provide CAANZ with their views.
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In addition to these public consultations, CAANZ commissioned several supporting projects as part of the review process. The Australian Consumer Law Survey 2016, conducted by EY Sweeney, was the second national survey of consumer and business awareness, understanding and experience of dealing with Australia’s consumer laws. CAANZ engaged QUT (Queensland University of Technology) to conduct a comparative analysis of consumer policy frameworks in Canada, the European Union, Singapore, the United Kingdom and the United States. The QUT study’s report, published in April 2016, considered four principal issues –issue 1: approaches to unconscionable or highly unfair trading practices; issue 2: approaches to regulation of e-commerce and peer-to- peer transactions; issue 3: institutional structures relating to the administration and enforcement of consumer laws; and issue 4: measures to facilitate access to justice. To independently assess the effectiveness of the multiple regulator model underpinning the ACL, the Productivity Commission was tasked to assess whether the institutional and administrative structures are effective in supporting a single national consumer policy framework and to make findings on how the model could be strengthened. The Productivity Commission sought submissions on an “Issues Paper” released in July 2016 and a “Draft Report” issued in December 2016 before submitting its final report on Consumer Law Enforcement and Administration to the Australian Government in March 2017. In the Australian Consumer Law Review “Final Report” published in March 2017, CAANZ identified a package of reforms (reproduced in Table 1 below) comprised of legislative proposals, non-legislative actions by regulators and a program of further research and policy development. There are 19 proposals for legislative change addressing administration and enforcement and the general and specific protections in the ACL. The Treasury Laws Amendment (Australian Consumer Law Review) Bill 2018 amends the ASIC Act, ACL and CCA to give effect to a number of proposals recommended in the ACL Review Final Report. At the time of writing (August 2018), the Treasury Laws 766
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Chapter 18 The Australian Consumer Law
Amendment (Australian Consumer Law Review) Bill 2018 had been passed by the House of Representatives and was before the Senate. The amendments: • ease the evidentiary requirements so that a party bringing proceedings may rely on both admissions of fact and findings of fact made in other proceedings; • extend the unconscionable conduct protections to publicly-listed companies; • ensure that the unsolicited services provisions operate as intended by including services that were not actually supplied; • clarify that an unsolicited consumer agreement may be entered into in a public place; • enhance price transparency by requiring that additional fees or charges associated with pre-selected options are included in the headline price; • strengthen the Minister’s and regulator’s powers to obtain information about product safety; • enable regulators to use investigative powers to better assess whether or not contract terms are unfair; • give courts the power to require a person in contravention of the ACL to engage a third party to give effect to a community service order; • clarify the scope of consumer guarantees where goods are transported or stored;
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• ensure that the terminology used in the consumer protection provisions in the ASIC Act relating to land are consistent with similar provisions in the ACL; and • clarify that the ACL-related consumer protections that apply to financial services also apply to financial products under the ASIC Act. By August 2018, the Treasury Laws Amendment (2018 Measures No. 3) Bill 2018 had been passed by both Houses of the Australian Parliament. This Bill amends the ACL and the CCA to provide for a safe harbour defence to an allegation of false, misleading or deceptive conduct where a person has complied with an information standard about free range eggs; and ensure the confidentiality of supplier information obtained by the Australian Energy Regulator in performing its wholesale market monitoring and reporting functions. Significantly, it is this Bill that also amends the ACL and the CCA to align the maximum penalties under the ACL with the maximum penalties under the competition provisions of the CCA. This key change to the ACL is discussed later in this chapter [18.630]. The Australian Consumer Law Review Final Report also identifies four areas in which regulators can take “action” to provide guidance and to clarify the law without the need for any changes to the legislation and, “looking to the future”, identifies seven priority areas for further research and investigation (see Table 1).
18.5 ENFORCEMENT OF THE AUSTRALIAN CONSUMER LAW [18.300] Although the enforcement provisions have been refined and streamlined, 10 different regulatory bodies have responsibility for enforcing the ACL under a “one law, multiple regulator model”. The ACL is administered and enforced jointly by the ACCC, the State and Territory consumer protections agencies and, in relation to financial services, ASIC.
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Table 1: Australian Consumer Law Review Final Report –Package of Reforms 1: Overview Looking to the future Commission a third Australian Consumer Survey in 2021 to assist Australian Consumer with monitoring and review of the ACL Survey 2: The legal framework 2.1 Consumer guarantees Proposal 1: Specify that where a good fails to meet the consumer guarantees Rights to refunds and within a short specified period of time, a consumer is entitled to the remedies of a refund or replacement without needing to prove a replacements “major failure” Proposal 2: Clarify that multiple non-major failures can amount to a major failure Multiple non-major failures Proposal 3: Enhance disclosure in relation to extended warranties by requiring: Extended warranties • agreements for extended warranties to be clear and in writing • additional information about what the ACL offers in comparison • a cooling-off period of 10 working days (or an unlimited time if the supplier has not met their disclosure obligations) that must be disclosed orally and in writing Proposal 4: Clarify the mandatory text requirements for warranties against defects by developing text specific to services and services Warranty against bundled with goods defects Proposal 5: Clarify the scope of the exemption from the consumer guarantees for the transport or storage of goods where those goods are Goods damaged or damaged or lost in transit lost in transit Action Work with stakeholders (including tribunals) to provide more Guidance on “unsafe” specific guidance on both “unsafe” goods and “reasonable durability” and “reasonable durability” Looking to the future Examine whether the current consumer guarantees are fit-for- purpose for purely digital products, certain market practices and Fit-for-purpose conemerging technologies sumer guarantees 2.2 Product safety Proposal 6: Introduce a general safety provision that would require traders to ensure the safety of a product before it enters the market including: General safety provision • a flexible and less prescriptive approach to compliance by reference to product safety standards (eg, a “safe harbour” defence to a breach of the general safety provision) • a penalty regime for breaches of the general safety provision, consistent with the ACL penalties regime
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Chapter 18 The Australian Consumer Law
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Proposal 7: Voluntary recalls
Clarify and strengthen voluntary recall requirements by: • introducing a statutory definition of “voluntary recall” • increasing penalties for failure or refusal to notify a voluntary recall, proportionate to other ACL penalties Proposal 8: Strengthen ACCC powers to obtain information about product safety, by broadening the power to apply to any person (including Powers to obtain a consumer) likely to have relevant information, rather than only information the supplier Action Make clearer traders’ mandatory reporting obligations by clarifying through regulator guidance: Mandatory reporting • existing reporting requirements (including timeframes) • reporting triggers on the meaning of “serious injury or illness” and “use or foreseeable misuse” Action Explore options to streamline processes for implementing product bans and compulsory recalls, taking into account findings of the Product bans and Productivity Commission’s study of Consumer Law Enforcement recalls and Administration Looking to the future Promote enhanced collection and dissemination of product safety data, taking into account findings of the Productivity Commission’s Product safety data study of Consumer Law Enforcement and Administration and initiatives undertaken by other regulatory regimes 2.3 Unconscionable conduct Proposal 9: Extend the ACL (and ASIC Act) unconscionable conduct protections to publicly-listed companies Publicly-listed companies Looking to the future Explore how an unfair trading prohibition could be adopted within the Australian context to address potentially unfair business Unfair trading practices 2.4 Unfair contract terms Proposal 10: Apply unfair contract terms protections to contracts regulated by the Insurance Contracts Act 1984 (Cth) Insurance contracts Proposal 11: Enable regulators to use existing investigative powers to better assess whether or not a term may be unfair Powers to obtain information 2.5 Unsolicited consumer agreements Proposal 12: Ensure that the unsolicited selling provisions operate as intended by clarifying that the provisions: Threshold requirements for unso• can apply to public places licited consumer • capture suppliers in their negotiations with consumers where the agreements suppliers obtain from a third party (sometimes referred to as a “lead generator”) a consumer’s contact details or permission to be contacted
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Looking to the future Unsolicited selling 2.6 Purchasing online Proposal 13: Pre-selected options Proposal 14: Online auctions
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2.7 Scope of the ACL Proposal 15: Definition of “consumer” Proposal 16: Financial products
Undertake an economy-wide study to examine the role, nature and impact of unsolicited selling in the Australian economy, to inform future policy development Enhance price transparency in online shopping by requiring that any additional fees or charges associated with pre-selected options are included in the headline price Modernise the “sale by auction” exemption from the consumer guarantees by ensuring the consumer guarantees apply to all online auctions Increase the $40,000 threshold in the definition of “consumer” to $100,000 Amend the ASIC Act to clarify that all ACL-related consumer protections that already apply to financial services also apply to financial products Clarify through regulator guidance the current application of the ACL to the activities of charities, not-for-profit entities and fundraisers
Action Charities, not-for- profit organisations and fundraisers Looking to the future Assess the effectiveness of the proposed guidance on not-for-profit fundraising, further regulator actions, and whether any amendment Charities, not-for- to the ACL is necessary profit organisations and fundraisers Looking to the future Review current exemptions, with a view to removing those that are Review of exemptions no longer in the public interest under the ACL 2.8 Other amendments Amendment (a) Amend the definition of “unsolicited services” in s 2 of the ACL to allow the false billing provisions (ss 40 and 162) to apply to false bills for services not provided Amendment (b) Amend s 12DC of the ASIC Act to address terminology inconsistent with other consumer protection provisions in the ASIC Act and that may unintentionally narrow the scope of the provision Amendment (c) Amend s 76 of the ACL (or the regulations) to clarify that disclosure requirements for unsolicited consumer agreements do not apply to certain exempt agreements 3: Administration and enforcement 3.1 The ACL in practice Proposal 17: Ease evidentiary requirements for private litigants through an expanded “follow-on” provision enabling them to rely on admitted Private action facts from earlier proceedings
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Chapter 18 The Australian Consumer Law
3.2 Penalties and remedies Proposal 18: Increase maximum financial penalties available under the ACL by aligning them with the penalty regime under the competition proviMaximum financial sions of the Competition and Consumer Act 2010: penalties • for companies, the greater of: - the maximum penalty (of $10 million), or - three times the value of the benefit the company received from the act or omission, or - if the benefit cannot be determined, 10% of annual turnover in the preceding 12 months • for individuals, $500,000 Proposal 19: Allow third parties to give effect to a community service order where the trader in breach is not qualified or trusted to do so Community service orders [18.310]
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State and Territory Consumer Protection Agencies Australian Capital Territory New South Wales Northern Territory Queensland South Australia Tasmania Victoria Western Australia
Fair Trading NSW Fair Trading NT Consumer Affairs Office of Fair Trading Consumer and Business Services Consumer, Building and Occupational Services Consumer Affairs Victoria Consumer Protection (Department of Mines, Industry Regulation and Safety)
[18.320] Commonwealth Consumer Protection Agencies Australian Competition and Consumer Commission (ACCC) Australian Securities and Investments Commission (ASIC) [18.330] The ACL regulators have entered into a memorandum of understanding that sets out a framework for communication, cooperation and coordination so that they can more effectively administer and enforce the law in each jurisdiction and across Australia. Each regulatory body exercises its compliance and enforcement powers independently but will generally give priority to matters that demonstrate one or more of the following (Commonwealth of Australia, Compliance and enforcement –How regulators enforce the Australian Consumer Law (2010) p 10):
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• conduct of public interest or concern; • conduct resulting in significant consumer detriment; • conduct affecting disadvantaged or vulnerable consumer groups; • conduct that suggests a pattern of non-compliance by the trader or is indicative of a risk of future misconduct; • conduct involving a significant new or emerging market issue; • a significant impact on market integrity; • whether action is likely to have a worthwhile educative or deterrent effect; • conduct demonstrating a blatant disregard for the law.
IN CONTEXT
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Productivity Commission Research Report March 2017 Consumer Law Enforcement and Administration The only thing that saves us from the bureaucracy is inefficiency. An efficient bureaucracy is the greatest threat to liberty. Eugene J McCarthy
[18.340] The Productivity Commission examined the arrangements for administering
and enforcing the ACL in parallel with the review of the content of the ACL conducted by Consumer Affairs Australia and New Zealand (CAANZ). The key points emerging from the Commission’s study are reproduced below.
Key points • Despite the adoption of a single Australian Consumer Law (ACL) in 2011, Australia’s consumer protection framework remains complex. – Two commonwealth and eight state and territory regulators administer and enforce the ACL. – Numerous specialist safety regulatory regimes complement the ACL. – Redress is provided via tribunals, courts and ombudsmen, and most ACL regulators. • The multiple regulator model for the ACL appears to be operating reasonably effectively given the intrinsic challenges in having 10 regulators administer and enforce one law. – The ACL regulators communicate, coordinate and collaborate with each other through well developed governance arrangements. – Some regulators have been criticised for undertaking insufficient enforcement. Limited resources partly explain this, but regulator culture may also play a role. – However, the limited evidence available on regulators’ resources and performance makes definitive assessments difficult. • There is scope to strengthen the ACL’s administration and enforcement, including through: – developing a national database of consumer intelligence – ensuring that data on consumer complaints published by ACL regulators are meaningful
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Chapter 18 The Australian Consumer Law
– providing all state and territory ACL regulators with the full suite of enforcement tools – increasing maximum financial penalties for breaches of the ACL – exempting interim product bans from commonwealth regulatory impact assessments – centralising powers for interim product bans and compulsory recalls in the ACCC – improving the transparency of the resourcing and performance of the ACL regulators. • The ACL regulators and specialist safety regulators generally understand the delineation of their remits and interact effectively, notwithstanding a handful of problematic cases. Consumers and suppliers are not always clear about which regulator to contact but they are typically redirected to the right regulator in a timely manner. • Interactions between ACL and specialist safety regulators could be enhanced through: – greater information sharing between ACL and specialist regulators – addressing deficiencies in the tools and remedies available to specialist regulators – regular national forums of building and construction regulators – greater national consistency in the laws underpinning electrical goods safety. • State and territory governments should tackle the current impasse on standardising electrical goods safety laws.
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• Governments should enhance ACL consumer redress, including by: – reviewing the bodies and powers for delivering ACL alternative dispute resolution services – implementing the recommendations.
Commission’s
Access
to
Justice
Arrangements
• Previous Commission proposals to address gaps in consumer policy research and advocacy should be revisited. There are also grounds for enabling designated advocacy groups to make “super complaints” to ACL regulators, subject to appropriate guidelines.
[18.350] ACCC enforcement actions for civil or criminal remedies are brought in the Federal Court of Australia. The State and Territory consumer protection regulators generally bring their legal actions in the relevant State or Territory court or tribunal. In Director of Consumer Affairs Victoria v Dimmeys Stores Pty Ltd [2013] FCA 618, the respondent challenged the authority of the Director of Consumer Affairs Victoria (“the Director”) to bring legal proceedings in the Federal Court of Australia. Marshall J, in rejecting the respondent’s submissions, noted at [14] that: The intergovernmental agreement was designed to effect a national approach to consumer protection laws. It is not inconsistent with such an approach for a state regulator to commence a proceeding relying on the ACL in respect of matters which primarily concern that state but also affect consumers in other states. The current proceeding is a typical example which mainly concerns conduct in Victoria but also to a lesser extent in neighbouring states.
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Business and the Law The intergovernmental agreement also provides for shared enforcement functions between federal, state and territory regulators. It is consistent with such a shared scheme for the Director to be considered to be “another person” for the purposes of the ACL.
[18.360] The offences in Ch 4 of the ACL and the remedies in Ch 5 of the ACL can be applied to those who are primarily liable but also to those who are involved as “accessories”. Liability under the ACL is imposed not only on the principal party who engages in the prohibited conduct but also against persons “involved” in the contravention. Section 2 of the ACL defines “involved” to mean that a person: • has aided, abetted, counselled or procured the contravention; or • has induced, or attempted to induce, a person, whether by threats or promises or otherwise, the contravention; or • has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or
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• has conspired with others to effect the contravention.
As watchdogs and consumer protection agencies, we all have our own patch and take our own actions, but we also take strength from collective advocacy … As the regulator responsible for issues with a national dimension, collaboration across the network of government and other specialised consumer bodies is vital for us. It is, in addition, not sufficient that we simply act on what is presented to us; we must also actively look for the main problem areas and seek to address them. Rod Sims, Championing the Rights of Consumers, Address to the Consumer Congress, (15 March 2013).
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This definition is the same as that in s 75B of the CCA (applies in relation to matters arising under that Act). It is well established that liability under this head is not imposed unless that person is aware or should have been aware of the relevant facts giving rise to the contravention, even though he or she may not be aware that they give rise to such a contravention: Yorke v Lucas (1985) 158 CLR 661. The class of potential respondents is substantially widened by the provision for accessorial liability. If the principal party cannot be sued because for example it is in liquidation, an action may be brought against directors or employees of the principal in respect of damage or loss arising from its contravention. In cases in which action is brought against the company, there are nevertheless significant practical advantages in proceeding against individuals which are explained by Warren Pengilley, (“Section 52 of the Trade Practices Act: A plaintiff’s New Exocet” (1987) 15 Australian Business Law Review 247 at 262): Thus, if a s [18] breach is litigated, an action may be brought not only against, say, a defendant corporation but also perhaps against its managing director, one or more of its key employees, or perhaps the whole board of directors. These parties are personally liable if they come within the provision set out above. Undoubtedly this changes the whole attitude to litigation when corporations are sued. No longer is it only the corporation’s money which is involved. It is the director’s or employee’s personal funds which are on the line. Litigation in these circumstances often takes a quite different path to that taken when only the impersonal corporation can be sued.
Public and private enforcement [18.370] In addition to the legal actions that may be brought by the ACL regulators, private actions for injunctions (s 232) and/or damages (s 236) can be brought in cases of contravention of the ACL. The availability of private actions is, indeed, one of the most significant factors responsible for the massive impact of the law on business conduct in Australia. It is not to undervalue the role of the ACCC to comment that particular
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Chapter 18 The Australian Consumer Law
vigilance in relation to for example advertising is likely to be exercised by the competitor of the offending advertiser. The availability of private actions enables an action to be instigated by the company whose business may be harmed by the false or misleading advertising. However, while private actions are restricted to civil remedies, the ACL regulators now have a wide range of powers that they can use to tackle harmful and exploitative business practices. These powers provide enforcement options that range from administrative remedies, through to civil actions and criminal proceedings.
18.6 THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION [18.380] Part II of the CCA establishes the ACCC as an independent statutory authority and provides for its functions and operation. The predecessor of the ACCC was the TPC, which was established under the TPA. In 1995, the TPC was merged with the Prices Surveillance Authority to form the ACCC, which assumed administrative responsibility for the TPA and the Prices Surveillance Act 1983 (Cth).
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The ACCC’s main role is to ensure compliance with the competition, fair trading and consumer protection provisions of the TPA. The ACCC is the sole regulatory body responsible for compliance with the competition provisions in the legislation (see Chapter 23 Competition Law). In relation to its fair trading and consumer protection jurisdiction the ACCC complements the role performed by the State and Territory consumer protection agencies (discussed at [18.300]). [18.390] The ACCC has wide statutory powers in relation to investigating contraventions. Information can be obtained informally from businesses and the general public and its own inquiries, but the ACCC can also compel the production of information, documents or evidence: CCA, s 155. If the ACCC, the Chairperson or a Deputy Chairperson has reason to believe that a person can provide information or documents or give oral or written evidence on a matter that may contravene the Act, a member of the Commission can give written notice requiring that person to do so. Individuals are not excused from furnishing information, or producing and permitting the inspection of documents in pursuance of s 155, on grounds that the information or documents may incriminate them: s 155(7). Refusal or failure to comply with a s 155 notice is an offence punishable by a fine not exceeding 20 penalty units or imprisonment for 12 months: CCA, s 155(6A). (The Crimes Act 1914 (Cth) contains provisions dealing with penalties and the Criminal Code (Cth) sets out general principles of criminal responsibility –see discussion of criminal law in Chapter 10). In ACCC v Rana [2008] FCA 374, North J imposed a term of imprisonment of six months on a defendant who failed to comply with a s 155 notice in relation to breaches of the consumer protection provisions of the Act.
Our work, of course, has been made much more effective by the introduction of the Australian Consumer Law which has brought with it new provisions to help tackle problematic conduct. Most important are the new sanctions such as million dollar civil penalties and the flexibility of infringement notices that better provide the spectrum of deterrence required. Rod Sims, Championing the Rights of Consumers, Address to the Consumer Congress (15 March 2013).
The ACCC also has the ability to issue “infringement notices” (discussed at [18.540]) and additional powers of “search, seizure and entry” in relation to product safety matters. These additional powers are found in Pt XI of the CCA headed “Application of the Australian Consumer Law as a law of the Commonwealth” and are not found in the ACL as an applied law of the States and Territories.
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IN CONTEXT
The ACCC’s approach [18.400] The ACCC receives around 200,000 enquiries and complaints a year. We usually investigate over 500 matters, and we take about 30-40 cases to court each year.
We are very aware of the effect we can have. Just making contact with a company can change behaviour. At the other end of the spectrum, when cases are taken to court, the effect is often considerable. Not just the case law or precedent value, but the strong deterrence message that results from the imposition of penalties and other orders if the ACCC establishes a breach of the Competition and Consumer Act 2010 (the Act). Indeed, we constantly hear of significantly changed behaviour across an entire industry when a case is taken against one company in that industry. Given the effect we can have we must target our enforcement actions carefully. And, of course, with very limited resources, we have to make sure they are put to best use. To help us do this, since 2012 we have published our Compliance and Enforcement Policy. The policy lists a range of factors that we consider when deciding whether or not to take action. It also lists about a dozen or so priority areas, which we review each year.
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The policy also explains the strategies we use to achieve compliance with the Act. Our approach involves a mix of enforcement, from warnings to court cases, and education and partnerships. R Sims, Priorities 2015, Speech to Committee for Economic Development of Australia, Sydney (19 February 2015).
As greater use is made of the new powers and penalties they will become a deterrent to others thereby increasing compliance with the law. Graeme Samuel, ACCC News Release 089/11 (7 June 2011).
[18.410] The ACCC’s enforcement and compliance priorities for 2018 (available at www.accc.gov.au) include: • consumer issues in new car retailing, including responses by retailers and manufacturers to consumer guarantee claims; • consumer issues in the provision of broadband services, including addressing misleading speed claims and statements made during the transition to the NBN; • systemic issues involving large or national traders avoiding or misrepresenting consumer guarantee rights; • competition issues in the financial services sector; • competition and consumer issues in the provision of energy as an essential service, including matters identified in the ACCC’s retail electricity pricing inquiry report and the ACCC’s wholesale gas inquiry; • competition and consumer issues concerning the use of digital platforms, algorithms and consumer data, with a focus on emerging markets and matters identified by the ACCC’s digital platforms inquiry;
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Chapter 18 The Australian Consumer Law
• ensuring small business receives the protections of industry codes and the unfair contract terms law, with a focus on Franchising Code of Conduct issues involving large or national franchisors; • ensuring better product safety outcomes for consumers in the online marketplace; • issues arising from the Takata airbags recall; • conduct that may contravene the new misuse of market power provisions and concerted practice provisions of the CCA; • competition and consumer issues in the agriculture sector, with a focus on the dairy inquiry, Horticulture Code of Conduct enforcement, and analysis of the viticulture industry; • competition issues in the commercial construction sector. In the area of consumer protection, the ACCC has identified some forms of conduct it considers to be so detrimental to consumer welfare that it will always regard them as a priority. These “enduring priorities” are product safety; vulnerable and disadvantaged consumers and conduct impacting Indigenous Australians. [18.420] The implementation of the ACCC’s enforcement policy is governed by the following guiding principles:
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Accountability –the ACCC’s decision-making takes place within rigorous corporate governance processes and is able to be reviewed by a range of agencies, including the Commonwealth Ombudsman and the courts; Transparency –the ACCC does not do private deals –every enforcement matter that is dealt with through litigation or formal resolution is made public. Confidentiality –in general, investigations are conducted confidentially and the ACCC does not comment on matters it may or may not be investigating; however, the ACCC may make a statement about an investigation where a matter is already in the public domain and the ACCC considers it to be in the public interest to do so. Timeliness – the ACCC’s investigations and the resolution of enforcement matters are conducted as efficiently as possible to avoid costly delays and uncertainty for business. Proportionality –the ACCC’s enforcement responses are proportionate to the conduct and the resulting harm or potential harm; Fairness –the ACCC seeks to balance voluntary compliance with enforcement activity while responding to many competing interests; take into account their approach in one matter when deciding how to pursue another; and balance fairness to individuals, companies and businesses subject to ACCC enforcement action, with informing the public about the ACCC’s work and being transparent about what action the ACCC is taking and why. The ACCC can choose from a range of compliance and enforcement tools, including, education, advice and persuasion; voluntary industry self-regulation codes and schemes; administrative resolution; infringement notices; enforceable undertakings; and court cases.
In its own activities the Commission will continue to look for, and apply, innovative solutions. While the detection and punishment of breaches of the law will always have a place in these solutions, the effect of such action in isolation is limited. Integrated strategies which include such elements as industry education, codes of conduct and well targeted compliance programmes and publicity –whichever me particular situation demands – are for more likely to achieve lasting reform. TPC, Priorities for 1992 and 1993.
[18.430] Legal action by the ACCC may result in the court: • making declarations that a company or individual has contravened the Act; Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-23 21:46:20.
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Business and the Law When it comes to consumer protection, strong enforcement by the ACCC is very important. By taking action in cases where we believe there is significant detriment, we make it clear where the boundaries are and what the consequences are for crossing the line. Over time companies will take our warnings on problematic behaviour even more seriously if we say what we will do, and then do what we say. Rod Sims, Chairman’s Address, Address to Law Council of Australia (9 August 2013).
• ordering injunctions restraining current or future conduct, or requiring respondents to take certain action; • requiring respondents to publish notices about their conduct and corrective advertising, and to disclose relevant information to others (eg to their customers); • making findings of fact that show contraventions of the Act so that damages may be recovered by consumers and businesses affected by the conduct; • making orders to achieve financial redress for consumers or businesses harmed by the conduct; • making various non- punitive orders, including community service or probation orders (which may include orders for implementing a compliance or an education and training program); • imposing significant pecuniary penalties for breaches of the ACL; • convicting persons found to have contravened the offence provisions of the ACL. [18.440] Figure 18.1: Regulator actions
Criminal conviction, fines
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Disqualification orders, civil pecuniary penalties Non-party redress orders, adverse publicity orders, non-punitive orders, public warning notices
Declarations, injunctions, damages, compensation orders
Infringement notices, court enforceable undertakings
Education, advice and persuasion, voluntary industry self-regulation codes, formal written warnings
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Chapter 18 The Australian Consumer Law The compliance pyramid … summarises the general approach to compliance and enforcement under the ACL. It shows the range of enforcement remedies available to ACL regulators. While criminal prosecution is reserved for a smaller number of significant cases, ACL regulators use the range of different compliance and enforcement tools that can be applied more broadly than criminal prosecution.
Commonwealth of Australia, Compliance and enforcement –How regulators enforce the Australian Consumer Law, 2010, p 11.
18.7 ADMINISTRATIVE REMEDIES [18.450] When introducing the ACL the government noted that regulatory bodies had been hampered by a limited range of powers to tackle harmful and exploitative business practices. The ACL regulators now have a wide range of discretionary administrative powers designed to allow matters to be dealt with more efficiently.
Enforceable undertakings [18.460] Part 5-1, Div 1, s 218 of the ACL allows the ACCC and the consumer protection regulators in the States and Territories to accept undertakings from a person “in connection with a matter” arising under the ACL.
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This section mirrors s 87B of the CCA (which continues to exist in the TPA but only applies in relation to matters arising under that Act). The second reading speech introducing s 87B (House of Representatives (3 November 1992)) explained that: It has proved efficient in some cases for the Commission to avoid prolonged litigation by accepting undertakings from businesses to cease particular conduct or to take action which will lessen the otherwise undesirable effects of their conduct. This approach has been used in appropriate cases for several years and has avoided considerable cost to both the Commission and the businesses concerned. At the same time the outcomes have been demonstrably advantageous to affected third parties and consumers generally.
Our outcomes for consumers do not stop at the court room door. In fact, much more is achieved through out of court action. Rod Sims, Current ACCC Priorities, Perth (13 September 2012).
Section 87B and now s 219 of the ACL afford legislative recognition to this practice by conferring power on the court to make an appropriate order if the undertaking is breached. [18.470] Undertakings are various but may include: an admission of the conduct; a commitment not to repeat the conduct; a commitment to implement a trade practices compliance program; a self investigation procedure to ensure the conduct is not repeated; some form of corrective advertising if appropriate; an acknowledgement that the ACCC will publish the terms of the undertaking. Typically a company will undertake to implement a compliance program and education and to remedy the breach through for example corrective advertising. While in most circumstances acceptance of an undertaking will resolve the matter, there may be circumstances in which the regulator negotiates and accepts an undertaking while continuing to investigate with a view to possible legal proceedings in relation to past or associated conduct. [18.480] If a term of the undertaking is breached, the court may make all or any of the following orders (ACL, s 218(4)):
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Although the most significant consequence for a party to a s 218 undertaking is that breaches of the undertaking are actionable in court, undertakings accepted by the ACCC are also publicly available on the “undertakings registers” on the ACCC’s website. This not only ensures transparency in the ACCC’s enforcement processes but also allows competitors, suppliers and customers to easily monitor compliance and report breaches to the ACCC. [18.490] Enforceable undertakings are an alternative to costly and lengthy court processes. In relation to this choice, the ACCC’s policy as to when it might accept an undertaking is as follows (Commonwealth of Australia, Section 87B of the CCA –Guidelines on the use of enforceable undertakings by the ACCC, (April 2014) p 4): When deciding between litigation and accepting an undertaking … the ACCC opts for the approach that it considers will produce the best results –in terms of lasting compliance with the law and redress for injured parties. The ACCC will be influenced by factors such as: • the nature of the alleged breach in terms of: – the seriousness of the conduct involved Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
– the impact of the conduct on third parties and the community at large – the product or service involved – the size of the company/business involved • the ability of a s 87B undertaking to offer redress to affected consumers and businesses • the history of complaints and/or ACCC action against the company, business or individuals involved; • prospects for rapid resolution of the matter; • the apparent good faith of the company/business.
Although this policy relates to s 87B undertakings, there is no reason to believe that ACCC will not take a similar approach to s 218 undertakings under the ACL.
Substantiation notices [18.500] ACL Pt 5-1, Div 2, ss 219-222 allows the ACCC and the consumer protection regulators in the States and Territories to issue “substantiation notices” to suppliers requiring them to substantiate claims made in relation to their goods and services. Before the ACL reforms, the ACCC could request information on a voluntary basis or pursuant to a s 155 notice if it had “reason to believe” that a person can provide information or documents or give oral or written evidence on a matter that may contravene the Act. There is a much lower threshold to issue a substantiation notice pursuant to s 219 of the ACL as the regulator only needs evidence of a claim or representation. Section 219(1) of the ACL applies: 780
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Chapter 18 The Australian Consumer Law if a person has, in trade or commerce, made a claim or representation promoting, or apparently intended to promote: (a) a supply, or possible supply, of goods or services by the person or another person; or (b) a sale or grant, or possible sale or grant, of an interest in land by the person or another person; or (c) employment that is to be, or may be, offered by the person or another person.
The written notice may require the person who made the claim or representation to give information and/or produce documents to the regulator that could be capable of substantiating or supporting the claim or representation: ACL, s 219(2). If the person fails to comply with a substantiation notice within the time period allowed in the notice, a pecuniary penalty may be imposed: ACL, s 221. Failure to comply with a substantiation notice is also a criminal offence: ACL, s 205 as is providing false or misleading information or documents in purported compliance with a substantiation notice: ACL, s 206. The maximum penalties and fines are set out at [18.620].
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Substantiation notices may be regarded as a preliminary enforcement tool and are likely to be used by the ACL regulators when investigating obviously dodgy claims or representations. If the person making the claim or representation is able to provide a reasonable basis for the claim, no further action may be necessary. But if there is no reasonable basis for the claim the ACL regulator may take further action as necessary.
If you are in the marketplace spruiking your goods, you better be able to justify what you say. Anything that makes the ACCC a more formidable investigator and regulator makes business pay very serious attention to reform. Nicotra A, Johnson Winter Slattery (March 2010).
Power Balance admits no reasonable basis for wristband claims, consumers offered refunds ACCC, News Release 284/10 (22 December 2010)
[18.510] Misleading advertising claims about
the alleged benefits of Power Balance wristbands and pendants have been withdrawn by the manufacturer after Australian Competition and Consumer Commission intervention. As a result consumers will be offered a refund if they feel they have been misled and Power Balance has agreed not to supply any more products that are misleadingly labelled. Power Balance Australia Pty Ltd claimed the wristbands improve balance, strength and flexibility and worked positively with the body’s natural energy field. It also marketed its products with the slogan “Performance Technology”. The ACCC raised concerns that these claims were likely to mislead consumers into believing that Power Balance products have benefits that they do not have. “Suppliers of these types of products must ensure that they are not claiming supposed benefits when
there is no supportive scientific evidence,” ACCC chairman Graeme Samuel said today. “Consumers should be wary of other similar products on the market that make unsubstantiated claims, when they may be no more beneficial than a rubber band,” Mr Samuel said. Power Balance has admitted that there is no credible scientific basis for the claims and therefore no reasonable grounds for making representations about the benefits of the product. Power Balance has acknowledged that its conduct may have contravened the misleading and deceptive conduct section of the Trade Practices Act 1974. The Power Balance wristbands were widely promoted in the media by various sporting celebrities. The wristbands were sold around Australia in sporting stores and also on the Power Balance website … “When a product is heavily promoted, sold at major sporting stores, and worn by celebrities,
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consumers tend to give a certain legitimacy to the product and the representations being made,” Mr Samuel said. “Retailers that continue to sell the product with misleading representations on the packaging are warned that they may be open to action from the ACCC,” Mr Samuel said. To address the ACCC’s concerns Power Balance has provided the ACCC with court-enforceable undertakings that it will: • only make claims about its products if they are supported by a written report from an
independent testing body that meets certain standards, • publish corrective advertising to prevent consumers from being misled in the future, • amend the Australian website to remove any misleading representations, • change the packaging to remove any misleading representations, • offer a refund to any consumers that feel they have been misled, and • remove the words “performance technology” from the band itself.
Public warning notices
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[18.520] Pt 5-1, Div 3, s 223 of the ACL allows the ACCC and the consumer protection regulators in the States and Territories to issue “public warning notices” to the general public about the conduct of a person if the regulator has reasonable grounds to suspect that the conduct may constitute a contravention of Chs 2, 3 or 4 of the ACL; and, is satisfied that one or more person has suffered or is likely to suffer detriment as a result of the conduct; and, is satisfied that it is in the public interest to issue the notice. The ACCC has a “public warning notice” register on its website and has used this power to alert the public to: misleading claims about the income potential of a business (Halkalia Pty Ltd, August 2010); misrepresentations about occupational health and safety requirements, harassment, coercion, and misleading or deceptive conduct (Safety Compliance Pty Ltd, November 2011); false or misleading representations about the uses or benefits of goods and services (Australian Business Funding Centre, June 2016); and asserting a right to payment for unsolicited goods and making false or misleading representations (Lux International Sales, March 2017 and December 2017). The aim of this new enforcement tool is to inform the public of potentially harmful conduct: “The success of the warning notice in achieving its objective will depend largely on the extent to which the notice is taken up and disseminated in the media” (S G Corones, The Australian Consumer Law (2nd ed, Lawbook Co, 2013) p 575). This new enforcement power is very useful for identifying unscrupulous operators but care is needed to ensure warnings are not given about legitimate businesses as the public warning notice may impact the financial position of the legitimate business. The new power is also not without controversy because there is no obligation on the regulator to inform the public if its concerns about the business or the person later prove to be baseless. Furthermore, there is no obligation on the regulator to follow through on a public warning notice by commencing legal action against the business. 782
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Chapter 18 The Australian Consumer Law
Distribution scheme “business opportunity” draws ACCC’s first public warning ACCC, News Release 170/10 (20 August 2010)
[18.530] The Australian Competition and Consumer Commission today issued its first Public Warning Notice.
The Notice has been issued concerning the conduct of the following corporations:
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• Halkalia Pty Ltd, a corporation whose principal place of business is Smithfield South Australia, and whose sole director is Mr Norman Lander, • Heartlink Enterprises Pty Ltd, a corporation whose principal place of business is Broadford Victoria and whose sole director is Ms Vicki Lowe, and • National Semi Retired Group Pty Ltd, a corporation whose principal place of business is Springvale Victoria, and whose sole director is Mr Laurence Hann. The ACCC can issue a Notice if it has reasonable grounds to suspect the conduct may breach certain provisions of the Trade Practices Act 1974; is satisfied that one or more persons has suffered, or is likely to suffer, detriment as a result of the conduct; and is satisfied that it is in the public interest to do so. A key consideration for the ACCC in issuing a Notice is whether it considers there is an imminent need to inform consumers so they can avoid suffering detriment. In this matter, the ACCC suspects the companies breached the Act by making misleading claims about the income from the business opportunity the companies promote, that is, delivering
Heartlink-branded household products to independent supermarkets. The “part time delivery business” is advertised in rural, regional and metropolitan newspapers and claims earnings of between $900 and $2,000 per week for between three to four days’ work. The ACCC considers the companies have no reasonable basis on which to claim these income projections and the conduct may constitute contraventions of the Act. The Public Warning Notice follows complaints from individuals who paid between $10,000 and $30,000 for a business. The majority have earned no income and none have reached the projected figure. An example advertisement is shown: Parcel Delivery Local part time business, For sale $15,000 With opportunity to earn approx $1,200pw With payments made weekly. Ph:xxxxxxxxxx The ACCC is warning the public that the advertisements may be misleading and that individuals who pay money for the advertised business opportunity may derive no earnings from the business.
Infringement notices [18.540] Part XI, Div 5 (ss 134-134G) of the CCA deals with the ACCC’s powers with respect to an “infringement notice”. The ACCC can issue an “infringement notice” to a person for an alleged contravention of an “infringement notice provision” as an alternative to court proceedings for an order under s 224 of the ACL for a pecuniary penalty: CCA,
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Now a door-to-door salesman can make money. But then again, so can a hold- up man. A Leff, Swindling and Selling (Free Press, 1976).
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s 134. The ACCC cannot issue an infringement notice and subsequently seek pecuniary penalties (discussed [18.630]) in relation to the same alleged contravention. An infringement notice can only be issued if the ACCC has reasonable grounds to believe the person has contravened an infringement notice provision: s 134A. An infringement notice provision is defined in s 134A(2) to include the provisions in the ACL dealing with unconscionable conduct, unfair practices (other than misleading or deceptive conduct), product safety, product information or substantiation notices. The penalty to be specified in the infringement notice issued to a person in relation to an alleged contravention of the ACL must be a penalty worked out using the table headed “Amount of penalty” set out in s 134C. The amount of the penalty specified in the infringement notice is: 600 penalty units for a listed corporation; 60 penalty units for a body corporate other than a listed corporation and 12 penalty units for individuals: s 134C. One penalty unit is equal to $110 so the infringement notice penalties are $66,000 for listed corporations, $6,600 for bodies corporate other than listed corporations and $1,320 for individuals.
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If the person pays the penalty specified in the infringement notice within the time period allowed in the notice, no civil or criminal proceedings may be commenced or continued against the person: s 134D(3). Failure to pay the penalty specified in the infringement notice leaves the person liable to proceedings under Ch 4 or Pt 5-2 of the ACL for alleged contravention of the infringement notice provision: s 134E. [18.550] This is a controversial new enforcement power because it essentially allows the ACCC to issue on the spot penalties without taking a matter to court. Nonetheless, it does allow the ACCC to deal quickly with lesser contraventions and the penalties are much lower than the pecuniary penalties available under s 224. The ACCC has had this power since April 2010 and it has become a common alternative to court proceedings. To date, more than 100 infringement notices have been issued, some comprising multiple notices to the one company, with over $620,000 in penalties paid. R Sims, Championing the Rights of Consumers, Address to the Consumer Congress (15 March 2013).
[18.560] The ACCC publicises its use of this power in the infringement notices register it has voluntarily set up on its website. The infringement notice register is a register of paid infringement notices issued by the ACCC and includes name or company details, infringement number, date paid and relevant section of the law. Infringement notices have been issued to date in relation to for example component pricing (restaurant menus); refund policies (retailers Jigsaw, David Lawrence); price representations (Dodo broadband services); supply of banned goods (chewing tobacco); promotion of mobile telephone plans (Optus); supply of goods which do not comply with relevant mandatory safety standards (G&R Wills Holdings) and misleading representations in advertisements (Nissan Motor Co). [18.570] The ACCC has also published guidelines on its use of infringement notices as a guide to business on the ACCC approach (Infringement Notices: Guidelines on the Use of Infringement Notices by the ACCC (2012)). Those guidelines provide as follows (at pp 2-4): Infringement notices are designed to provide a timely, cost-efficient enforcement outcome in relation to relatively minor contraventions of the Act. … Generally speaking, the ACCC will only consider issuing an infringement notice where it is likely to seek a court-based resolution should the recipient of the notice choose not to pay. It is important to note that before issuing an infringement notice the ACCC will have turned
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Chapter 18 The Australian Consumer Law its mind to the prospect of non-compliance and be prepared to proceed to court as a likely alternative. The ACCC determines the appropriate enforcement tools to address consumer protection concerns on a case by case basis, taking into consideration the alleged contravention, the business involved and the impact of the conduct on consumers and businesses. A benefit of the infringement notice provisions is that they allow for timely and efficient dispute resolution without the need for litigation. ACCC consideration of the most appropriate mechanism to address consumer protection concerns will ordinarily include an evaluation of other options available to the ACCC to address its concerns, including court enforceable undertakings, civil proceedings, including civil penalty proceedings, and criminal proceedings. The ACCC will take into account a broad range of sometimes competing factors in considering whether to seek to resolve a matter through the issuing of an infringement notice. Examples of circumstances where the ACCC is more likely to consider the use of an infringement notice include: • where it forms the view that the contravening conduct is relatively minor or less serious • where there have been isolated or non-systemic instances of non-compliance • where there have been lower levels of consumer harm or detriment • where the facts are not in dispute or where the ACCC considers the circumstances giving rise to the allegations are not controversial, and • where infringement notices form part of a broader industry or sectoral compliance and enforcement program following the ACCC raising concerns about industry wide conduct.
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18.8 OFFENCES [18.580] Chapter 4 of the ACL creates a criminal offence regime for most but not all of the provisions in Ch 3 of the ACL headed Specific Protections. It is important to note that no criminal liability is attached to contraventions of the provisions in Ch 2 of the ACL headed General Protections. It is not a crime to engage in misleading or deceptive conduct and/or unconscionable conduct or to include unfair terms in consumer contracts, because it was considered inappropriate to attach criminal liability to these very broad general prohibitions. Consequently, no fines are payable for breaches of the ACL provisions prohibiting misleading or deceptive conduct or unconscionable conduct or unfair terms in consumer contracts. Chapter 4 of the ACL sets out the ACL offences and the maximum fines that may be imposed for each offence: Pt 4-1 Offences relating to unfair practices Pt 4-2 Offences relating to consumer transactions Pt 4-3 Offences relating to safety of consumer goods and product related services
It will not always be possible to monitor the ethics of marketing, but this does not relieve marketers of their responsibilities to hare regard for core ethical principles. Sometimes they do not even seem to perceive the presence of an ethical question. Grace and Cohen, Business Ethics (1995) p 127.
Pt 4-4 Offences relating to information standards Pt 4-5 Offences relating to substantiation notices [18.590] The maximum fine for consumer law offences is the same as the maximum civil pecuniary penalty available for contravention of the consumer provisions. Civil penalties and remedies are set out in Ch 5 of the ACL and discussed at [18.630].
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A criminal sanction can only be imposed by a court where the contravention is proved beyond a reasonable doubt (the criminal standard of proof –see also Chapter 10 Criminal Law: Concepts of control). Criminal sanctions exist alongside civil penalties that can be ordered where the contravention is proved on the balance of probabilities (the civil standard or proof). There is no guidance in the ACL as to when contraventions should be pursued criminally and when only civil remedies should be sought. Criminal actions represent a very small proportion of the ACCC’s enforcement activities but are considered necessary for the most serious and blatant contraventions of the ACL. For example, in ACCC v Skippy Australia Pty Ltd [2006] FCA 1343, a fine of $450,000 was imposed on a defendant who failed to comply with mandatory consumer product safety standards for baby walkers. Criminal prosecutions for offences under Ch 4 of the ACL may be commenced within 3 years after the commission of the offence and the liability to pay a fine extends to persons who are involved in the contravention. [18.600] The liability of corporations for ACL offences is determined by the Criminal Code (Cth) (a schedule to the Criminal Code Act 1995 (Cth)). Section 12.2 of the Criminal Code (Cth) states that conduct will be attributed to a corporation where the conduct is committed by an employee, agent or officer of a body corporate acting within the actual or apparent scope of employment.
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The maximum fine payable for each offence is specified in the offence in Ch 4 of the ACL. The magnitude of the penalty imposed reflects a number of predictable factors including the efforts made by the offending corporation to ensure compliance. A non-exhaustive list of factors that a court may consider when assessing a fine for a federal offence is found in s 16A of the Crimes Act 1914 (Cth). Some of these factors will not be relevant to corporate offenders. A court may take account of the following matters: (a) the nature and circumstances of the offence; (b) other offences, if any, that are required or permitted to be taken into account; (c) if the offence forms part of a course of conduct consisting of a series of criminal acts of the same or a similar character –that course of conduct; (d) the personal circumstances of any victim of the offence; (e) any injury, loss or damage resulting from the offence; (f)
the degree to which the person has shown contrition for the offence:
(i) by taking action to make reparation for any injury, loss or damage resulting from the offence; or (ii) in any other manner;
…
(g) if the person has pleaded guilty to the charge in respect of the offence –that fact; (h) the degree to which the person has cooperated with law enforcement agencies in the investigation of the offence or of other offences;
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(i)
the deterrent effect that any sentence or order under consideration may have on the person;
…
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Chapter 18 The Australian Consumer Law (k) the need to ensure that the person is adequately punished for the offence; (m) the character, antecedents, age, means and physical or mental condition of the person; (n) the prospect of rehabilitation of the person (p) the probable effect that any sentence or order under consideration would have on any of the person’s family or dependents…
[18.610] Defences that apply to the offence provisions are set out in ACL Ch 4, Pt 4-6. The relevant defences are:
The law does not content itself with classifying and punishing crime. It invents crime. Norman Douglas, An Almanac (1945).
• reasonable mistake of fact, including a mistake of fact caused by reasonable reliance on information supplied by another: s 207 (see: Thorp v CA Imports Pty Ltd [1989] FCA 515) • where the contravention was due to the act or default of another person, to an accident or to some other cause beyond the defendant’s control, and the defendant took reasonable precautions and exercised due diligence to avoid the contravention: s 208 (see: Adams v ETA Foods Ltd [1987] FCA 402)
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• where the offence was committed by the publication of an advertisement, the defendant received the advertisement for publication in the ordinary course of business and did not know and had no reason to suspect that its publication would amount to a contravention: s 209 • where goods or services are acquired for the purposes of resupply and the defendant did not know and could not with reasonable diligence have ascertained that the goods or services did not comply with a product safety standard or an information standard: ss 210-211 (see: Pretorius v Venture Stores (Retailers) Pty Ltd [1992] FCA 46). [18.620] Maximum Fines and Civil Pecuniary Penalties under the ACL ACL provisions Pt 2-1 Misleading or deceptive conduct Pt 2-2 Unconscionable conduct
Maximum fine n/a n/a
Maximum pecuniary penalty n/a n/a
n/a
n/a
Pt 2-3 Unfair contract terms
n/a
n/a
(s 224) For a body corporate: The greater of: a) $10 million; b) 3 times the value of the benefit; or c) if the value of the benefit cannot be determined –10% of the annual turnover in the relevant 12-month period For an individual: $500,000 n/a n/a
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ACL provisions Pt 3-1 Unfair practices
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Pt 3-2 Consumer transactions
Maximum fine Div 1 False or misleading representations (ss 151-160) Div 2 Unsolicited supplies (ss 161-163) Div 3 Pyramid Schemes (s 164) Div 4 Pricing (s 166) Div 5 Other unfair practices (ss 167-168) For a body corporate: The greater of: a) $10 million; b) 3 times the value of the benefit; or c) if the value of the benefit cannot be determined –10% of the annual turnover in the relevant 12-month period For an individual: $500, 000 Div 1 Consumer guarantees (s 169) display notices For a body corporate: $50,000 For an individual: $10,000 Div 2 Unsolicited consumer agreements (ss 170 – 187) For a body corporate: $50,000 For an individual: $10,000 Div 3 Lay-by agreements (ss 188-191) For a body corporate: $30,000 For an individual: $6,000 Div 4 Miscelleneous (ss 192-193) For a body corporate: $50,000
Maximum pecuniary penalty (s 224) For a body corporate: The greater of: a) $10 million; b) 3 times the value of the benefit; or c) if the value of the benefit cannot be determined –10% of the annual turnover in the relevant 12-month period For an individual: $500,000
(s 224) For a body corporate: $50,000 For an individual: $10,000 (s 224) For a body corporate: $50,000 For an individual: $10,000 (s 224) For a body corporate: $30,000 For an individual: $6,000 (s 224) For a body corporate: $50,000 For an individual: $10,000
For an individual: $10,000
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Chapter 18 The Australian Consumer Law
ACL provisions Pt 3-3 Safety of consumer goods and product related services
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Pt 3-4 Information standards
Pt 3-5 Liability of manufacturers for goods with safety defects Pt 5-1 Enforcement
Maximum fine Div 1 Safety standards (ss 194-195) Div 2 Bans on consumer goods and product related services (ss 197-198) Div 3 Recall of consumer goods (s 199) For a body corporate: The greater of: a) $10 million; b) 3 times the value of the benefit; or c) if the value of the benefit cannot be determined –10% of the annual turnover in the relevant 12-month period For an individual: $500, 000 (ss 203-204) For a body corporate: The greater of: a) $10 million; b) 3 times the value of the benefit; or c) if the value of the benefit cannot be determined –10% of the annual turnover in the relevant 12-month period For an individual: $500, 000 n/a
n/a
Div 2 Substantiation notices (s 205) compliance For a body corporate: $16,650 For an individual: $3,300 (s 206) false information For a body corporate: $ 27,500 For an individual: $5,500
Maximum pecuniary penalty (s 224) For a body corporate: The greater of: a) $10 million; b) 3 times the value of the benefit; or c) if the value of the benefit cannot be determined –10% of the annual turnover in the relevant 12-month period For an individual: $500,000
(s 224) For a body corporate: The greater of: a) $10 million; b) 3 times the value of the benefit; or c) if the value of the benefit cannot be determined –10% of the annual turnover in the relevant 12-month period For an individual: $500,000 n/a n/a
(s 224) compliance For a body corporate: $16,650 For an individual: $3,300 (s 224) false information For a body corporate: $ 27,500 For an individual: $5,500
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18.9 CIVIL REMEDIES Pecuniary penalties [18.630] Pt 5-2 Remedies, Div 1 –Pecuniary penalties (ss 224-230) of the ACL allows the ACCC and the consumer protection regulators in the States and Territories to seek civil pecuniary penalties for breaches of the unconscionable conduct provisions, the unfair practices provisions (but not in relation to misleading or deceptive conduct), the product safety provisions and most of the other provisions of the ACL. Pecuniary penalties are a new enforcement option introduced by the ACL providing an alternative to criminal proceedings. But in imposing “pecuniary penalties” and not “fines” s 224 avoids the criminal standard of proof. Section 224 sets the maximum penalty levels and extends liability to those involved in a contravention of the relevant ACL provisions. These are the same maximum limits on fines that can be imposed for ACL offences. See [18.620] for details. Corporations and individuals cannot be penalised twice in separate criminal and civil penalty proceedings for conduct that is substantially the same: s 225.
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[18.640] It is a criminal offence pursuant to s 229 of the ACL for corporations to indemnify officers, employees or agents (whether by agreement or by making a payment and whether directly or through an interposed entity) against any of the following liabilities: (a)
liability to pay a pecuniary penalty for a contravention of the law;
(b)
legal costs incurred in defending or resisting proceedings in which the person is found to have such a liability.
In determining the appropriate pecuniary penalty, s 224(2) directs the court to have regard to all relevant matters including: (a) the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission; and (b) the circumstances in which the act or omission took place; and (c) whether the person has previously been found by a court … to have engaged in any similar conduct.
[18.650] The table below is comprised of cases (listed in chronological order) where the pecuniary penalty for contravention of the ACL was $1 million or higher. Within only a few years, the civil penalty provisions have clearly become a significant enforcement mechanism. Pecuniary penalties for breach of the ACL of $1 million or higher Case Total penalty Conduct ACCC v Yellow Page Marketing BV $2.7 million misrepresentations about subscrip(No 2) [2011] FCA 352 tions to online business directories ACCC v Harvey Norman Holdings Ltd $1.25 million misrepresentations in catalogue [2011] FCA 1407 advertising and 3D TV promotions Singtel Optus Pty Ltd v ACCC [2012] $3.6 million misleading advertising of internet FCAFC 20 broadband plans 790
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Chapter 18 The Australian Consumer Law
Pecuniary penalties for breach of the ACL of $1 million or higher Case Total penalty Conduct ACCC v TPG Internet Pty Ltd (No 2) $2 million misrepresentations and failing [2012] FCA 629 to prominently specify minimum charge ACCC v Apple Pty Ltd [2012] FCA 646 $2.25 million misleading claims about iPads with WiFi + 4G in advertising ACCC v Energy Watch Pty Ltd [2012] $1.95 million misleading advertising FCA 749 ACCC v Neighbourhood Energy Pty $1 million illegal door-to-door sales practices Ltd [2012] FCA 1357 ACCC v Cotton On Kids Pty Ltd [2012] $1 million failure to comply with mandatory FCA 1428 product safety standard ACCC v AGL Sales Pty Ltd [2013] $1.5 million illegal door-to-door sales practices FCA 1030 ACCC v Hewlett-Packard Australia Pty $3 million misrepresentations about consumer Ltd [2013] FCA 653 guarantee rights Director of Consumer Affairs Victoria $3 million failure to comply with mandatory v Dimmeys Stores Pty Ltd [2013] FCA product safety standard 1371 ACCC v Scoopon Pty Ltd [2014] FCA $1 million false or misleading representations 820 ACCC v Energy Australia Pty Ltd $1.2 million unlawful door-to-door selling [2014] FCA 336 practices ACCC v Coles Supermarkets Australia $10 million unconscionable conduct Pty Ltd [2014] FCA 1405 ACCC v Energy Australia Pty Ltd $1.1 million false or misleading representations [2015] FCA 274 ACCC v Origin Energy Electricity $2 million unlawful door-to-door selling Limited [2015] FCA 278 practices ACCC v Coles Supermarkets Australia $2.5 million false or misleading representations Pty Ltd [2015] FCA 330 ACCC v Woolworths Limited [2016] $3 million false or misleading representations FCA 44 ACCC v Clinica Internationale Pty Ltd $1.025 false or misleading representations; (No 2) [2016] FCA 62 million unconscionable conduct ACCC v Hillside (Australia New $2.75 million false or misleading representations Media) Pty Ltd trading as Bet365 (No 2) [2016] FCA 698 ACCC v Reckitt Benckiser (Australia) $6 million false or misleading representations Pty Ltd [2016] FCAFC 181 ACCC v Lifestyle Photographers Pty $1.1 million unconscionable conduct Ltd [2016] FCA 1538 ACCC v Valve Corporation (No 7) $3 million false or misleading representations [2016] FCA 1553
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Business and the Law
Pecuniary penalties for breach of the ACL of $1 million or higher Case Total penalty Conduct ACCC v Acquire Learning & Careers $4.5 million false or misleading representations, Pty Ltd [2017] FCA 602 unconscionable conduct andunsolicited consumer agreements ACCC v Get Qualified Australia Pty $8 million false or misleading representations, Ltd (in liquidation) (No 3) [2017] FCA unconscionable conduct and unso1018 licited consumer agreements ACCC v Thermomix in Australia Pty $4.6 million false or misleading representations Limited [2018] FCA 556 ACCC v Ford Motor Company of $10 million unconscionable conduct Australia Limited [2018] FCA 703 ACCC v Telstra Corporation Limited $10 million false or misleading representations [2018] FCA 571 ACCC v Optus Internet Pty Limited $1.5 million false or misleading representations [2018] FCA 777 ACCC v Apple Pty Ltd (No 4) [2018] $9 million misrepresentations about consumer FCA 953 guarantee rights ACCC v Meriton Property Services Pty $3 million conduct liable to mislead the public Ltd (No 2) [2018] FCA 1125 ACCC v Domain Name Corp Pty Ltd $1.95 million false or misleading representations [2018] FCA 1269 ACCC v H J Heinz Company Australia $2.25 million false or misleading representations Limited (No 2) [2018] FCA 1286
When the ACL was introduced, the maximum pecuniary penalty for a body corporate was $1.1 million; and the maximum pecuniary penalty for individuals was $220,000. These were the same maximum limits on fines that could be imposed for ACL offences. In ACCC v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405, Gordon J. considered a $10 million penalty against the respondent for unconscionable conduct in dealings with its suppliers and noted at [2.4.1]: “The ACL provides for significant penalties for these contraventions. It is a matter for the Parliament to review whether the maximum available penalty of $1.1 million for each contravention of Pt 2-2 of the ACL by a body corporate is sufficient when a corporation with annual revenue in excess of $22 billion acts unconscionably. The current maximum penalties are arguably inadequate for a corporation the size of Coles”. In ACCC v Apple Pty Ltd [2018] FCA 953, Lee J observed that the ACL Final Review Report proposed increasing the maximum financial penalties available under the ACL and noted at [65] that “[one] might think that this case is a paradigm example of the difficulties that can arise when a penalty regime fixes maximum penalties as to body corporates, without reference to size of the contravener”. One of the key recommendations of the Australian Consumer Law Review was to increase the maximum financial penalties available under the ACL and align them with the penalties under the competition provisions of the CCA. This was considered necessary to sufficiently deter highly profitable conduct that contravened the law. 792
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Chapter 18 The Australian Consumer Law
This recommendation was implemented in August 2018 with the passage of the Treasury Laws Amendment (2018 Measures No. 3) Bill 2018. The new maximum pecuniary penalties and fines that apply for breaches of the ACL occurring on or after the commencement date of this amendment are: for corporations -the greater of $10 million; 3 times the value of the benefit; or if the benefit cannot be determined, 10% of the annual turnover in the relevant 12-month period; and for individuals -$500,000. This is a significant change to the penalty regime for the ACL that supports the ACCC’s view that penalties should deter companies breaching the ACL and “are not simply seen as the cost of doing business”. In December 2016, the Full Federal Court upheld an appeal by the ACCC against the penalty imposed for contravening the ACL and ordered the respondent pay a revised penalty of $6 million (up from $1.7 million): ACCC v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181. In ACCC v H. J. Heinz Company Australia Limited (No 2) [2018] FCA 1286, the Federal Court ordered penalties totalling $2.5 million for misleading health claims when the ACCC had sought a penalty of $10 million. Given the seriousness of the contravention and the size of the respondent, the ACCC has stated that it is “carefully considering the judgment” because it “wants to ensure that penalties for breaches of the consumer law are large enough to get the attention of the financial markets, boards and senior management” (ACCC, Media Release 165/18 (24 August 2018).
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Consumer Law penalties set to increase ACCC, Media Release 164/18 (23 August 2018)
[18.660] The ACCC welcomes legislation that
has passed Federal Parliament today to increase maximum financial penalties under the Australian Consumer Law (ACL). In its final report on the ACL Review, Consumer Affairs Australia and New Zealand (CAANZ) recommended penalties for a breach of the ACL be raised from $1.1 million for companies to the greater of $10 million, three times the value of the benefit received, or where the benefit cannot be calculated, 10 per cent of annual turnover in the preceding 12 months. Penalties against individuals under the ACL will also increase from $220,000 to $500,000 per breach. “Companies will now face more serious financial consequences for breaching consumer law that align with competition law breaches,” ACCC Chair Rod Sims said. “We have strongly advocated for higher maximum penalties to enable courts to impose more
substantial penalties. Penalties need to hit the bottom line so they are not simply seen as the cost of doing business. Perhaps more important, penalties need to be high enough to be noticed by boards and senior managers so that compliance with the law is a higher priority.” “Increased penalties will help to deter large companies from breaching consumer laws. This is a profound change that I believe will improve corporate behaviour significantly, and so improve the Australian economy and how it works for consumers,” Mr Sims said. The highest penalty the Federal Court has ordered for breaches of Australian Consumer Law is $10 million (in ACCC actions against Coles and Ford). The highest penalty the Federal Court has ordered for breaches of competition law is $46 million (in an ACCC action against Yazaki).
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Injunctions [18.670] In Pt 5-2 Remedies, Div 2 Injunctions (ss 232-235) of the ACL the court is given very wide powers to restrain contraventions or attempted contraventions of the law. Section 232(1) of the ACL allows a court to grant an injunction, in such terms as the court considers appropriate, if the court is satisfied that a person has engaged, or is proposing to engage, in conduct that constitutes or would constitute: (a) a contravention of a provision of Chapter 2, 3 or 4; or (b) attempting to contravene such a provision; or (c) aiding, abetting, counselling or procuring a person to contravene such a provision; or (d) inducing, or attempting to induce, whether by threats, promises or otherwise, a person to contravene such a provision; or (e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of such a provision; or
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(f) We have welcomed the new laws with enthusiasm and are using them to protect consumers. We are particularly pleased with the penalties we have achieved as these not only show consumers that their rights are being protected, but they also have a clear, profound and lasting impact on corporate behaviour … R Sims, Current ACCC Priorities, Speech to Australia Israel Chamber of Commerce Western Australia Business Leaders Lunch, Perth (13 September 2012).
conspiring with others to contravene such a provision.
[18.680] The application for injunctions may be made by the regulator or any other person: ACL, s 232(2). See: Director of Consumer Affairs Victoria v Dimmeys Stores Pty Ltd [2013] FCA 618. An injunction is the remedy most commonly sought in most private actions where a business takes action in respect of the conduct of a competitor in breach of the ACL. [18.690] The ACL provisions refer to the power to grant different types of injunctions. Restraining injunction (restraining a person from engaging in certain conduct) The power to grant an injunction restraining a person from engaging in conduct, may be exercised (s 232(4)): (a) whether or not it appears to the court that the person intends to engage again, or to continue to engage in the conduct; and (b) whether or not the person has previously engaged in conduct of that kind; and (c) whether or not there is an imminent danger of substantial damage to any other person if the person engages in conduct of that kind.
Without limiting the scope of s 232(1), the court may grant an injunction restraining a person from carrying on a business for a specified period or except on specified terms and conditions: s 232(5). Performing injunction (requiring a person to do any act or thing) The power to grant an injunction requiring a person to do any act or thing may be exercised (s 232(7)): (a) whether or not it appears to the court that the person intends to refuse or fail again, or continue to refuse or fail, to do that act or thing; and (b) whether or not the person has previously refused or failed to do that act or thing; and (c) whether or not there is an imminent danger of substantial damage to any other person if the person refuses or fails to do that act or thing.
Without limiting the scope of s 232(1), the court may grant an injunction requiring a person to do any of the following s 232(6): 794
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Chapter 18 The Australian Consumer Law
(a)
refund money;
(b)
transfer property;
(c)
honour a promise;
(d)
destroy or dispose of goods.
The court is also empowered to grant injunctions by consent: s 233. Interim injunctions may also be ordered if the court considers it desirable pending the final determination of the matter: s 234. Whether an applicant will be granted an interim injunction will be determined by the strength of the applicant’s claim to final relief and the balance of the risk of doing an injustice by either granting or withholding the interlocutory relief sought: Warner-Lambert Company LLC v Apotex Pty Ltd [2014] FCAFC 59.
Damages [18.700] Section 236 of the ACL provides the basis for compensation for contravention of the ACL. If the claimant suffers loss or damage because of the conduct of another person; and the conduct contravened a provision of Ch 2 or 3 of the ACL, the claimant may recover the amount of the loss or damage by action against that other person: s 236(1).
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Actions for damages under the ACL may be commenced within six years after the day on which the cause of action that relates to the conduct accrued: s 236(2) and the liability to pay damages extends to any person involved in the contravention: s 236(1). In order to recover damages, the claimant must prove that loss or damage suffered was “because of” the conduct in breach of the ACL. Whether there is a causal connection between the conduct and the loss for which compensation is being sought is a question of fact to be determined by taking a common sense approach to the test of causation: March v Stramere (E & MH) Pty Ltd [1991] HCA 12. Causation is also the only real limitation on any award of damages; principles of common law relevant to assessing damages in contract and tort are not directly relevant: Henville v Walker [2001] HCA 52.
Compensation orders for injured persons and non-party consumers [18.710] In addition to the remedy of damages in s 236, s 237 of the ACL gives the court power to make compensatory orders for contravention of the ACL against the person who engaged in the conduct or a person involved in that conduct. The difference between the provisions is that under s 236, a cause of action will arise only when actual loss or damage has been suffered, whereas under s 237, a cause of action will arise when loss or damage has been or is likely to be suffered.
A man without a smiling face must not open a shop. Chinese proverb.
ACL s 237 also makes it clear that compensation orders can be made on the application of the ACCC and/or the State and Territory consumer regulators made on behalf of one or more such injured persons: s 237(1)(b). ACL s 239 empowers the ACCC and the State and Territory consumer regulators to bring proceedings for compensation orders on behalf of “non-party consumers” who are in a class of persons likely to have suffered loss or damage caused by the respondent’s contravention of the ACL.
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[18.720] A court may, on the application of the regulator, make such orders as the court thinks appropriate. The kinds of orders that may be made include those listed in s 243: (a)
declaring the whole or any part of a contract to be void either ab initio or from a specified date;
(b)
varying a contract or arrangement in such manner as the court thinks fit;
(c)
refusing to enforce any or all of the provisions of such a contract or arrangement;
(d)
directing the respondent to refund money or return property to the injured person;
(e)
directing the respondent to pay the injured person the amount of the loss or damage;
(f)
directing the respondent, at her or his own expense, to repair, or provide parts for, goods that had been supplied by the respondent to the injured person;
(g)
directing the respondent, at her or his own expense, to supply specified services to the injured person;
(h)
varying or terminating instruments creating or transferring an interest in land.
The financial and other hurdles which may make it impracticable for an individual or small business to seek redress in the courts are overcome by empowering the ACL regulators to bring legal actions on their behalf to redress contraventions of the ACL.
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18.10 OTHER REMEDIES Non-punitive orders [18.730] The court, on application of one of the ACL regulators, may make one of a number of orders described as “non-punitive orders” against a person who has contravened or a person who has been involved in a contravention of a provision of Ch 2, 3 or 4 of the ACL: s 246(1). “Non-punitive orders” are set out in s 246(2): (a) an order directing the person to perform a service that is specified in the order, and that relates to the conduct, for the benefit of the community or a section of the community; (b) an order for the purpose of ensuring that the person does not engage in the conduct, similar conduct, or related conduct, during the period of the order (which must not be longer than 3 years) including: (i) an order directing the person to establish a compliance program for employees or other persons involved in the person’s business, being a program designed to ensure their awareness of the responsibilities and obligations in relation to such conduct; and (ii) an order directing the person to establish an education and training program for employees or other persons involved in the person’s business, being a program designed to ensure their awareness of the responsibilities and obligations in relation to such conduct; and 796
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Chapter 18 The Australian Consumer Law (iii) an order directing the person to revise the internal operations of the person’s business which led to the person engaging in such conduct; (c) an order requiring the person to disclose, in the way and to the persons specified in the order, such information as is so specified, being information that the person has possession of or access to; (d) an order requiring the person to publish, at the person’s expense and in the way specified in the order, an advertisement in the terms specified in, or determined in accordance with, the order.
Non-punitive orders therefore include orders for community service, probation, disclosure and corrective advertising. A community service order requires a person to perform a service that relates to the conduct and is for the benefit of the community. For example, in ACCC v Virgin Mobile Australia Pty Ltd [2002] FCA 1548, the respondent was required to create an internet site explaining to consumers the obligations of advertisers under the legislation. In ACCC v Scoopon Pty Ltd [2014] FCA 820, the respondent was ordered, as part of a community service order, to prepare and hold an educational seminar on ACL issues for other online group buying traders. Probation orders not only prohibit the offender engaging in the prohibited conduct but may also include orders requiring establishment of a compliance program and/or a training program for employees and others. The focus of s 246 is clearly corrective conduct.
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Adverse publicity orders [18.740] The Court, on application of one of the ACL regulators, may make an “adverse publicity order” against a person who has contravened a provision of Pt 2-2 or Ch 3; or has committed an offence against Ch 4: s 247(1). An adverse publicity order in relation to a person is an order described in s 247(2) that requires the person:
[The argument] that the victim can always bring a civil action against the defendant for the recovery of the loss resulting from a criminal act ignores financial inability and the lack of litigious stamina of the majority of victims to sustain a civil suit. At present criminal justice is administered principally for the protection of the whole of society. Its concern for the individual victim should not be merely incidental to that purpose … Hodgson, Profits of crime and their recovery, 1984.
(a) to disclose, in the way and to the persons specified in the order, such information as is so specified, being information that the person has possession of or access to; and (b) to publish, at the person’s expense and in the way specified in the order, an advertisement in the terms specified in, or determined in accordance with, the order.
Section 247 is intended to punish wrongdoing. If such an order is made by the court, a respondent must run public advertisements explaining its behaviour and the penalty imposed. See for example Director of Consumer Affairs Victoria v Manningham Property Group Pty Ltd [2017] FCA 1448; ACCC v 1Cellnet LLC [2005] FCA 856.The existence of this specific power to make adverse publicity orders does not detract from the general power to order corrective advertising under s 246.
Disqualification orders [18.750] On application by one of the ACL regulators, the Court may make an order disqualifying a person from the management of a corporation for a time if it is satisfied that (ACL, s 248):
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(a)
the person has contravened, attempted to contravene or has been involved in a contravention of the law (includes unconscionable conduct provisions, some consumer protection and product safety provisions); and
(b)
the disqualification is justified.
A statutory note to s 248 of the ACL states that s 206EA of the Corporations Act 2001 (Cth) provides that a person is disqualified from managing corporations if a court order is in force under this section and that Act contains various consequences for persons so disqualified. In determining whether the disqualification is justified, the court may have regard to (s 248(2)): (a)
the person’s conduct in relation to the management, business or property of any corporation; and
(b)
any other matters that the court considers appropriate.
If the court makes an order disqualifying a person from managing corporations, the regulator must notify ASIC; and give ASIC a copy of any such order: s 248(3). Note: ASIC must keep a register of persons who have been disqualified from managing corporations: see s 1274AA of the Corporations Act 2001 (Cth).
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In Director of Consumer Affairs Victoria v Dimmeys Stores Pty Ltd [2013] FCA 618, an executive of the respondent identified as the person primarily responsible for the respondent’s failure to comply with the relevant consumer product safety standards was disqualified from managing corporations for six years. The first court order disqualifying a company director from managing a company for breach of the ACL was made in ACCC v Halkalia Pty Ltd [2012] FCA 534 discussed in the ACCC news release at [18.760]. This matter also serves as a reminder that the ACL regulators have a range of enforcement options available to them and will seek all the appropriate orders and remedies when bringing matters to court.
Heartlink company director banned for 15 years and penalised $450,000 after ACCC action ACCC, Media Release 108/12 (29 May 2012)
[18.760] Heartlink
company director Mr Laurence Hann has been banned for 15 years from managing a company and penalised $450,000 after the Federal Court found his conduct amounted to an “egregious series” of contraventions of competition and consumer law. The judgement handed down yesterday concerned false, misleading or deceptive conduct in the promotion and sale of a parcel distribution business for “Heartlink” branded household
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products. The court found that consumers were misled about the profitability and earnings potential of the business opportunity as well as the overall viability of the business. Australian Competition and Consumer Commission chairman Rod Sims said the ACCC considers this a very important outcome. “It is the first time the ACCC has obtained orders from the Federal Court which disqualify an individual from managing companies.”
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Chapter 18 The Australian Consumer Law
“This outcome demonstrates the ACCC will use all its powers to take action against those who engage in unscrupulous business practices which prey on disadvantaged or vulnerable consumers.” … In handing down the $450,000 civil pecuniary penalty against Mr Hann, Justice Tracey said “I consider his conduct to constitute an egregious series of contraventions of legislation designed to protect consumers. He well knew what he was doing was wrong but he still persisted.” As well as disqualifying Mr Hann from managing a corporation for 15 years, Justice Tracey also imposed injunctions against Mr Hann for 15 years which prevent him from carrying on a business or supplying goods or services in connection with which: • persons are invited to invest money or perform work
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• any claim is made that moneys or profits earned by the sale of goods are donated to charity, or • goods or services concerned are or include household cleaning products.
In making these orders, Justice Tracey said “the conduct has resulted in substantial losses being sustained by people, many of them elderly, across Australia. Mr Hann has a long history of establishing companies and other entities and using them to promote dubious business opportunities in order to obtain funds. He should not have the opportunity to do so again.” Justice Tracey also made further orders, including: • a civil pecuniary penalty against Halkalia Pty Ltd in the amount of $450,000 • injunctions against each of Halkalia Pty Ltd, Heartlink Enterprises Pty Ltd and National Semi- Retired Group Pty Ltd in similar terms to those imposed against Mr Hann for 15 years • declarations that Halkalia Pty Ltd, Heartlink Enterprises Pty Ltd, National Semi- Retired Group Pty Ltd and Mr Hann had each engaged in false, misleading or deceptive conduct in contravention of sections 52 and 59(2) of the Trade Practices Act 1974, and • costs.
Country of origin representations [18.770] Ch 5, Pt 5-3 of the ACL sets out a regime for determining whether representations as to country of origin are misleading or deceptive (for the purposes of s 18 of the ACL) or whether they are false or misleading (for the purposes of s 29(1)(a) or s 29(1)(k) or s 151(1)(a) or s 151(1)(k) of the ACL). This Part of the ACL creates a number of defences to what may otherwise be contraventions of ss 18, 29(1) and 151 in relation to representations: about goods being “made in” a specified country; about goods being “a product of” or “produce of” a specified country; about country of origin claims based on the use of a prescribed logo; that goods were “grown in” a particular country; and that ingredients or components were “grown in” a particular country. See Chapter 20 for a discussion of country of origin claims and the ACL.
Remedies relating to guarantees [18.780] Ch 5, Pt 5-4 of the ACL sets out the remedies regime for actions against suppliers of goods and services that do not comply with the statutory consumer guarantees
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provided by Ch 3, Pt 3-2, Div 1 of the ACL. The remedies vary depending on whether the failure to comply with the consumer guarantee for example as to title, or acceptable quality or fitness for any disclosed purpose, is classified as a “major failure”: s 260. See Chapter 21 for a discussion of the consumer guarantees under the ACL.
QUESTIONS 1.
Why does the Australian Consumer Law rely on both public and private enforcement?
2.
Outline and assess the range of enforcement options and remedies available for the ACCC in respect of breaches of the Australian Consumer Law.
3.
Has the Australian Consumer Law moved too far from caveat emptor?
4.
Perfect Products Pty Ltd (Perfect) commissioned Awesome Ads Pty Ltd (Awesome) to prepare a comprehensive television advertising campaign for Perfect’s new range of kitchen products. Some information in relation to the quality of the products was provided to Awesome by Perfect. The advertisements contained information which was false and misleading.
Advise the ACCC as to the potential liability of the following parties in respect of the misleading advertisements: i. Perfect ii. Awesome
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iii. Elvis, an actor who appears in the advertisement stating that “Perfect’s products are perfect. I know. I use them. Goodnight”. Elvis, in fact, had never used Perfect’s products until he used them in the advertisement. iv. Kitchen Treasures Pty Ltd –a retail shop supplying Perfect’s products and using point-of-sale supplied by Perfect which includes misleading information. v. Channel 747, which plays the misleading advertisements (and continues to do so even after a competitor of Perfect advises them that the advertisements are misleading on the basis that “if we pulled ads every time a competitor got its knickers in a twist we would soon be out of business”).
WEB REFERENCES ACL Regulators: Commonwealth Australian Competition and Consumer Commission http://www.accc.gov.au Australian Securities and Investments Commission http://www.asic.gov.au ACL Regulators: State and Territory ACT: http://www.accesscanberra.act.gov.au NSW: http://www.fairtrading.nsw.gov.au
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Chapter 18 The Australian Consumer Law
NT: http://www.consumeraffairs.nt.gov.au QLD: http://www.fairtrading.qld.gov.au SA: http://www.cbs.sa.gov.au Tas: http://www. cbos.tas.gov.au Vic: http://www.consumer.vic.gov.au WA: http://www.commerce.wa.gov.au The Australian Consumer Law http://www.consumerlaw.gov.au Australian Consumers Association http://www.choice.com.au Australian Government Business Entry Point http://www.business.gov.au Consumers International http://www.consumersinternational.org Competition and Consumer Act Education Programs https://www.accc.gov.au/about-us/ tools-resources/cca-education-programs
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Misleading or Deceptive Conduct Andrew Terry THE BUSINESS CONTEXT The statutory prohibition of “misleading or deceptive conduct in trade or commerce” (under s 18 of the Australian Consumer Law and, for financial products and services, the Australian Securities and Investments Commission Act 2001 (Cth)) and the Corporations Act 2001 (Cth) is the most litigated provision in Australian business law. It imposes an ethical framework for the conduct of business and has a potential impact on all business activities. In only 23 words –“A person shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive” –it has changed the rules for the conduct of business in Australia. It has been described as a “comprehensive provision of wide impact” which has dramatically reshaped the conduct of business in Australia. The breadth and generality of the prohibition is its strength –ultimately the test is very straightforward and simply requires that conduct is misleading. Of course this standard can be stated much more easily than it can be applied and it has generated a massive body of case law. It is not only the broad ethical generality of the prohibition of misleading or deceptive conduct that makes it such an influential provision in business. It is also the fact that it applies to all conduct in business including advertising and representations made in the course of negotiations preceding a contract. Despite s 18 being located in the Australian Consumer Law, the majority of actions brought for misleading conduct are instigated by businesses either in respect of a competitor’s passing off or false advertising or by a business alleging that a business opportunity has been misrepresented by
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the other party during to pre-contract negotiations. The application of the misleading conduct provision to pre-contract misrepresentation in commercial rather than purely traditional consumer contexts has meant that s 18 is highly significant in business contracting.
19.1 A COMPREHENSIVE PROVISION OF WIDE IMPACT ................................................................................... 805 [19.10] Section 18 Australian Consumer Law .......................................................................................................... 805 [19.30]
Misleading conduct in relation to financial products or services ...................................................... 806
[19.50]
Section 18 and the specific misrepresentation provisions .................................................................. 807
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19.3 FACTORS IN THE DEVELOPMENT OF s 18 ...................................................................................................... 807 [19.70]
Wide scope and application ...................................................................................................................... 808
[19.80]
Width of the concept “misleading or deceptive” .................................................................................. 808
[19.90]
Irrelevance of intention, knowledge, motive or fault ........................................................................... 808
[19.100]
Low threshold for evaluating conduct .................................................................................................... 809
[19.110]
Ineffectiveness of exemption clauses ...................................................................................................... 809
[19.120]
Reverse onus of proof in relation to statements as to the future ....................................................... 809
[19.130]
No defences .................................................................................................................................................. 810
[19.140]
Wide range of remedies ............................................................................................................................. 810
[19.150]
Wide range of potential plaintiffs ............................................................................................................ 810
[19.160]
Wide range of potential defendants ........................................................................................................ 811
[19.170]
Enforcement by the business community .............................................................................................. 811
19.4 APPLICATION ........................................................................................................................................................... 812 [19.190] Person ............................................................................................................................................................ 812 [19.210]
Engaging in conduct ................................................................................................................................... 812
[19.220]
In trade or commerce ................................................................................................................................. 812
19.5 “MISLEADING OR DECEPTIVE”: THE GENERAL PRINCIPLES ................................................................ 816 [19.320]
The meaning of “misleading or deceptive” ............................................................................................ 818
[19.410]
Intention to mislead not required ............................................................................................................ 821
[19.420]
Misleading to whom? ................................................................................................................................. 821
[19.430]
Overall impression and qualifications .................................................................................................... 821
[19.440]
Other general principles ............................................................................................................................ 822
19.6 THE MAJOR CATEGORIES OF MISLEADING OR DECEPTIVE CONDUCT ........................................... 822 19.7 ADVERTISING .......................................................................................................................................................... 823 [19.470]
Trade rival litigation .................................................................................................................................... 823
[19.500]
The relevant target audience ..................................................................................................................... 826
[19.560]
The standard of the target audience ........................................................................................................ 828
[19.590]
Objective test ................................................................................................................................................ 830
[19.600]
The conduct must cause the misconception .......................................................................................... 831
[19.650] Puffery ........................................................................................................................................................... 833 [19.700]
Overall impression, asterisks and fine print qualifications ................................................................ 835
[19.760]
Silence and half-truths ............................................................................................................................... 838
[19.770]
Comparative advertising ........................................................................................................................... 839
804
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Chapter 19 Misleading or Deceptive Conduct
[19.830] Endorsements .............................................................................................................................................. 842 [19.850]
Tests and surveys ......................................................................................................................................... 844
[19.860]
Reviews and testimonials .......................................................................................................................... 844
[19.890]
Advertising through sponsored website links ....................................................................................... 845
[19.910]
Social media ................................................................................................................................................. 846
19.8 UNFAIR COMPETITION/PASSING OFF ............................................................................................................ 848 [19.940]
A “misrepresentation” not a “misappropriation” action ...................................................................... 849
[19.950]
The need for an established representation .......................................................................................... 849
[19.970]
Similar names .............................................................................................................................................. 850
[19.990]
Similar shape ............................................................................................................................................... 851
[19.1010]
Similar get-up .............................................................................................................................................. 852
[19.1030]
Similar packaging ........................................................................................................................................ 854
[19.1040]
Similar colour ............................................................................................................................................... 854
19.9 PRE-CONTRACTUAL MISREPRESENTATION ................................................................................................ 855 [19.1060]
Section 18 and negotiations ....................................................................................................................... 855
[19.1120]
Promises, predictions, forecasts and representations as to the future ............................................. 860
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[19.1150] Opinions ....................................................................................................................................................... 861 [19.1170]
Relaying false information ........................................................................................................................ 863
[19.1210]
Half-truths, silence and non-disclosure ................................................................................................. 866
[19.1240]
Exclusions, acknowledgements and disclaimers .................................................................................. 868
19.1 A COMPREHENSIVE PROVISION OF WIDE IMPACT Section 18 Australian Consumer Law [19.10] Section 18(1) of the Australian Consumer Law (ACL) provides that: A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
Note that much of the case law on s 18 refers to s 52 of the Trade Practices Act 1974 (Cth) (TPA), the predecessor of s 18. This case law is still relevant. In cases where it will not mislead s 52 TPA has been changed to [s18 ACL]. [19.20] It has been described as a “comprehensive provision of wide impact” (Brown v Jam Factory Pty Ltd [1981] FCA 35 per Fox J). At the time of the introduction of its predecessor –s 52 of the TPA –there would have been little argument with the proposition that s 52 constituted the most important legislative initiative in the area of commercial law in recent times. The proposition that it would become one of the most important and most litigated provisions in the entire statute book would have been greeted with some scepticism. It was located under the leading “consumer protection” and there seems little doubt that it was intended as a residual consumer protection provision to catch conduct falling outside the specific prohibitions which follow it. But although certain of
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Like most general precepts framed in abstract terms [s 18] affords little practical guidance to those who seek to arrange their activities so that they will not offend against its provisions. Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44 at [7] per Gibbs CJ.
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the restrictive trade practices provisions have the capacity for a more dramatic restructuring of Australian trade and commerce, no other provision has had a greater day-to- day influence in the marketplace than s 52 (and then s 18). Its metamorphosis from its intended role as a residual consumer protection provision to a versatile and significant action for purely inter partes (private), and essentially commercial, litigation is of a magnitude without parallel in Australian jurisprudence. In conjunction with a range of flexible civil remedies, it provides a broad-spectrum antidote to a wide range of conduct falling short of the norm that it establishes. It does not simply add to the general law, but in some circumstances totally embraces common law actions (see [19.310]). Section 18 is a comprehensive provision of wide impact, which does not adopt the language of any common law cause of action. It does not purport to create liability at all; rather does it establish a norm of conduct, failure to observe which has consequences provided for elsewhere in the same statute, or under the general law. Brown v Jam Factory Pty Ltd [1981] FCA 35 per Fox J.
806
Misleading conduct in relation to financial products or financial services [19.30] Section 18 does not apply to misleading conduct engaged in relation to financial services and financial products (s 131A), which since 1998 has been similarly regulated by s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and s 1041H of the Corporations Act 2001 (Cth). The decisions of the courts in relation to s 18 ACL apply also to s 12DA and s 1041H and vice versa.
IN CONTEXT
The increasing complexity of the basic prohibition of misleading conduct [19.40] In Wingecarribee Shire Council v Lehman Brothers Australia Ltd [2012] FCA 1028,
Rares J expressed his displeasure with the increasing complexity of the basic prohibition of misleading conduct in these terms (at [947]-[948]): For many years all one had to know was that the elegantly simple s 52(1) of the Trade Practices Act 1974 (Cth) prohibited a corporation from engaging in conduct, in trade or commerce, that was misleading or deceptive or likely to mislead or deceive. For some purpose that is not evident the Parliament decided to remove elegant simplicity in its statutory drafting some years ago. Now the community and the Courts must grapple with a labyrinth of statutes, all prohibiting such conduct, in relatively general fields (such as s 18 of Sch 2 of the Competition and Consumer Act 2010 (Cth) and see s 131A of that Act itself) and also in particular fields, such as s 1041H(1) of the Corporations Act and s 12DA(1) of the ASIC Act. The latter two provisions state: 1041H(1) A person must not, in this jurisdiction, engage in conduct, in relation to a financial product or a financial service, that is misleading or deceptive or is likely to mislead or deceive. 12DA(1) A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive. (emphasis added) Of course, each Act has a myriad of complex definitions of what is a financial product or a financial service or are financial services. Each Act gives a person, who suffers
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Chapter 19 Misleading or Deceptive Conduct
loss or damage by conduct of another in contravention of the prohibition, the right to compensation (eg s 1041I(1), s 12GF) coupled with substantively identical related exceptions and qualifications concerning proportionate liability. Since the end result of this legislative morass seems to be the same, it is difficult to discern why the public, their lawyers (if they can afford them) and the Courts must waste their time turning up and construing which of these statutes applies to the particular circumstance. Here, should it make any difference whether Grange was alleged to have engaged in conduct in relation to “financial services” (s 12DA(1)) or “a financial product or a financial service” (s 1041H(1))? Why is there a difference? Why does a court have to waste its time wading through this legislative porridge to work out which one or ones of these provisions apply even though it is likely that the end result will be the same? As Edmund Davies LJ lamented in The “Putbus” [1969] P 136 at 152: Were bewilderment the legitimate aim of statutes, the Merchant Shipping (Liability of Shipowners and Others) Act, 1958, would clearly be entitled to a high award. Indeed, the deep gloom which its tortuosities induced in me has been lifted only by the happy discovery that my attempt to construe them has led me to the same conclusion as my brethren.
Section 18 and the specific misrepresentation provisions
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[19.50] Section 18(2) of the ACL provides that “Nothing in Part 3-1 [which is about unfair practices] limits by implication subsection (1)”. The general prohibition of misleading or deceptive conduct overlaps the operation of these specific provisions and indeed was conceived as a “backstop” to cover any gaps that might occur in the specific forms of misrepresentation prohibition. A body of case law has developed in relation to many of these particular prohibitions but conduct that contravenes the specific misrepresentation provision will always contravene s 18. The general principles which have developed in relation to s 18 are equally applicable to these specific misrepresentation provisions. The major difference between s 18 and the specific misrepresentation provisions is that criminal fines and civil pecuniary penalties are not available for s 18 contraventions. Section 18 creates a norm of business conduct, and allows persons to seek damages and injunctions to breaches of that norm, rather than giving rise to a contravention that attracts punitive sanctions which is the province of the specific misrepresentation provision. “Injunctions” (the remedy usually sought in trade rival litigation in relation to misleading advertising) and damages (the remedy usually sought in respect of pre-contractual misrepresentation including a contract) are available. Enforcement can be by the ACCC as well as through private actions.
19.3 FACTORS IN THE DEVELOPMENT OF S 18 [19.60] The rationale for s 52 of the TPA was clearly spelt out by Senator Lionel Murphy in his second reading speech (“Parliamentary Debates” (1974) 60 Hansard 547):
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Now the problem I had in understanding the law was because of the language of the law. Instead of taking each word and finding out the case that the word related to, once in a while I got lazy and I would apply common sense. And then I got really screwed up. Lenny Bruce.
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Business and the Law Clause 52 prohibits misleading or deceptive conduct –and does so in general terms. It is important that there should be such a provision if the law is not to be continually one step behind businessmen who resort to smart practices.
In the first five years of the TPA there were only 19 reported cases involving s 52 and its role was simply as a residual consumer protection provision supporting the specific unfair practices. Today s 18 is the most litigated section in the statute book and has an actual or potential impact on virtually every commercial activity. A number of factors are responsible for this metamorphosis.
Wide scope and application [19.70] The operation of s 18 simply requires a person (either a natural legal person (an individual) or an artificial legal person (a company)), engaging in conduct answering the description of “misleading or deceptive”, and the occurrence of that conduct in trade or commerce. All conduct in trade or commerce which can be categorised as “misleading or deceptive” or “likely to mislead or deceive” is prohibited. Pincus J has explained that (“Trade Practices” (1988) 2 Commercial Law Quarterly 15) that:
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What the parliament has done has been to cut through all the refinements and simply create a duty not to make misleading statements and provide a broad range of remedies for breach of that duty.
Section 18 has little respect for the traditional boundaries of established causes of action and has been applied in a wide range of situations. If the prerequisites of conduct in trade are satisfied, any conduct that fits the description “misleading or deceptive” is vulnerable and civil remedies (usually injunctions and/or damages) can be obtained. There is nothing in [s 18] that would confine it to conduct which was engaged in as a result of a failure to take reasonable care. A corporation which has acted honestly and reasonably may therefore nevertheless be rendered liable to be restrained by injunction and to pay damages if its conduct has in fact misled or deceived or is likely to mislead or deceive. Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44 at [7] per Gibbs CJ.
808
Width of the concept “misleading or deceptive” [19.80] The terms “misleading or deceptive” are not, and probably cannot be, comprehensively defined. Their generality is a strength which provides flexibility to accommodate s 18 to the totality of conduct in trade or commerce. Conversely, their generality is also a weakness. In Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44, Gibbs CJ in the High Court commented that although the words “mislead” and “deceive” are clear and unambiguous: Nevertheless they are productive of considerable difficulty when it becomes necessary to apply them to the facts of particular cases. Like most general precepts framed in abstract terms, the section affords little practical guidance to those who seek to arrange their activities so that they will not offend against its provisions.
Misleading or deceptive conduct may arise through silence, opinions and representations as to future events and cannot be excluded by traditional exclusionary “devices”.
Irrelevance of intention, knowledge, motive or fault [19.90] Section 18 does not incorporate a mental element and a breach of the section is independent of moral turpitude. In the language of the High Court in Yorke v Lucas [1985] HCA 65 (at [7]per Mason ACJ, Wilson, Deane and Dawson JJ):
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Chapter 19 Misleading or Deceptive Conduct It is, of course, established that contravention of that section does not require an intent to mislead or deceive and even though a corporation acts honestly and reasonably, it may nonetheless engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
It is simply a question of an objective interpretation of the relevant facts. Was the conduct misleading or deceptive or was it likely to mislead or deceive?
Low threshold for evaluating conduct [19.100] In determining whether conduct is misleading or deceptive for the purposes of s 18, the class of persons likely to be affected has to be identified. In Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136, Franki J observed that “all persons exposed to the conduct should be considered” and in Annand & Thompson Pty Ltd v TPC [1979] FCA 62 at [26], he stated that: The question is to be tested by the effect on a person, not particularly intelligent or well informed, but perhaps of somewhat less than average intelligence and background knowledge although the test is not the effect on a person who is, for example, quite unusually stupid.
Although there are some differences of emphasis in the expression of the appropriate test, s 18 adopts a much lower threshold for evaluating conduct than the common law. The common law’s “reasonable man” is replaced by the “unsuspecting modest member of the community” (Henderson v Pioneer Homes Pty Ltd [1980] ATPR 40-168 at 42,327).
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Ineffectiveness of exemption clauses [19.110] Section 18 imposes a public duty that cannot be excluded or waived. It is now well established that an exclusion clause in a written contract, which may be effective to exclude common law liability for pre-contractual misrepresentation, cannot exclude a claim based on s 18. In Petera Pty Ltd v EAJ Pty Ltd [1985] FCA 277 for example Wilcox J held in a case involving representations concerning the turnover of a restaurant business that an exemption clause was ineffective: Whatever may be the effect of [such a clause] in relation to an action brought in contract, in which reliance is placed upon an alleged warranty or condition not included in the contract of sale, [such a clause] should not be allowed to defeat a claim based upon [s 18].
Although contractual devices are ineffective to exclude liability for misleading or deceptive conduct, prominently displayed disclaimers may in some circumstances be effective to prevent conduct being categorised as misleading or deceptive.
Reverse onus of proof in relation to statements as to the future [19.120] The utility of s 18 has been significantly enhanced by the enactment of s 4 of the ACL which provides that in relation to representations as to future conduct (promises, predictions, forecasts or other statements as to the future), a representation shall be deemed to be misleading unless based on reasonable grounds when made. The onus of proving that the statement was based on reasonable grounds lies upon the party making the representation. Persons who make statements as to the future must now be prepared to substantiate the grounds on which they were made.
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Misleading or deceptive conduct generally consists of representations, whether express or by silence; but it is erroneous to approach [s 18] on the assumption that its application is confined exclusively to circumstances which constitute some form of representation. Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd [1988] FCA 40 at [31] per Lockhart J.
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No defences
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[19.130] “Information providers” are exempt from the s 18 prohibition of misleading conduct in respect of editorial comment and news reporting (s 19 –see [19.290]) but no other defences are provided. [If] a s 52 breach is litigated, an action may be brought not only against, say, a defendant corporation but also perhaps against its managing director, one or more of its key employees, or perhaps the whole board of directors. These parties may be personally liable. Undoubtedly this changes the whole attitude to litigation when corporations are sued. No longer is it only the corporation’s money which is involved. It is the director’s or employee’s personal funds which are on the line. Litigation in these circumstances often takes a quite different path to that taken when only the impersonal corporation can be sued. W Pengilley, “Section 52 of the Trade Practices Act, A plaintiff’s new Exocet?” (1987) 15 Australian Business Law Review 262.
810
Wide range of remedies [19.140] In State Energy Commission of Western Australia v Fluor Australia Pty Ltd [1987] FCA 99 French J, in commenting on the “very real advantage conferred on the applicant who is able to invoke s 18 over the plaintiff who is limited to common law causes of action”, referred to the wider range of remedies available to the litigant. A breach of s 18 does not have criminal consequences, or give rise to civil pecuniary penalties but a range of civil remedies is available: the possible grant of an injunction against repetition (ACL, Pt 5-2, s 232), an award of damages for breach (ACL, s 236) and “other orders” (ACL, s 243). These other orders include: declaring the whole or any part of a contract void or to have been void ab initio or at all times on or after a certain date, varying a contract, refusing to enforce any or all of the provisions of a contract, requiring return of money or property, directing payment of moneys, requiring a person to repair goods or provide parts for goods or to supply specified services, requiring a person to vary an instrument relating to land, or an order terminating the effect of such an instrument.
Wide range of potential plaintiffs [19.150] Although “damages” (s 236) and “other orders” (s 243) are recoverable only by “a person who suffers loss or damage” by reason of the contravention of s 18, “any person” is entitled to seek an injunction under s 232. The fact that an applicant can seek an injunction provides a powerful and versatile remedy in a range of commercial circumstances and has contributed significantly to the widening influence of the provision. The availability of injunctive relief to corporations adversely affected by the conduct of their competitors is particularly important in advertising and passing off cases. The application, though it vindicates or protects the private interests of the competitor, at the same time secures the public interest of consumer protection. Another important consequence of the status to sue –locus standi –being widened is that public interest/litigation is encouraged. In Phelps v Western Mining Corp Ltd [1978] ATPR 40-077 for example an interested member of the public sought an injunction against the Australian Uranium Producers’ Forum in respect of certain promotional material published by that Forum. The defence of locus standi, which would have succeeded at common law, failed. Similarly, the Australian Federation of Consumer Organisations had standing to bring a misleading or deceptive conduct action against the Tobacco Institute of Australia in respect of a newspaper advertisement denying a link between passive smoking and diseases caused by inhalation of cigarette smoke by non-smokers (Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations [1993] FCA 83).
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Chapter 19 Misleading or Deceptive Conduct
Wide range of potential defendants [19.160] Primary liability for contravention of the prohibition of misleading or deceptive conduct is imposed on any person engaging in the misleading or deceptive conduct. The net is therefore spread widely and a range of persons may be primarily liable for misleading deceptive conduct. A particular misleading advertisement may involve for example the advertiser, the advertising agency and the media in liability. The class of potential defendants is nevertheless substantially widened by making accessories to a breach of the ACL, including s 18, personally liable. Damages, injunctions and other orders for misleading or deceptive conduct may be recovered against the “person” whose conduct gave rise to the loss or damage suffered as a result of the breach or “against any person involved in the contravention”.
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Enforcement by the business community [19.170] The most significant development to date has undoubtedly been its enforcement by the business community, rather than by the traditional consumers it was originally enacted to protect, or the regulatory agencies. Private actions dominate the reported cases. Section 18 has a sphere of influence much wider than traditional notions of consumer protection. The earliest cases were typical consumer protection situations, where goods or services were being promoted in a manner that was misleading or deceptive. A trader may seek injunctive relief to restrain a rival trader from falsely describing the attributes of its (the rival’s) product (eg Colgate-Palmolive Pty Ltd v Rexona Pty Ltd [1981] FCA 146 where Colgate was granted an interlocutory injunction to restrain Rexona from advertising unproven claims as to the plaque-inhibiting ability of an additive to its toothpaste). A trader may also seek an injunction to restrain a rival trader who disparages the applicant’s product by inaccurate comparisons (eg State Government Insurance Commission v JM Insurance Pty Ltd [1984] FCA 127 where an interlocutory injunction was granted to restrain a competitor from making inaccurate comparisons in relation to the cost of car insurance). Although the applicant in such a case is clearly motivated by private interest, such actions are obviously consistent with the consumer protection objectives of the ACL. The next phase in the enforcement of s 18 by commercial interests was its use as an alternative to a passing off action. Although this use of the section was not anticipated at the time the legislation was enacted, it is a logical development. The trader is motivated by self-interest, but the public interest is also vindicated. As Mason J stated in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44, “the remedy to prevent deception of the public often has the incidental effect of protecting a competing trader’s goodwill which would be also injured by that deception”.
A lie is an abomination unto the Lord, and a very present help in trouble. Anonymous.
The most recent development is characterised by actions in which one party to a private commercial contract seeks a remedy under s 18 in respect of pre-contractual representations which prior to the TPA would have been sought to be redressed, with little hope of success, in actions for breach of contract, deceit or negligent misstatement. The section has become a valuable tool for dealing with commercial misrepresentation in situations where the applicant bears little resemblance to the traditional consumer.
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19.4 APPLICATION [19.180] Section 18 is activated by a person who engages in conduct in trade or commerce. These prerequisites impose little restriction in practice. Not surprisingly, the question of whether such conduct is “misleading or deceptive or is likely to mislead or deceive” is more difficult.
Person [19.190] “Person” includes a natural legal person, an individual, and an artificial legal person, a corporation. It also includes the Crown and its agencies in so far as they carry on a business (ACL, s 2A). Accountants are witchdoctors of the modern world. Harman LJ.
A “corporation” is defined in s 4 of the ACL to mean a body corporate that: (a) is a foreign corporation; (b) is a trading corporation formed within the limits of Australia or is a financial corporation so formed; (c) is incorporated in a Territory; or
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(d) is the holding company of a body corporate of a kind referred to in paragraph (a), (b) or (c). You can’t expect on every occasion that a politician will tell the truth. He’s not allowed to and it wouldn’t be sensible to do it. Senator Graham Richardson, The Australian (2 November 1994).
[19.200] A number of cases have considered the meaning of “trading corporation” –in particular the extent to which trading must represent a substantial aspect of its activities. In R v Federal Court of Australia; Ex parte WA National Football League [1979] HCA 6 it was held that trading which is merely a peripheral aspect of those activities will not be sufficient to render it a trading corporation. Whether the trading activities are substantial and not merely peripheral is a question of fact and degree. In Orion Pet Products Pty Ltd v Royal Society for the Prevention of Cruelty to Animals (Vic) [2002] FCA 860 (see [19.280]) it was held that the RSPCA was a trading corporation. Although the ultimate aim of its trading activities was not to create a profit but to fund the pursuit of its animal welfare objective, its trading activities were “anything but modest”.
Engaging in conduct [19.210] The concept of “engaging in conduct” is broadly defined to mean doing any act or refraining (other than inadvertently) from doing that act (ACL, s 2(2)). Conduct is not restricted to any particular form of behaviour and may be constituted by positive conduct (eg by written or oral statements, displays or actions) and by deliberate inactivity (eg by failing to disclose information). It follows that a number of people may contravene s 18 in respect of the same conduct. A misleading label attached by a manufacturer may result in both the manufacturer and the retailer who displays the goods incurring liability for breach of s 18. Liability for a misleading advertisement may attach to the advertiser, the advertising agency which prepared the advertisement and the media which carried the advertisement.
In trade or commerce [19.220] In practice the “in trade or commerce” requirement does not greatly affect the scope of the section. Normal business dealings are clearly in trade or commerce and the 812
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Chapter 19 Misleading or Deceptive Conduct
most important categories of conduct excluded are isolated transactions by private individuals which are not connected with a business or trading activities. The sale of a private residence is not conduct in trade or commerce, and in O’Brien v Smolonogov [1983] FCA 305, the Full Federal Court held that: The mere use, by a person not acting in the course of carrying on a business, of facilities commonly employed in commercial transactions, cannot transform a dealing which lacks any business character into something done in trade or commerce.
Legal writing is one of those rare creatures, like the rat and the cockroach, that would attract little sympathy even as an endangered species. Richard Hyland.
However, the conduct of real estate agents and solicitors engaged by the private vendor may be in trade or commerce. In Argy v Blunts [1990] FCA 51 for example it was held that although the private vendor could not be liable under s 18, the vendor’s real estate agent who had misrepresented the property in brochures and advertisements and the vendor’s solicitor who incorrectly issued an environmental planning certificate had engaged in misleading conduct in trade or commerce in breach of s 18. The leading decision on the meaning of “in trade or commerce” is Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17, which involved representations in the employment context.
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Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17
Case Study
Background
[19.230] The statutory misleading conduct action overlaps a number of traditional legal actions and
is frequently used in an attempt to avoid various limitations of these actions. Concrete Constructions provides an example in the employment context, albeit unsuccessful because of the High Court’s narrow interpretation of the “in trade or commerce” requirement. Facts An employee sustained injuries when he fell to the bottom of an air conditioning shaft because a foreman had incorrectly explained how to remove a grate. In order to avoid the limitations on lump sum compensation payments to employees under State legislation, the employee brought his action for damages under s 52 of the TPA. Issue The High Court had to decide whether a communication by a company to an employee which resulted in the employee suffering personal injury was “in trade or commerce”. Decision
The majority of the High Court rejected a wide construction that would encompass activities “undertaken in the course of, or as incidental to, the carrying on of an overall trading or commercial business” (at [7]per Mason CJ, Deane, Dawson, Gaudron JJ). The majority adopted a narrow construction. The question was not whether the conduct which was engaged in was in connection with trade or commerce, or in relation to trade or commerce, but whether it was in trade or commerce (at [8]):
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[Section] 52 was not intended to extend to all conduct, regardless of its nature, in which a corporation might engage in the course of, or for the purpose of, its overall trading or commercial business. [It] was not intended to impose, by a side-wind, an overlay of Commonwealth law upon every field of legislative control into which a corporation might stray for the purposes of, or in connection with, carrying on its trading or commercial activities. What the section is concerned with is the conduct of a corporation towards persons, be they consumers or not, with whom it (or those whose interests it represents or is seeking to promote) has or may have dealings in the course of those activities or transactions which, of their nature, bear a trading or commercial character.
Implications There is a significant difference between conduct being in trade or commerce and conduct in relation to trade and commerce. In the words of the majority: The giving of a misleading hand signal by the driver of one of its trucks is not, in the relevant sense, conduct by a corporation “in trade or commerce”. Nor, without more, is a misleading statement by one of a building company’s own employees to another employee in the course of their ordinary activities.
Communication of religious beliefs
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Plimer v Roberts [1997] FCA 1361 [19.240] Public lectures concerning the existence of Noah’s Ark were held not to be in trade or commerce despite an entry fee being charged and literature available for sale.
Political communications
Unilan Holdings Pty Ltd v Kerin [1992] ATPR 41-169 [19.250] The Federal Court held that a statement made by the then Minister for Primary Industries in an address to an international conference in Dubrovnik that the government would maintain the reserve price for wool was also held not to be in trade or commerce. It was held that the giving of a speech to an international wool conference by a Minister of State is not an aspect or element of activities or transactions which, of their nature, bear a trading or commercial character: “It does not form part of the central conception of trade or commerce … and is not so made merely because the speech concerns matters of trade or commerce”: at 40,324. The giving of the speech was a matter in relation to trade or commerce, but it was not conduct which was actually in trade or commerce.
Durant v Greiner (1990) 21 NSWLR 119 [19.260] The Supreme Court of New South Wales held that statements made by the Premier and the Minister for Education in relation to school closures were not in trade or commerce. Although the Premier may have been acting as a professional politician when he made the representation concerning the future of a particular school, that conduct was not in trade or commerce as it was not trading or commercial in character. 814
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Chapter 19 Misleading or Deceptive Conduct
Public health and educational communications
Tobacco Institute of Australia Ltd v Woodward (1993) 32 NSWLR 559 [19.270] It was held that a person who made public statements on behalf of a lobby group opposed to tobacco was not engaged “in trade or commerce”.
Orion Pet Products Pty Ltd v Royal Society for the Prevention of Cruelty to Animals (Vic) [2002] FCA 860 [19.280] The RSPCA made a series of statements to the effect that use of the electronic dog collars for training dogs was cruel, ineffective and illegal. An action was brought alleging misleading conduct, injurious falsehood and defamation. The misleading conduct action failed. Although a number of the statements were false or misleading they were not made “in trade or commerce” (at [192]-[193]): The RSPCA is … a trading corporation. However, many of its functions have a non-trading or commercial character. [The] broadcasts combine educational and political objectives. They may provide a benefit to the RSPCA from greater public exposure of its intellectual property, including its name and logo. However, any such benefit is purely incidental. The [written statements] were similarly part of an educational and political agenda. They were only tenuously, if at all, connected with the RSPCA’s trading activities.
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The action for injurious falsehood was also unsuccessful but damages were awarded for defamation.
IN CONTEXT
Exception for “information providers” [19.290] In the early 1980s the misleading conduct action was successfully used in two
cases in which newspaper publishers were liable under s 52 of the TPA for essentially defamatory comment (Australian Ocean Line Pty Ltd v West Australian Newspapers Ltd [1985] FCA 37 and Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd [1984] FCA 180). The consternation these decisions caused among publishers led to the enactment of s 65A in 1984 which exempted a person who “carries on a business of providing information” from the operation of the misleading or deceptive conduct provisions in relation to publications in the course of carrying on its business of providing information. The “prescribed information provider” exemption does not apply to advertisements or promotional material. Section 65A was justified in terms of the government’s recognition of “the need to maintain a vigorous free press” (Second Reading Speech, House of Representatives, Hansard (13 September 1984) p 1296) but the question asked in the CCH Editorial Comment on the Australian Ocean Line Pty Ltd v West Australian Newspapers Ltd (1983) ATPR 40-349 at 46,345 is nevertheless pertinent:
[Section 18] does not exist only to protect the wise. Park v Koh [2007] NSWSC 12 at 131 per McDougall J.
One may well ask why a law which seeks to restrain the use of inaccurate claims by suppliers of other goods and services should not apply to persons falling into the
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Business and the Law … judicial observations can never be regarded as complete definitions; they must be read in the light of the facts and issues raised in the particular case. BS Brown & Sons v Craiks Ltd [1970] 1 WLR 752 at 754 per Lord Reid.
category of “information providers” in respect of the services they purvey. If the community is to be protected from suppliers of shoddy goods, should it not be equally protected against standards of journalism which leave much to be desired in terms of accuracy and attention to detail? The equivalent provision of the ACL is s 19. It exempts the media from the s 18 prohibition of misleading conduct in respect of editorial comment and news reporting but not in respect of advertisements or other promotional material.
Commercial commentary
Fletcher v Nextra Australia Pty Ltd [2015] FCAFC 52 [19.300] Nextra and NewsXpress (of which Fletcher was a director and 50% shareholder) were competing
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newsagency franchise systems. Fletcher published an article on an internet blog which was critical of a flyer which Nextra has published to encourage non-member newsagents to join the group. Nextra alleged that Fletcher’s article was misleading or deceptive. The litigation raised the issue of whether the publication of an article on a blog was “in trade or commerce”. It was held that: There can be little doubt that the remarks made by a commentator, as distinct from an industry participant, where they are unlikely to be intended to have an impact on trading or commercial activities, would not be conduct in trade or commerce. However, Mr Fletcher was not an independent commentator. He was an active participant in the newspaper franchise industry and intended his conduct to have an impact on trading or commercial activities.
19.5 “MISLEADING OR DECEPTIVE”: THE GENERAL PRINCIPLES IN CONTEXT
Misleading or deceptive conduct: relevant legal principles [19.310] In Shahid v the Australasian College of Dermatologists [2007] FCA 693 at [61], Nicholson J summarised the principles relating to misleading conduct which have emerged from the cases (references omitted):
(a) [Section 18(1)] is expressed in terms of broad generalities which are explicitly preserved by [s 18(2)]. [Section 18(1) of the ACL] should be widely interpreted, not read down. (b) The section is not confined to conduct that is intended to mislead or deceive. (c) The section is not confined to conduct which was engaged in as a result of a failure to take reasonable care. (d) A person who has acted honestly and reasonably may be liable to be restrained by injunction, and to pay damages, if his, her, or its conduct has in fact misled or deceived or is likely to mislead or deceive.
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Chapter 19 Misleading or Deceptive Conduct
(e) One meaning the words “mislead” or “deceive” share in common is “to lead into error”.
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(f) The words “likely to mislead or deceive” make it clear that it is unnecessary to prove that the conduct in question actually deceived or misled anyone.
(g) The Court must decide objectively for itself whether the conduct is misleading or deceptive or likely to mislead or deceive.
(h) Evidence that members of the public have actually been misled is admissible but not necessary or conclusive.
(i) The section provides remedies additional to the common law.
(j) Consideration must be given to the class of consumers likely to be affected by the conduct.
(k) Whether or not conduct amounts to a representation is a question of fact to be decided by considering what was said and one against the background of all the surrounding circumstances. In some cases, such as an express untrue representation made only to identified individuals, the process of deciding that question of fact may be direct and uncomplicated. In other cases, the process will be more complicated and call for the assistance of certain guidelines upon the path to decision.
(l) In cases of representations to the public (rather than cases involving representations to identified individuals), the “ordinary” or “reasonable” members of the class of prospective purchasers must be considered.
(m) In an assessment of the reactions or likely reactions of the “ordinary” or “reasonable” members of the class of prospective purchasers of a mass-marketed product for general use, the Court may well disregard assumptions by persons whose reactions are extreme or fanciful in deciding the application of the section.
(n) It must be determined whether the misconceptions or deceptions alleged to arise or to be likely to arise are properly to be attributed to the ordinary or reasonable members of the class of prospective purchasers.
(o) In cases of alleged representations for conduct to mislead or deceive the representee must labour under some erroneous assumption. Such an assumption can include the obvious such as a simple assumption that an express representation is worthy of credence. The nature of the erroneous assumption which must be made before conduct can mislead or deceive will be a relevant, and sometimes decisive, factor in determining the factual question whether conduct should properly be categorised as misleading or deceptive or as likely to mislead or deceive.
(p) The question whether particular conduct causes confusion or wonderment cannot be substituted for the question whether the conduct answers the statutory description in the section.
(q) A document or advertisement which, when read or viewed carefully as a whole, is factually true and accurate may still be capable of being misleading if it contains a potentially misleading primary statement which is corrected elsewhere in the document or advertisement (eg by use of “fine print” or a symbol pointing to some qualification) but without the reader’s or viewer’s attention being adequately drawn to the correction. The principle which applies to those cases is that the qualifying material must be sufficiently prominent or conspicuous to prevent the primary statement from being misleading. Put another way the degree of prominence required (of the qualifying material) may well vary with the potential of the primary statement to be misleading or deceptive.
The agreement can hardly be described as a shining example of the draftsman’s art –indeed it is not going too far to describe it as exuding the glutinous aroma of paste pot and scissors. Vander Wool v Goddenough [1983] Conv R 55-115 per Powell J.
(r) Nothing in the terms of the section suggests that a statement made which is literally true may not at the same time be misleading or deceptive. (s) It is not necessary that there must be a representation for the section to be infringed. To add such a requirement is to impose a gloss on the statutory words. “Representation” is not
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co-extensive with “conduct”. False impressions conveyed by pictures rather than words, can be misleading conduct. (t) There is no room under the legislation for publication of misleading or deceptive advertising so long as it is corrected by later material. Whether conduct is misleading or deceptive (or likely to be so) depends on the circumstances in which it occurs and not on what might happen in the future.
The meaning of “misleading or deceptive” [19.320] “Misleading” and “deceptive” are words in common use. In the words of Gibbs CJ in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44 they are “nevertheless … productive of considerable difficulty when it becomes necessary to apply them to the facts of particular cases”. The interpretation and application of statutory words, which are not defined, are discussed below.
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To lead into error The most appropriate meaning for the word “deceive” in the Oxford Dictionary is: “To cause to believe what is false; to mislead as to a matter of fact, to lead into error, to impose upon, delude, take in”. The most appropriate definition in that dictionary for the word “mislead” is: “To lead astray in action or conduct; to lead into error; to cause to err”. Weitmann v Katies Ltd [1977] ATPR 40- 041 at 17,444 per Franki J.
[19.330] Section 18 is directed at conduct that is “misleading or deceptive or is likely to mislead or deceive”. The words “or is likely to mislead or deceive” were added in 1977 as a precautionary matter to make it clear that the section should apply without requiring proof that the conduct had actually misled or deceived. “Misleading or deceptive” conduct is not defined but has been interpreted to require conduct which “leads into error” (Weitmann v Katies Ltd [1977] ATPR 40-041 at 17,444 per Franki J). Conduct is likely to mislead or deceive if there is a “real or not remote chance or possibility regardless of whether it is less or more than 50%” (Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd [1984] FCA 180 at [14] per Bowen CJ, Lockhart and Fitzgerald JJ). In Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136, it was held that conduct “cannot be categorised as misleading unless it contains or conveys a misrepresentation” although other cases have cautioned against over-refinement of the statutory language. In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd [1988] FCA 40, Lockhart J (at [31]) said that: Misleading or deceptive conduct generally consists of representations, whether express or by silence, but it is erroneous to approach [s 18] on the assumption that its application is confined exclusively to circumstances which constitute some form of representation … Ultimately in each case it is necessary to examine the conduct, whether representational in character or not, and ask the question whether the impugned conduct of its nature constitutes misleading or deceptive conduct. This will often, but not always, be the same question, as whether the conduct is likely to mislead or deceive.
[19.340] However, it is not only direct misrepresentation which is caught. In Pacific Dunlop Ltd v Hogan [1989] FCA 188 Burchett J commented (at [10]) that: It would be unfortunate if the law merely prevented a trader using the primitive club of direct misrepresentation, while leaving him free to employ the more sophisticated rapier of suggestion, which may deceive more completely. 818
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Chapter 19 Misleading or Deceptive Conduct
[19.350] The fact that the person or persons at whom the conduct was directed did not take reasonable care to protect their own interests or did not make further enquiries which might have disclosed the true position does not absolve the maker of the representation from responsibility (Neilson v Hempston Holdings Pty Ltd [1986] FCA 100).
Literal truth [19.360] It has been clearly established that a statement which is literally true can nevertheless mislead or deceive. Stephen J gave an example in Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd [1978] HCA 11 at [17]: To announce an opera as one in which a named and famous prima donna will appear and then to produce an unknown young lady bearing by chance that name will clearly be to mislead and deceive. The announcement would be literally true but none the less deceptive, and this because it conveyed to others something more than the literal meaning which the words spelled out.
Other examples are reported by consumer affairs agencies from time to time, usually in the context of mail-order sales. Persons who offer devices for doubling money or telling the weather do not escape s 18 by providing, respectively, scissors (cut your paper money in half) or a rock attached to a piece of string with instructions to tie it to a clothes line (if it gets wet it’s raining if it gets snow on it it’s snowing and, presumably, if cats and dogs land on it, it’s raining cats and dogs).
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Confusion [19.370] Despite some initial confusion with the concept of “confusion” it is now well established that conduct which merely confuses does not mislead or deceive. In the Taco Bell case, Deane and Fitzgerald JJ concluded that: Conduct which produces or contributes to confusion or uncertainty may or may not be misleading or deceptive for the purposes of [s 18]. In some circumstances, conduct could conceivably be properly categorised as misleading or deceptive for the very reason that it represents that confusion or uncertainty exists where, in truth, there is no proper room for either. Ordinarily, however, a tendency to cause confusion or uncertainty will not suffice to establish that conduct is of the type described in [s 18]. The question whether particular conduct causes confusion or wonderment cannot be substituted for the question whether the conduct answers the statutory description contained in [s 18] … Irrespective of whether conduct is likely to produce confusion, it cannot be categorised as misleading for the purposes of [s 18] unless, in all the circumstances, it contains or conveys a misrepresentation.
As to when conduct is to be characterised as misleading or deceptive, judicial exegesis probably can do little at a general level to expand upon the ordinary words of the section; and obviously it cannot be allowed to supersede them. In the end one must always return to them and apply them to the particular facts. Taylor Bros Ltd v Taylor Group Ltd [1988] 2 NZLR 1 at 39 per Cooke P.
Guy v Crown Melbourne Limited (No 2) [2018] FCA 36 [19.380] Mortimer J prefaced her judgment with the comment that: This case is about selected aspects of what happens when people gamble on poker machines. Whether or not one views the expenditure of money on various games of chance as a desirable or enjoyable activity or not, in this proceeding it is inappropriate to adhere to the language of a “game” and “players”. That language hides or minimises a number of matters: the inherent nature of the activity, the heavy commercialisation of poker machine gambling, the sophisticated inputs by manufacturers into the design of poker machines, the intensive regulation of these kinds of activities, and the harm done to significant numbers of people who gamble on poker machines, and to their families and loved ones. …
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Business and the Law Notwithstanding my view that the Court should not shy away from characterising this case as about gambling activities, rather than “playing” a “game”, it is no part of the Court’s task in this case to characterise gambling as a desirable, or undesirable, activity, nor to engage with policy decisions made by the executive and legislative branches of government about whether those activities should be lawful and if so, in what circumstances.
The misleading or deceptive conduct action was brought by a former gambling addict against Crown Casino and the manufacturer of poker machines in respect of the decision of particular machines which allegedly misrepresented to players their chances of winning by giving the impression of an equal representation of symbols on the electronic spinning wheels. Mortimer J found that the “return to player” display on the machine’s screen, which indicated return rate of 87.8 per cent gave the impression a player would only lose 12.2 per cent of their bets, which in reality that figure was calculated over the lifetime of a machine and includes jackpots that occasional players rarely won. Her Honour nevertheless found that such an impression was “fleeting”: [It would be] dispelled as soon as she or he actually starts gambling and the randomness of the operation of the machine and the returns become apparent. The impression is fleeting and may cause confusion but it is not misleading or deceptive as the law defines those concepts.
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Ambiguity [19.390] Ambiguity will contravene s 18 if any of the reasonably possible meanings are misleading or deceptive or likely to mislead or deceive. In Siddons Pty Ltd v The Stanley Works Pty Ltd [1991] FCA 116, the Full Federal Court borrowed language from defamation case law (Lewis v Daily Telegraph Ltd [1963] 1 QB 340 at 374) in pointing out (at [16]) that: Precedents drawn from the days of travel by stage coach do not fit the conditions of travel today. The principle that the danger must be imminent does not change, but the things subject to the principle do change. They are whatever the needs of life in a developing civilization require them to be. MacPherson v Buick Motor Co 217 NY 382 (1916) at 391 per Cardozo J.
When persons publish words that are imprecise, ambiguous, loose, fanciful or unusual, there is room for a wide variation of reasonable opinion on what the words mean or connote. The publisher can hardly complain in such a case if he is reasonably understood as having said something that he did not mean.
Whether or not the ambiguity has this consequence will, of course, be governed by the characteristics of the audience exposed to it.
IN CONTEXT
Context and the dominant message [19.400] Where advertising material uses simple phrases and words evoking attractive notions, but without necessarily precise meaning, ambiguity or reasonably available different meanings may well arise. Context and the “dominant message” will be important. If one or more of the reasonably available different meanings is misleading, the conduct may well be misleading or deceptive, or false and misleading. ACCC v Coles Supermarkets Australia Pty Limited [2014] FCA 634 at [47] per Allsop CJ
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Chapter 19 Misleading or Deceptive Conduct
Intention to mislead not required [19.410] It has been noted earlier that s 18 does not incorporate a mental element and is not confined to conduct where there is an intention to mislead. A person can contravene s 18 even though conduct was engaged in reasonably and honestly.
Misleading to whom?
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[19.420] Whether particular conduct misleads or deceives is not considered in a vacuum. The capacity of conduct to mislead or deceive is determined by its likely effect on the relevant target audience. In cases where the representation is made in the context of private commercial negotiations, the situation is straightforward –the effect of the conduct is determined with reference to the characteristics of the actual recipient. A statement which is capable of misleading an ordinary consumer may, when made to a “thoughtful or reasonably careful businessman” appear as “nothing more than exaggerated salesman’s talk, not to be taken as more than an expression of hope, and not something one could safely rely on” (Re Brown v Jam Factory Pty Ltd [1981] FCA 35 per Fox J). In cases where the conduct is directed at the wider public as in the advertising situation, the situation is more complex. Two relevant propositions were laid down by Deane and Fitzgerald JJ in Taco Company of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136: First, it is necessary to identify the relevant section (or sections) of the public (which may be the public at large) by reference to whom the question of whether conduct is, or is likely to be, misleading or deceptive falls to be tested. Second, once the relevant section of the public is established, the matter is to be considered by reference to all who come within it, including the astute and the gullible, the intelligent and the not so intelligent, the well educated as well as the poorly educated, men and women of various ages pursuing a variety of vocations.
The class of consumers and the standard to be applied in relation to them is discussed in the context of advertising at [19.450].
Overall impression and qualifications [19.430] Section 18 deals with “conduct”, and whether particular statements mislead or deceive must be considered in the context of the conduct as a whole. In Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44, Gibbs CJ stated that: It would be wrong to select some words or acts which, alone, would be likely to mislead if those words or acts, when viewed in their context, were not capable of misleading. It is obvious that where the conduct complained of consists of words it would not be right to select some words only and to ignore others which provided the context which gave the meaning of the particular words.
Truth must be the foundation stone, the cement to solidify the entire social edifice. Pope John Paul II.
A corollary of this proposition is that fine print disclaimers and qualifications will not prevent a s 18 action if the overall impression it conveys is misleading or deceptive. This principle is particularly important in the context of advertisements and is discussed in that context at [19.700].
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Other general principles [19.440] The extensive case law on s 18 has given rise to a number of other good principles in relations to opinions, relaying false information, half-truths and misleading conduct by silence and promises and predictions. These issues have arisen primarily in pre-contractual representations and are discussed at [19.760] in that context.
19.6 THE MAJOR CATEGORIES OF MISLEADING OR DECEPTIVE CONDUCT [19.450] Section 18 is indiscriminate in its application and, provided the prerequisites for its operation are in place, it catches misleading or deceptive conduct in a range of circumstances where pre-existing legal rules may or may not provide an action. Section 18 is no respecter of traditional actions. It not only adds to the general law but in some circumstances totally embraces older actions. The effect of s 18 on the external legal order has been expressed by French J in these terms (“A Lawyer’s Guide to Misleading or Deceptive Conduct” (1989) 63 Australian Law Journal 250 at 250):
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Resorting to florid metaphor, the dedicated legal modernist may depict the common law and its causes of action as primeval broadacres grazed by slow-moving sauropods. Upon this landscape the action for misleading or deceptive conduct falls as a kind of statutory comet threatening significant reductions in the species numbers of fraud, negligent misstatement, passing off, defamation, collateral warranty and contractual representation. There is only one thing in the world worse than being talked about, and that is not being talked about. Oscar Wilde.
In Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31 at [5], French CJ and Kiefel J expressed the scope of s 18 in these terms: The cause of action for contravention of statutory prohibitions against conduct in trade or commerce that is misleading or deceptive or is likely to mislead or deceive has become a staple of civil litigation in Australian courts at all levels. Its frequent invocation, in cases to which it is applicable, reflects its simplicity relative to the torts of negligence, deceit and passing off. Its pleading, however, requires consideration of the words of the relevant statute and their judicial exposition since the cause of action first entered Australian law in 1974.
Any “misleading or deceptive” conduct is vulnerable to the statutory action. It provides an alternative to innocent, negligent or fraudulent misrepresentation actions, and even defamation actions. In Seafolly Pty Ltd v Madden [2012] FCA 1346, Tracey J observed (at [1]) that: Since the commencement of uniform defamation laws in Australia, companies with ten or more employees have been unable to prosecute proceedings for defamation. This case illustrates the difficulties now confronted by such companies when their commercial reputations are called into question.
In that case the statutory misleading conduct action provided an effective substitute. Seafolly, a swimwear company, alleged that Madden, a bikini designer, had made statements on her personal Facebook page which suggested that Seafolly had copied some of her designs. The false allegations were held to be made in trade or commerce and these statements were false, and despite being personal Facebook statements, were held to be in trade or commerce. It was held that the false statement constituted misleading or deceptive conduct. 822
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Chapter 19 Misleading or Deceptive Conduct
The majority of cases nevertheless fall into three major categories: • advertising; • unfair competition through “passing off”; and • pre-contractual representations.
19.7 ADVERTISING [19.460] The most obvious use of s 18 is in relation to false, misleading or deceptive advertising. Since the introduction of the TPA there has been a massive increase in trade rival litigation. Misleading advertising is no longer the exclusive domain of the consumer or the regulatory agencies. Actions are increasingly brought by competitors of the offending corporation to restrain a rival trader from falsely describing the attributes of its products or its competitors’ products. Although such actions are obviously motivated by commercial self-interest, the wider consumer interest is vindicated irrespective of the identity of the applicant.
I offer my opponents a bargain: if they will stop telling falsehoods about us, I will stop telling the truth about them. Adlai Stevenson, during the US presidential campaign, 1952.
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This section discusses the application of the most common general principles that have developed through the case law in relation to advertising. Several other good principles –those relating to representations as to the future, passing on information provided by another, and the expression of opinions –have arisen most commonly in relation to misrepresentation in pre-contractual negotiations and are discussed in that context at [19.1060].
Trade rival litigation Colgate Palmolive Pty Ltd v Rexona Pty Ltd [1981] FCA 146 [19.470] Examples of trade rival litigation abound but a well-known and straightforward example is the case in which Colgate Palmolive successfully restrained a competitor’s false description of the attributes of a product. The disruption caused to Rexona’s advertising campaign to promote the introduction of Aim toothpaste was massive. The advertising featured such statements as: “Aim –Plaque Toothpaste with citraden, helps keep decay-causing plaque away all day”; “Aim –a breakthrough in the fight against decay-causing plaque”; “Aim is 50-90% more effective than Australia’s best known toothpastes in slowing down the growth of plaque between brushing”; “Independent clinical tests have proved that, while no toothpaste can permanently rid the teeth of plaque, Aim with citraden slows down the regrowth of plaque dramatically”; and “Comparative tests show that Aim is significantly better at slowing down the regrowth of plaque than the toothpaste your family is probably using now”. Lockhart J accepted that much of the advertising would lead the public to believe that Aim with citraden reduced decay or inhibited plaque or was better at reducing decay than other toothpastes and that the foregoing were proved by scientific tests. Although some of the statements, when read in isolation, did not convey the meaning that citraden reduces decay, when the statements were read as a whole and in context they did convey this impression. His Honour found that Colgate had established a prima facie case and granted interlocutory injunctions to restrain Rexona distributing or displaying either the offending advertising material or toothpaste tubes or packaging containing the offending statements. The statements had not been conclusively proved by the scientific tests relied on by Rexona in the advertising. Lockhart J considered the scientific evidence and found that there was a real dispute as to whether citraden inhibits plaque and whether
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Business and the Law the concentration in Aim would in fact inhibit plaque or reduce decay. Some evidence indicated that Aim was not better than other toothpastes in inhibiting or reducing plaque. The tests relied on by Rexona were largely unpublished and had not been independently assessed by the dental profession.
Trade rival litigation can nevertheless backfire badly.
Narhex Australia Pty Ltd v Sunspot Products Ltd [1990] FCA 232 [19.480] This case concerned well-publicised litigation between competing distributors of anti-wrinkle creams containing an ingredient known as elastin. The conclusion of the case brought little satisfaction to either company. The applicant succeeded in establishing that the respondent’s advertising of its “John Plunkett’s super cross-linked elastin eye cream with 10% cross-linked elastin CLR SOL N plus collagen CLR and rose hip oil” was misleading. The 10% figure was based on the fact that the cream contained 10% of an elastin solution, which had, as one ingredient, cross-linked elastin. In fact it contained only about 0.05% elastin. Although the abbreviation CLR SOL N and other label details rendered this claim literally true, potential consumers with no scientific knowledge would be misled into believing that the product contained 10% elastin. The applicant’s victory was nevertheless hollow. The respondent’s cross-claim in respect of misleading or deceptive conduct on the part of the applicant was also successful. Foster J considered that:
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the general elegance of the design of the cross-respondent’s packaging, including the rich but tasteful colouring, coupled with the prominent use of the word Paris and the clearly displayed French language directions, combine to convey the impression of a definite connection with France … I am satisfied that, at the very least, it indicates that the product is currently available to consumers in France and in Paris in particular. To the less astute purchaser it could also convey overtones of acceptance of the product by discerning Parisian buyers.
The packaging was misleading because the product was not made in France, imported from France or distributed in France. The misleading impression given by the packaging was not saved by a sticker indicating that the product was “Manufactured in Japan for Narhex Australia Pty Limited”.
IN CONTEXT
Principles to be applied in cases of allegedly misleading advertising [19.490] A helpful statement of the principles to be applied in determining whether advertising is misleading was given by Nicholas J in Samsung Electronics Australia Pty Limited v LG Electronics Australia Pty Limited [2015] FCA 227 at [60]-[73] (references omitted):
“It’s a lie, isn’t it?” said the Chairman. “It’s not exactly a lie, sir. It is a commercial term.” J Dunbar and C Webb, Laughing matter (M Joseph, 1980).
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The principles to be applied in determining whether a person contravenes s 18 of the ACL are relatively well-established and were for the most part settled while s 52 of the Trade Practices Act 1974 (Cth) was still in force. The question whether conduct is misleading or deceptive or likely to mislead or deceive is a question of fact that must be determined in light of the relevant surrounding circumstances. A person may be found to have contravened s 18(1) even though he or she lacked any intention to mislead or deceive.
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Chapter 19 Misleading or Deceptive Conduct
Conduct may be misleading or deceptive if it induces error but it is not sufficient merely to show that it may have led to confusion or caused people to wonder. Evidence that some people may have been misled is not essential but is admissible and may be persuasive. Ultimately, however, the question whether conduct is misleading or deceptive or likely to mislead or deceive is a matter for the Court. It is necessary to distinguish the question whether an advertisement, alleged to be misleading or deceptive, has a tendency to lead a consumer into error, from the question whether the consumer has suffered loss and damage as a result of being led into error. The former question is logically anterior to the latter. The characterisation of conduct alleged to be misleading or deceptive “generally requires consideration of whether the impugned conduct viewed as a whole has a tendency to lead a person into error”. As the majority observed in [ACCC v TPG Internet Pty Ltd [2013] HCA 54]: It has long been recognised that a contravention of s 52 of the TPA may occur, not only when a contract has been concluded under the influence of a misleading advertisement, but also at the point where members of the target audience have been enticed into “the marketing web” by an erroneous belief engendered by an advertiser, even if the consumer may come to appreciate the true position before a transaction is concluded. That those consumers who signed up for TPG’s package of services could be expected to understand fully the nature of their obligations to TPG by the time they actually became its customers is no answer to the question whether the advertisements were misleading. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
In order to establish that conduct is misleading or deceptive or likely to mislead or deceive it is not necessary to show that it conveys a false or misleading representation … When the Court is concerned to ascertain the mental impression created by a number of representations conveyed by one communication it is wrong to attempt to analyse the separate effect of each representation. The meaning and effect of an advertisement must be ascertained from the advertisement as a whole in its context. The dominant message of the advertisement is of crucial importance. If it is established that a corporation did intend to mislead, a Court may more readily infer that the conduct complained of was misleading. Where there is an issue in proceedings under [s 18 of the ACL] as to the effect of conduct on a class of persons such as consumers who may range from the gullible to the astute, the Court must consider whether “the ‘ordinary’ or ‘reasonable’ members of that class” would be misled or deceived. In Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc [1992] FCA 630, Hill J, referring to a newspaper advertisement, observed: Where, as in the present case, the advertisement is capable of more than one meaning, the question of whether the conduct of placing the advertisement in a newspaper is misleading or deceptive conduct must be tested against each meaning which is reasonably open. This is perhaps but another way of saying that the advertisement will be misleading or likely to mislead or deceive if any reasonable interpretation of it would lead a member of the class, who can be expected to read it, into error …
Even minor qualities of unimportant commodities are enlarged upon with a solemnity which would not be unbecoming in an announcement of the combined return of Christ and all the apostles. More important services, such as the advantages of whiter laundry, are treated with proportionately greater gravity. Galbraith JK, The New Industrial State (New American Library, 1971).
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The relevant target audience
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[19.500] Whether particular conduct misleads or deceives is not considered in a vacuum. The capacity of conduct to mislead or deceive is determined by its likely effect on the relevant target audience. In cases where the representation is made in the context of private commercial negotiations, the situation is straightforward –the effect of the conduct is determined with reference to the characteristics of the actual recipient. A statement which is capable of misleading an ordinary consumer may, when made to a “thoughtful or reasonably careful businessman” appear as “nothing more than exaggerated salesman’s talk, not to be taken as more than an expression of hope, and not something one could safely rely on” (Brown v Jam Factory Proprietary Limited [1981] FCA 35 per Fox J). In cases where the conduct is directed at the wider public as in the advertising situation, the situation is more complex. The relevant propositions were laid down by Deane and Fitzgerald JJ in Taco Company of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136: First, it is necessary to identify the relevant section (or sections) of the public (which may be the public at large) by reference to whom the question of whether conduct is, or is likely to be, misleading or deceptive falls to be tested. Second, once the relevant section of the public is established, the matter is to be considered by reference to all who come within it, including the astute and the gullible, the intelligent and the not so intelligent, the well educated as well as the poorly educated, men and women of various ages pursuing a variety of vocations. Thirdly, evidence that some person has in fact formed an erroneous conclusion is admissible and may be persuasive but is not essential. Such evidence does not itself conclusively establish that conduct is misleading or deceptive or likely to mislead or deceive. The Court must determine that question for itself. The test is objective … Finally, it is necessary to inquire why proven misconception has arisen … The fundamental importance of this principle is that it is only by this investigation that the evidence of those who are shown to have been led into error can be evaluated and it can be determined whether they are confused because of misleading or deceptive conduct on the part of the respondent.
The audience
The court should turn its face against invitations to give the legislation a highly technical interpretation or to be niggardly in giving full scope to the generality of the language employed by the parliament. Australian Guarantee Corporation Ltd v Jennings [1981] ATPR 40-210 at 42,906 per Rogers J.
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[19.510] The first proposition requires the audience to be identified. Misleading or deceptive conduct is not determined in a vacuum, it is determined in relation to the effect on those likely to be affected by the conduct under consideration. While the effect of some conduct may have to be tested in relation to the public at large (eg atypical advertisement), in other cases it may be a smaller section of the public which may be more or less susceptible than the general public. An advertisement directed at children for example is tested by different standards from an advertisement directed at solicitors. In Dillon v Baltic Shipping Company “Mikhail Lermontov” [1990] ATPR 40-992 (which involved an allegation of misleading conduct in inducing the applicant to sign a “release of liability” document), Carruthers J (at 50,909) held that the relevant class was clearly defined: It consisted of passengers of both sexes, of various ages, of varying degrees of intelligence, education and savoir faire. Each of the members of the class had one thing in common –they were survivors of a shipwreck.
The targeted sections of the public may vary according to the facts of each case. In ACCC v Telstra Corporations Limited [2007] FCA 1904 for example, which concerned the advertising
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Chapter 19 Misleading or Deceptive Conduct
of mobile phones across Australia, the court recognised that events were not all targeted to that section of the public in the same manner, at the same time and throughout geographic Australia. The court held that it was possible to divide the identified sections of the public geographically into six subclasses in relation to each Telstra’s conduct had to be considered.
Weitmann v Katies Ltd [1977] ATPR 40-041 [19.520] Franki J dismissed an application for an injunction under which the applicant (a clothing designer
and wholesaler who had adopted the words “Saint Germain” as its unregistered trademark) had sought to restrain the respondent (a clothing retailer) from selling imported garments which had the name “Saint Germain” embroidered on the sleeve Franki J stated (at 17,444) that: I am of the opinion that one should consider the relevant customers as those likely to be buying shirts from a Katies retail store. The evidence shows that such a person is likely to be a fairly typical member of the community who is not seeking to purchase a particularly high fashion article, but seeking what might be described as good value for money. In my opinion, the applicant has not shown that the words “Saint Germain”, appearing on the sleeve of ladies’ shirts sold as proposed in a Katies store, is likely to deceive such customers. The relevant conduct with which I am concerned is that of selling such shirts, as proposed, in a Katies store.
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[19.530] The definition of the audience was also crucial to the decision as to the capacity of conduct to
mislead or deceive. It was held that WSC’s description of their world series cricket matches as “Super tests” breached [s 18] because a substantial segment of the population would be misled into believing that the “Super tests” advertised were in fact test matches exclusively arranged by the Australian Cricket Board. St John J rejected the respondent’s contention that consideration of the advertising should be restricted to persons with some knowledge about cricket. His Honour held (at 17,422) that the advertising should be considered in relation to a wider audience: Provision was made on the brochure for application for tickets for children. The degrees of knowledge about cricket must, like every other subject of knowledge, vary between slight knowledge and erudition.
[19.540] There is a difficulty with the commonly used phrase “target audience”. The audience exposed to the conduct may be wider than the particular groups intended. The capacity of conduct to mislead or deceive is considered in relation to the audience exposed to it. Conduct directed at children for example may reach a wider audience. In Surge Licensing Inc v Pearson [1991] FCA 274 unauthorised character merchandising through the sale of T-shirts at Paddy’s Market in Sydney featuring the Teenage Mutant Ninja Turtles smoking marijuana constituted misleading conduct through the implied misrepresentation that the vendors were approved licensees. This conduct may not have been misleading to a juvenile audience who presumably would not understand the subtleties of either character merchandising or marijuana, but it was misleading when considered in relation to the public at large. Einfeld J (at [14]) held that: The presumed audience of the television programme to establish reputation is children but the involvement of children normally implies a flow-on effect, at least of consciousness, on their adult parents. There was also evidence that sales took place at Paddy’s Market which is
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Business and the Law attended by people of all ages. I think it is proper to conclude that the relevant public here is the public at large.
It should also be noted that it is not necessary that every member of the relevant audience be misled. In Siddons Pty Ltd v The Stanley Works Pty Ltd [1991] FCA 116 at [18], the Full Court held that: The court could conclude that a significant number of persons affected might take the words in a meaning which amounted to a false representation. Thus, we are not concerned with a search for one meaning which would be conveyed to all. If, in a particular case, particular words would be likely to convey to a significant number of potential purchasers a particular erroneous belief, a contravention of s 52 may be established.
IN CONTEXT
Relevant legal principles where conduct is not directed at a specific individual
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[The battle is for the] shelf space in our stomachs. J Meyers, Publisher, Beverage Digest, on competition between soft-drink bottlers.
[19.550] A useful summary of the approach of a court required to assess conduct by reference to a specific class or classes of consumers was provided by Gordon J in ACCC v Telstra Corporation Limited [2007] FCA 1904 at [17] (references omitted):
(1) … identify the relevant section or sections of the public by reference to which the issue is to be tested. The target section or sections of the public would, of course, vary according to the facts of each case. The relevant section or sections of the public may be confined by factors such as the time period over which the alleged representations were made and the geographical circulation of the advertisements containing the alleged representations. (2) … having identified the relevant section or sections of the public, consider who comes within that section or those sections. This may include the astute and the gullible, the intelligent and the not so intelligent, the well educated and the poorly educated. (3) … it is permissible, but not essential, to have regard to evidence that some person has in fact been misled, though this evidence will not be conclusive; (4) … it is necessary to enquire whether any proven misconception has arisen because of the misleading or deceptive conduct; (5) … where the persons alleged to have been misled are members of a class, it is necessary to isolate a representative member of the class and enquire whether that hypothetical person is likely to be deceived; (6) … when considering the likely effect of the misrepresentation on this hypothetical person, he or she should be judged as an “ordinary” or “reasonable” member of the class, excluding reactions to the representation that are “extreme” or “fanciful”.
The standard of the target audience [19.560] Once the affected class is determined, the conduct has to be assessed by reference to all persons within that class. The appropriate minimum standard to be expected of the class has been the subject of judicial debate. There is little support for the test proposed by Gibbs CJ that “the section must … be regarded as contemplating the effect of 828
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Chapter 19 Misleading or Deceptive Conduct
the conduct on reasonable members of the class” (Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44). There is also little support for a test proposed by Murphy J in that case which encompasses all purchasers including the “uneducated, the inexperienced, the ignorant, the unthinking and the credulous”. The most commonly adopted test is that of Franki J in Annand & Thompson Pty Ltd v Trade Practices Commission [1979] FCA 36 at [26]: The test is whether in an objective sense the conduct of the appellant was such as to be misleading or deceptive when viewed in the light of the type of person who is likely to be exposed to that conduct. Broadly speaking it is fair to say that the question is to be tested by the effect on a person, not particularly intelligent or well-informed, but perhaps of somewhat less than average intelligence and background knowledge although the test is not the effect on a person who is, for example, quite unusually stupid. The question is not whether the purchaser was deceived but whether the conduct was misleading or deceptive.
Spender J took a similar view in Pacific Hotels Pty Ltd v Asian Pacific International Ltd [1986] FCA 297 at [28] when he said that an applicant cannot succeed where “only a moron in a hurry would be misled”.
Early to bed, early to rise, no booze and advertise. Jeweller Anthony Coote of Angus & Coote, relating his grandfather’s secrets of success, Business Review Weekly (18 December 1995).
Director of Consumer Affairs Victoria v Domain Register Pty Ltd [2017] FCA 1603
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[19.570] This case involved consideration of the knowledge to be imported to a target audience. Domain carried on business as a supplier of internet domain name registration services using a business model of sending an unsolicited standard form notice to persons who have registered a business name with a “.com.au” domain name offering to supply registration of a “.com” domain name on payment of a specified price. It was alleged that the notices were misleadingly similar in appearance to an invoice. Evidence was given by several people who said that they paid the price specified in the belief that the notice was an invoice, and thereby obtained registration of a “.com” domain name which they did not intend to acquire and did not want. Over a three year period Domain had sent unsolicited notices to over 300,000 people around Australia who had registered a “.com.au” domain name. Its conduct was characterised as being directed to a broad cross- section of the Australian public “the target audience largely comprised people carrying on businesses, and companies and organisations in or connected to Australia.” In relation to the characteristics to be imputed to this target audience, Domain argued that the ordinary or reasonable class member is likely to have had a reasonably high level of knowledge and perspicacity regarding the internet and domain name registration and likely to have paid close attention to the notice. Murphy J did not accept this for four reasons: First, it is likely that many recipients of the notices are relatively unsophisticated internet users with little knowledge in relation to the system for domain name registration, save for understanding that a domain name can be registered. Such persons are unlikely to understand that very similar domain names are capable of separate registration. … Second, the recipients of the notices will include many employees who had nothing to do with setting up or registering the domain name of the business or organisation in which they work and are likely to have little knowledge about the identity of the registrar with which their business or organisation dealt. … Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-23 21:46:27.
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Business and the Law Third, the Notice has an appearance similar to an invoice. As a result, in many businesses the Notice was likely to be directed to those responsible for paying bills rather than to those who decide whether the business wishes to acquire a “.com” domain name. Fourth, while some class members are likely to have read the notice with care because it invites or requests payment, it was sent to a broad cross-section of the public many of which are unlikely to have closely read it. Many recipients are likely to have been busy and to have dealt speedily with the notice. It was held that Domain’s conduct in sending out the Notices misled or deceived or was likely to mislead or deceive the hypothetical ordinary or reasonable member of the class to which the conduct was directed. [Although,] the substantial majority of the persons to whom it sent a Notice did not understand it to be an invoice, because only 21,089 of the 301,083 persons to whom Domain sent a Notice proceeded to register a “.com” domain name through it. I am nevertheless satisfied that Domain’s conduct in sending out the unsolicited Notices was likely to mislead or deceive many members of the class. The number of recipients actually misled can only be a subset of the 21,089 persons who acquired a “.com” domain name, comprising a not insignificant number of the class, and I consider the Notice was likely to mislead or deceive a greater number than those actually misled. There is no requirement for Consumer Affairs to demonstrate that class members have actually been misled or deceived in order to establish a contravention.
IN CONTEXT
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Advertising, the general public and the dominant message [19.580] Where conduct or representations is or are directed to members of the public at large, the conduct or representations must be judged by their effect on “ordinary” or “reasonable” members of the class of prospective purchasers … In a context such as the present, the purchasing of a staple such as bread in a supermarket, the ordinary or reasonable person may be intelligent or not, may be well educated or not, will not likely spend any time undertaking an intellectualised process of analysis, will often be shopping for many other items, and will be likely affected by an intuitive sense of attraction rather than by any process of analytical or logical choice. The dominant message of advertising for bread is likely to be simple, though intuitively diffuse. What is reasonable care by members of the public … must be judged in the above context. The purchase of bread from a baker or bread shop should not normally call for astute attention to disclaimers about the wares on sale at the counter. ACCC v Coles Supermarkets Australia Pty Limited [2014] FCA 634 at [43] per Allsop CJ (references omitted)
Objective test [19.590] In Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136 the third of the four propositions set out by Deane and Fitzgerald JJ makes it clear that the test as to whether conduct contravenes s 18 is objective: 830
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Chapter 19 Misleading or Deceptive Conduct evidence that some person has in fact formed an erroneous conclusion is admissible and may be persuasive but is not essential. Such evidence does not itself conclusively establish that conduct is misleading or deceptive or likely to mislead or deceive. The court must determine that question for itself. The test is objective.
For example, the character of conduct directed at a particular target audience is determined by reference to the class. The question is not whether any particular person was misled or deceived but whether the conduct was misleading or deceptive. In ACCC v Coles Supermarkets Australia Pty Limited [2014] FCA 634 Allsop CJ expressed the test in these terms (at [45]):
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Evidence that someone was actually misled or deceived may be given weight. The presence or absence of such evidence is relevant to an evaluation of all the circumstances relating to the impugned conduct. Where the conduct and representations are to the public generally and concern a body of simple direct advertising, the absence of individuals saying they were misled may not be of great significance. There was no such evidence here. The ACCC was criticised for that. That criticism is unfounded. The objective assessment of advertising using ordinary English words in an attempt to persuade can be undertaken without the lengthening of a trial by the bringing of witnesses of indeterminate numbers. Language, especially advertising, seeking to raise intuitive senses and associations, can have its ambiguities and subtleties. The task of evaluating the objective character and meaning of the language in the minds of reasonable members of the public is not necessarily one that will be assisted in any cost-effective manner by calling members of the public. The question is one for the Court.
Although expert and survey evidence may be admissible to establish that conduct was misleading or deceptive or likely to mislead or deceive (especially in cases such as where it is alleged that “nine out of 10 Australian homemakers use brand X”), it is neither essential nor conclusive. In a merger case, Arnotts Ltd v TPC [1990] ATPR 41-061 at 51,808, the Full Federal Court held that: In a civil case in which a market survey might cast light on relevant issues, it is desirable in principle to admit into evidence a report of a professionally conducted survey, upon proof that it has been satisfactorily conducted using relevant and unambiguous questions; without requiring evidence from each of the participants.
It is always the best policy to speak the truth, unless of course you are an exceptionally good liar. Jerome K Jerome.
Such surveys are nevertheless not essential or conclusive. Apart from any issues relating to the collection and interpretation of data, the question of whether conduct is misleading is an objective question for the court to answer. If damages are being sought for misleading or deceptive conduct the applicant must establish reliance on the misleading or deceptive conduct.
The conduct must cause the misconception [19.600] Conduct cannot be characterised as misleading or deceptive unless it caused the misconception complained of. In the Taco Bell case, (Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136), Deane and Fitzgerald JJ explained that: it is necessary to inquire why proven misconception has arisen … The fundamental importance of this principle is that it is only by this investigation that the evidence of those who are shown to have been led into error can be evaluated and it can be determined whether they are confused because of misleading or deceptive conduct on the part of the respondent.
There are a number of situations in which the necessary causal connection between the conduct and the misconception cannot be established: Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-23 21:46:27.
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Erroneous assumption
McWilliam’s Wines Pty Ltd v McDonalds System of Australia Pty Ltd [1980] FCA 159 [19.610] The allegation of misleading conduct was based on McWilliam’s use of the name “Big Mac” to pro-
mote its wine. McDonald’s argued that consumers would erroneously conclude that there was a connection between the two firms or that McDonald’s had endorsed or approved McWilliam’s product. The action failed because any public misconception arose not from McWilliam’s use of the name but from the erroneous preconceived notion of consumers that nobody else could use the words. Although “Big Mac” was a trademark of a hamburger supplied by McDonald’s it did not extend to wine. The words were descriptive and there was no deception between the two types of goods or their source. Smithers J (at 42,584) commented that: A member of the public can hardly complain of being misled by the conduct of another if because of errors made by himself he erroneously interpreted the nature of that conduct.
Third party intervention
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[19.620] Labels that would have distinguished the defendant’s furniture from similar furniture first produced
by the plaintiff had been removed by a third party (an employee of the retailer) for whom the defendant was not responsible. The labels would have alerted purchasers to the separate identity of the manufacturers and precluded the defendant’s conduct from being characterised as misleading or deceptive. In these circumstances the defendant had not breached s 52 of the TPA.
Complainant’s conduct [19.630] In some circumstances the conduct that gives rise to the alleged deception may be that of the complainant and not the person the complainant is taking action against.
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd [1978] HCA 11 [19.640] The Sydney Building Information Centre, which had carried on business under that name for many
years, sought to restrain a competitor from using the words “building information centre” in its name. The High Court held that these words merely described the nature of the businesses and any public confusion resulted not from the use of these words by the Hornsby Building Information Centre but from the fact that the Sydney Building Information Centre had used what Stephen J described as an “eloquently descriptive trade name”. Stephen J commented (at [22]) that there is a price to be paid for the advantages flowing from the use of descriptive rather than distinctive trade names: Because it is descriptive it is equally applicable to any business of a like kind, its very descriptiveness ensures that it is not distinctive of any particular business and hence its application to other businesses will not ordinarily mislead the public.
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Chapter 19 Misleading or Deceptive Conduct
Puffery [19.650] Prior to the introduction of the TPA, grandiose, exaggerated and unsubstantiated claims were treated in quite a lenient manner by the law on the basis that they were mere “puffing” statements rather than “representations” which could attract contractual obligations. “Puffery” is not prohibited although the lines are now more clearly drawn. The attitude of the ACCC is clearly expressed in ACCC, Advertising and Selling Guidelines (1991), p 16: The law does not prohibit imaginative advertising or the use of humour, cartoons, slogans, etc. Regardless of how the message is communicated, the message itself should not be “misleading or deceptive” or “likely to mislead or deceive”. Exaggeration or puffery used to attract attention, but which is so self-evident that it is unlikely to mislead anyone, would not contravene the law. However, representations and claims that take on a factual character, particularly in quality and price terms, may amount to a breach unless they are capable of substantiation.
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Self-evident exaggeration will still escape censure, but statements capable of substantiation in an objective way will mislead unless substantiated. The ACCC gives the example of a cafe’s claim that it has “the best coffee in town”: a reasonable consumer is likely to recognise this as advertising puffery and is unlikely to rely on that statement or find it misleading.
In our factory, we make lipstick. In our advertising, we sell hope. Charles Revlon.
Bembridge v Just Spectacles Pty Ltd [2006] WASC 185 [19.660] Advertising puffery was described in this case as “flamboyant statements, hyperbole, exaggerated rhetoric which would not reasonably be understood to be literally true”.
A poster in a Perth shopping centre promoting a spectacles shop within the centre contained the words “Double for Nothing” and “Buy one pair – get another pair free”. At the bottom of the poster were the words, in much smaller print, “Conditions Apply”. There was no asterisk next to the promotional grab indicating that the offer was qualified by conditions. In the Magistrate’s Court the advertiser was acquitted of a charge of false or misleading representations. The allegedly misleading words were held to be “no more than puffery [which] when viewed objectively through the eyes of a reasonable reader [would be] clear that there were conditions which applied … notwithstanding the size of the print of the words ‘conditions apply’ and that there was no asterisk or other direct indicator that these words relate to the offer”. On appeal the Supreme Court held that the poster was false or misleading. While there may have been “some element of hyperbole” involved it was evident that when the words “Double for Nothing” were read with the words “Buy one pair – get another pair free” – they together constituted a clear offer. There was “no element of puffery” in the representation. The qualification implied by the words “conditions apply” was not effective in all the circumstances applying to the display of the poster to convey to the ordinary reader that the offer which would otherwise be considered by conditions and so would not be generally available to any customer: The nature of the poster in its entire context implies the conclusion that, in truth, the words “conditions apply” were not readily discernable in the circumstances in which they were displayed, in a shopping mall through which people moved from shop to shop, where there may be crowds, where people are not taking the time to carefully peruse and consider the whole of any advertising material and where the ordinary shopper, who is contemplating the purchase of spectacles, would be inclined, on the strength of the advertisement, to make a quick decision to go to the
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Business and the Law respondent’s shop and investigate further. That was, after all, the object of the exercise, in my opinion. In short, the respondent took insufficient measures to clearly bring the qualifications to the attention of the class of reader who would be exposed to the poster.
The case contains little in the way of new principle but nevertheless provides yet another warning of the need for truth, and caution, in advertising.
Weasel words [19.670] Jeffrey Schrank described a “weasel” word as (Schrank J, Snap, Crackle and Popular Taste: The Illusion of the Free Choice in America (Delacorte Press, New York, 1977) pp 95-96):
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one which weakens the statement or deprives it of real meaning. It is an equivocal word designed to avoid a firm commitment to the truth. A “weasel” word is named after the habits of the weasel. A weasel is an animal capable of sucking the contents out of a raw egg without doing apparent damage to the shell and when the farmer comes to collect the eggs he discovers the weaseled egg only when it is handled. An egg attacked by a weasel looks like the real thing but on closer inspection it is empty and hollow. An advertisement claim containing a “weasel” word looks like a statement of some real advantage but on closer examination is a hollow statement without meaning. This case is all about adjectives. Moss v Lowe Hunt & Partners Pty Ltd [2010] FCA 1181 at [1] per Katzmann J.
Advertisers should exercise restraint in the use of weasel words as the overall impression defines the standard by which advertising is to be judged. An advertisement which promises for example “up to 50% better performance” may be literally true in special cases, but if the overall impression that consumers generally can expect similar results is false and misleading the advertisement is obviously vulnerable.
Union Carbide Australia Ltd v Duracell Australia Pty Ltd [1987] ATPR (Digest) 46-020 [19.680] This case provides an example of the use of weasel words in advertising. An injunction was granted in respect of the respondent’s breach of [s 18] through its misleading or deceptive comparison of its alkaline batteries with the applicant’s carbon-zinc batteries. The advertised claim that the Duracell battery “lasts up to six times longer” represented a grossly exaggerated view of the capacity and value of the Duracell batteries. On a continuous high-drain discharge test there was a great disparity between the batteries but on an intermittent discharge test there was much less disparity. Fox J held that it was necessary to determine the way in which the advertisements would have been understood by the ordinary consumer. The ordinary consumer would have understood the respondent’s advertisement as a whole as intended to be a reasonably fair statement applying to a fairly wide range of uses and not limited to the special situations and comparisons found in continuous high-drain discharge tests. The consumer would not know of or be concerned with special standards for testing, but allowing for the inevitable enthusiasm of advertisers, he would have still expected that if he purchased a Duracell battery, it would last for a time approaching six times the life of a corresponding Eveready battery, and that he would be likely to obtain a large saving in price. However, if intermittent test results were taken the representations were far from accurate and represented a gross exaggeration.
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Chapter 19 Misleading or Deceptive Conduct
IN CONTEXT
Advertising and the degradation of language [19.690] There was some debate and discussion during the case about what was called the “degradation of language” and about a mistrust or healthy cynicism of advertising by the public. One needs, of course, not to be unrealistic about the world, advertising or consumer behaviour. Advertising should not be parsed and analysed in the fashion of a 19th Century equity draftsperson. Nevertheless, the courts should be astute and careful not to permit consumers to be misled on available meanings or connotations of phrases deliberately chosen to sell products on the basis that everyone takes advertising with a pinch of salt. To place emphasis on advertising licence that bends the truth will not only degrade the language, but lead to a culture of deception in the market. These matters do not elevate this case to a question of principle, but they should be borne in mind when broad laudatory language, intended to affect the buying decisions of members of the public, is such as to lead consumers into error and so to mislead or deceive, and the justification for such involves an intellectual shrug and a knowing nod to the effect that the public is cynical enough to look after itself.
Antique Rolled-arm Couch near new. Otago Daily Times, New Zealand (21 August 1993).
ACCC v Coles Supermarkets Australia Pty Limited [2014] FCA 634 at [160] per Allsop CJ
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Overall impression, asterisks and fine print qualifications [19.700] The average Australian is exposed to many thousands of messages a day as he or she deals with traffic signs, billboards, newspapers, radio and television, advertising, and so on. It is therefore hardly surprising that overall impressions created by particular advertising are important in assessing whether the ACL has been breached. Advertisements are often read superficially. The “grab” –the immediate message that attracts the consumer’s attention –is of particular importance and fine-print qualifications are unlikely to be effective to correct a misleading impression created by more prominent parts of the advertisement. In the words of Merkel J in Telstra Corporation v Optus Communications Pty Ltd [1996] FCA 1035: In television and print advertising where a false dominant impression is conveyed, its message will not be ameliorated by the accuracy of the detailed message which is derived from a careful analysis of all of the constituent parts of the advertisement.
Liability for misleading conduct cannot be excluded (see [19.1240]) but disclaimers or qualifications may be effective if they remove the capacity of the particular representation to mislead. The ACCC (ACCC Update (February 2002)) advises that when making an offer an advertiser can stipulate terms and conditions provided they do not contradict the first overall impression. The associated fine print should not include: • conditions at obscure locations; • text that is too small;
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• text that is flashed on screen for only a moment; and • voice-overs that are too quick or too quiet. If you put qualifications in a message, they should be easily found. Consumers shouldn’t have to be lawyers, speed-readers or detectives to work out exactly what the offer is.
IN CONTEXT
The advertiser and the asterisk [19.710] Some advertisers appear devoted to their continuing relationship with “*” (the
increasingly infamous asterisk), “Conditions apply” and other clichés, used (it is hoped) to limit the expectations of the audience.
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Lunch on this trip will be provided free on account of the fact that the cost has already been added to the original price of the ticket. Canary Island Brochure.
These qualifications usually appear in close proximity to the lead selling point. Where “*” appears near the word “Free” for example, the copywriter may be trying to trade on positive reactions to the selling point, while still endeavouring to keep within the law by putting the conditions in the fine print. She or he may not succeed in avoiding a breach of the Act. The main selling point used for a product may make such a strong impression that no number of *s and associated fine print can dispel it. In this situation it is not acceptable for the advertiser to put the important facts –the real terms and conditions of the offer –at obscure locations in the marketing documents or presentation. Remember that whether something misleads an audience depends on the overall impression created, and the relationship between this and the actual facts of the matter. The consumer is not required to exhaustively search for those facts. Instead, the advertiser must clearly direct the consumer’s attention to the most significant of the terms and conditions – those having an important impact on the decision to purchase. Such explicit reference to the main limitations will bring the overall impression that is created back into balance. From a “correct” overall impression the consumer can make a basically informed judgement about what is offered. ACCC, Advertising and Selling (1997), pp 15-17
Siddons Pty Ltd v The Stanley Works Pty Ltd [1991] FCA 138 [19.720] The Full Federal Court held that the word “Australia” and a map of Australia on tools misrepresented that tools were made in Australia. It was held that the relevant audience for the promotion of an inexpensive steel socket was the relatively large class of those “engaged in skilled trades or home handy work”. For the members of that class: A decision to purchase is unlikely to be the subject of anxious consideration. The immediate impression that the article makes on the purchaser’s mind would therefore seem to be of great practical importance in influencing the decision whether or not to purchase.
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Chapter 19 Misleading or Deceptive Conduct
Henderson v Pioneer Homes Pty Ltd [1980] ATPR 40-159 [19.730] The Full Federal Court acknowledged that advertising is often read superficially. It was held that
an advertisement for a house and land package at an advertised price including deposit and low weekly payment under temporary financing arrangements was misleading because a fine-print reference to refinancing at higher commercial rates after one year did not negate the overall impression created. Smithers J commented (at 42,247) that: I consider that talk of bridging finance for one or two years does not with any clarity qualify the simple message of the prominent part of the advertisement. If a document is addressed to simple or ordinary people and contains a firm, prominent and simple assertion which all can understand, the impression created thereby is not to be washed away by implications said to be lurking in statements positive, rather than negative in form, in a legend in the advertisement, the alleged full import of which is not stated. The sort of reader in contemplation is hardly likely to think that what is stated so plainly and attractively in lines one and two, is being cancelled by implications to be gathered from the small print.
ACCC v Target Australia Pty Ltd [2001] FCA 1326 [19.740] A television advertisement in relation to a clothing sale included the visual statement “25% off all
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clothing” and the exclusionary statement “Excludes underwear, socks & hosiery”. The exclusionary statement was less than one-tenth of the screen height and appeared for approximately 1.75 seconds or approximately 12% of the length of time of the advertisement. There was no vocal mention of the exclusion and the advertisement included the statement “… Twenty-five per cent off every stitch of clothing”.
It was held that the size of the words containing the qualifying advice, compared to the size of the Target name and the Target rondel, was not sufficient to have distracted attention from the name of the rondel. An additional factor was that the qualifying advice was given at the end of the advertisement when the viewer’s attention may have waned. Lee J held (at [15]) that: Consumers who relied on the sound content of the television advertisements, not attentively watching the television, would not have known that any item was excluded. And, as far as the visual images were concerned, the size of the words containing the qualifying advice, compared with the size of the Target name and rondel, was not sufficient to distract attention from the latter. That information was given at the end of each advertisement when the viewer’s attention may not have been as keen as at the beginning. Furthermore, it is often the case that the first impression will be the lasting impression.
Lee J in the Federal Court granted injunctions restraining conduct, made orders requiring corrective advertising and made an order in relation to Target’s trade practices compliance program.
IN CONTEXT
Offers with disclaimers and fine print [19.750] It is common to see advertisements with limitations or disclaimers using an asterisk (*), “conditions apply” or other requirements to limit the audience’s expectations. Fine print is often used in advertisements, contracts, labelling and signs. These qualifications usually appear close to the lead selling point. If an asterisk appears near the word “free”, for example, a business may be trying to trade on
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positive reactions to the selling point, while trying to keep within the law by putting the conditions in the fine print. This may not protect that business from breaching the ACL. The main selling point used for a product or service may make such a strong impression that no disclaimer can dispel it. An advertiser must not make the real terms and conditions of the offer unclear or unreadable by: • placing text in obscure locations • flashing disclaimers on screen for only a moment • using voice overs that are too quick or too quiet. The type and context of the advertisement is relevant as well. For example, it will be harder to ensure that small print conveys the real terms of the offer on a billboard on a highway that cars pass at 100 kilometres per hour, as compared to small print in a newspaper advertisement. Example: A gardening service offers a special lawn mowing deal –after four paid services, the fifth lawn mowing is half-price. The offer is made through a series of radio advertising segments. At the end of the ad, there is a quick mention that “terms and conditions apply” without going into further detail. The terms and conditions are in fact quite onerous, requiring the customer to live in a two kilometre radius of the business, be a pensioner and it applies only to lawn mowing on Monday mornings. The failure to clarify or explain important elements of the offer is likely to mislead customers and therefore breach the ACL.
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ACCC, Advertising and Selling Guide (2014).
Silence and half-truths
Comparative advertising has been common in the United States since the mid-1960s. In that time knocking copy has produced some of the country’s most brilliant commercials: the Pepsi ad in which young people in the distant future find a relic (a Coke bottle) so ancient they cannot identify it, the famous ad for Wendy’s, a fast food restaurant, which jibed McDonald’s hamburgers by asking “Where’s the beef?” The Australian (24 May 1991).
[19.760] The misrepresentation provisions impose no obligation on an advertiser to disclose information unless the failure to mention a particular matter renders the advertisement misleading. The ACCC gives the following example in its Advertising and Selling Guidelines (1997): A marketer of long distance telephone services offered a 5 per cent standard discount to encourage subscription to its services. However, this marketer did not advise the existing customers of a competitor that they would, if they switched companies, lose their current standard discount of 6 per cent. The Commission intervened and obtained undertakings to cease the conduct and to offer refunds where promised discounts were not realised.
However, half-truths may be misleading by the insufficiency of information that permits a reasonably open but erroneous conclusion to be drawn. The Guidelines note that leaving out an important detail is even worse than for example hiding it in the fine print of a disclaimer: The latter is illegal because it misleads consumers about the comparative importance of the detail. However, if a significance matter is omitted, the consumer is then completely in the dark and the revelation of the true state of affairs, if it happens at all, comes as an unpleasant surprise. 838
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Chapter 19 Misleading or Deceptive Conduct
Comparative advertising [19.770] Comparative advertising is a particularly effective form of advertising. Provided that the comparisons are accurate it can provide consumers with useful information as to the respective merits of competing products. In HCF Australia Ltd v Switzerland Health Fund Pty Ltd [1988] ATPR 40-846, Fox J in the Federal Court commented that comparative advertising will “be examined more critically” than other forms of advertising because the reader “is less likely than otherwise to regard what is written as a mere exaggeration, stated with an excess of enthusiasm”. In commenting on this passage, Heerey J, in Country Road Clothing Pty Ltd v Nagee Nominees Pty Ltd [1991] FCA 101, added the corollary that “the comparative advertiser who gets his facts right should have no fear of [s 18]”. In Carsales.Com Limited v One Way Traffic Limited [2015] VSC 367 Judd J noted (at [36]) that:
We were hoping to build a small profitable company; and of course, what we’ve done is build a large, unprofitable company. Jeff Bezos, US Businessman.
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Where an advertisement is capable of more than one meaning, the question of whether it is misleading or deceptive is to be tested against each meaning which is reasonably open. Comparative advertising does not involve any different approach, although by engaging in such conduct an advertiser may become exposed to the risk that a seemingly innocuous statement will become coloured or informed by the comparison.
Comparative advertising is not prohibited by the intellectual property laws –the Trade Marks Act 1995 (Cth) expressly provides that a registered trademark is not infringed when it is used “for the purposes of comparative advertising” (s 122(1)(d)). Complaints in respect of comparative advertising rest on the basis that the comparison was “misleading or deceptive” in breach of s 18, or the specific misrepresentation provisions. The comparative advertising is not vulnerable if it compares “like with like”.
Makita (Australia) Pty Ltd v Black & Decker (Australasia) Pty Ltd [1990] FCA 236 [19.780] An injunction was granted and corrective advertising ordered in respect of a television commercial
which featured a “torture test” between two competing drills. The commercial featured time-lapse takes which showed smoke being emitted by the competitor’s drill which increased in intensity as the test continued. The Federal Court held that the editing of the commercial to reduce the period before smoke first appeared in the competitor’s drill and to remove takes showing the advertiser’s drill stalling and emitting smoke contravened [s 18].
Duracell Australia Ltd v Union Carbide Australia Ltd [1988] FCA 380 [19.790] This case concerned a television advertisement pitting the respondent’s alkaline battery (Energiser)
against the applicant’s alkaline battery (Duracell). An interlocutory injunction was granted. The claim that “new Energiser Double AA batteries last longer on average than Duracell” was based on unconvincing experiments and, even if true, did not apply to very similar Energiser batteries made using old technology which were still generally available. Burchett J (at [13]) warned that: For the very reason that a purchaser of cheap commodities cannot sensibly be expected to devote much time and thought to the weighing of statements made about them by their producers, it seems to me that an inaccurate statement or an ambiguously qualified statement may often be found to be misleading. In the area of comparison advertising, it has repeatedly been said that particular care is required. An unfair comparison may, quite simply,
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Business and the Law because it is unfair, be misleading. It may mislead a consumer into thinking there is a basis for a choice where, in truth, there is not; or that a choice may be made on grounds which are not truly valid.
Gillette Australia Pty Ltd v Energiser Australia Pty Ltd [2002] FCAFC 223
Case Study
Background
[19.800] The manufacturers of “Energiser” and “Duracell” batteries have been regular courtroom
combatants in relation to comparative advertising, the legal context for which was explained by Heerey J in these terms (at [20]): The characterisation of advertising as comparative does not of itself have legal significance, or create any kind of presumption in favour of a party alleging a breach of Part V of the TPA. There is no basis in the TPA for regarding comparative advertising as an inherently disreputable form of commercial conduct, to be viewed with suspicion by the courts. On the contrary, to the extent that comparative advertising provides consumers with accurate hard facts about competing products, it assists in the making of better informed consumer choices and thereby results in more effective competition.
Of course, the more actual comparisons that are used, the more potential there is for error (and half- truth). So advertisers have to be careful. Understood in context, that is all that the passages referred to by his Honour are saying. Assertions of factual inaccuracy have to be carefully considered by courts in comparative advertising cases, no differently from any other cases.
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The facts The facts as set out by Heerey J were as follows (at [15]-[16]): The advertisement shows a race conducted over a rugged and arid landscape. Lined up at the start are two bunnies. One bunny has a Duracell battery, with brand name visible, on his back. The other bunny has a black battery with no brand. He glances around with a knowing and slightly sinister look. The race starts and both bunnies set off. The Duracell bunny is always in front. On two occasions the exhausted non-Duracell bunny is replaced by a similarly garbed runner, who emerges from a hiding place along the track. This appears obviously pre-arranged. The Duracell bunny, apparently oblivious to his opponents’ tactics, crosses the finishing line, running strongly and well in front of the last of the non-Duracell bunnies to enter the race. A white-coated bunny with clipboard and stopwatch records the finish. A brief view back along the track shows the three non-Duracell bunnies collapsed. At the conclusion the Duracell bunny, looking fresh and modestly triumphant, is standing on a mountain. The narrative is thus a story of the Duracell bunny winning a race against a relay team of three competitors. So the message conveyed is not only the power superiority of the Duracell battery to its competitor, but the quantification of that superiority. There is the following voice-over: Which lasts longer? Duracell Alkaline or Eveready Super Heavy Duty batteries. While Duracell Alkaline keeps on Running, Eveready Super Heavy Duty just can’t keep up. Uh oh, no matter what they try it won’t help. With up to 3 times more power Duracell always beats Eveready Super Heavy Duty. The advertisement displays the following superscript in white: Eveready Super Heavy Duty is a cheaper non-alkaline battery. In AA, AAA, C & D sizes only. Duracell lasts up to 3 times longer than Eveready Super Heavy Duty in AA, AAA, C & D sizes only.
The issue The dispute was based on the difference between alkaline and non-alkaline (carbon zinc) batteries. Both parties produced alkaline batteries which are more powerful and more expensive than 840
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Chapter 19 Misleading or Deceptive Conduct
non-alkaline batteries. Only Energiser produced non-alkaline batteries including the Eveready Super Heavy Duty battery. Energiser claimed that the advertisement was misleading because it failed to inform viewers that: • Eveready Super Heavy Duty batteries are much cheaper than Duracell batteries; and • Energiser in fact manufactured a battery which was equivalent to the Duracell battery in terms of power and price. Gillette argued that its comparison claim was simply that Duracell batteries lasted longer than Energiser Super Heavy Duty batteries and that no claims were made in respect of Energiser’s alkaline batteries (which may have had an equivalent performance to Gillette’s Duracell batteries). The decision At trial the advertisement was found to be misleading. On appeal the Full Federal Court held that Duracell’s claim to last up to three times longer referred only to the Eveready Super Heavy Duty battery; therefore, the advertisement could not be regarded as misleading or deceptive.
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Heerey J commented (at [22]) that to introduce notions of “fair” comparisons was to put “an unwarranted gloss on the plain words of provisions of Part V such as ss 52(1) and 53(a). Provided the factual assertions are not untrue, or misleading half-truths, an advertiser can lawfully compare a particular aspect of its product or service favourably with the same aspect of a competitor’s product or service”. He gave the following example (at [23]): airline X might advertise that its economy class seats provide 20 cm more leg room than those of airline Y. If that is in fact true, I do not see that the TPA obliges airline X to provide in its advertisement detailed information as to the myriad other factors which might influence consumers choosing between airlines. And if airline Y wants to advertise that its fares are cheaper, its aircraft more modern, and its flights more frequent than those of X then again, providing no untruths or misleading half-truths are stated, that is legitimate.
In relation to the advertisement he held (at [28]) that: There is no doubt on the evidence that the Eveready Super Heavy Duty battery, the highest selling carbon zinc battery in Australia, competes head to head with Duracell’s alkaline battery. Duracell is entitled, in my opinion, to point out truthfully to consumers a feature of its product which is superior to that of a rival product. If viewers think that Energiser has no other batteries which are more powerful than the Eveready Super Heavy Duty, then that belief would spring from their own mistaken assumptions and not from anything Duracell has told them in the advertisement. The appropriate remedy is for Eveready to correct such mistaken assumptions, if they exist, by its own advertising. There is no legal or ethical obligation on a trader to publicise the full range of a competitor’s products, and reasonable viewers would not think otherwise.
Implications The decision sets out important principles for determining whether comparative advertising contravenes the TPA. It clearly “winds back” the constraints on comparative advertising established in earlier decisions which required “fair” comparisons of “like with like”. One commentator suggests that “Post Gillette, apples with apples comparisons are not required. Advertisers are relatively free to compare their products and others as long as they disclose the nature of comparisons made” (D Shirrefs, “Gillette v Energizer –Good Law and Good Economics” (2004) 12 Trade Practices Law Journal 135). Another concludes that “if the whole truth is told and there is no misleading impression created, there is no breach of s 52: an advertiser does not create a misleading impression by failing to go further and publicise the whole range of a competitor’s product” (W Pengilley, (2003) 18(9) Trade Practices Law Bulletin 138 at 139).
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GlaxoSmithKline Australia Pty Ltd v Reckitt Benckiser (Australia) Pty Limited (No 2) [2018] FCA 1 [19.810] It was held that the manufacturer of Nurofen had engaged in misleading or deceptive conduct and made false representations by conducting a comparative advertising campaign in which it was claimed that Nurofen provides faster and more effective relief from the pain caused by common headaches than does Panadol. Foster stated that: [It] is misleading or deceptive … for Reckitt to claim that ibuprofen (Nurofen) provides faster and more effective relief from pain caused by common headaches … than does paracetamol (Panadol) when the only study which supports such a clear cut claim is [only one clinical trial] and where the balance of the scientific knowledge [does not support this].
The decision was upheld on appeal ([2018] FCAFC 138): The body of scientific evidence… did not support the making of simplistic comparisons of the kind found in Reckitt’s comparative advertising material. It was misleading for Reckitt to make the representations it did –which carried with them an unqualified and definitive statement of scientific fact –when the overall conclusion to be drawn from the scientific evidence was that no authoritative comparisons between active treatments were possible in the then state of scientific knowledge.
IN CONTEXT
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Freedom of speech and comparative advertising [19.820] Telstra Corporation Ltd v SingTel Optus Pty Ltd [2007] FCA 824 is a strong endorsement of “freedom of speech” in advertising. Gray J held that there was no principle that like had to be compared with like. If the comparison is truthful a company can make a comparison of whatever feature(s) it chooses to compare products that compete with each other (at [17]): The underlying principle of freedom of speech must be capable of being invoked for good or for ill. Those who wish to sell their products are entitled to exercise the right of free speech, just as much as those who wish to spread their ideas or opinions. Commercial invocation of the right of free speech may be irksome, but attempts to trespass too far on those rights, in the case of commercial people, give rise to the risk that free speech will be a right wound back in the case of those who seek to spread their ideas and opinions. For this reason, in my view, the Court should be very slow to grant an injunction, on the basis of a serious question to be tried, that restrains people from advertising especially where it can be seen that the remedy of damages after the event is available.
In modern business it is not the crook who is to be feared most, it is the honest man who doesn’t know what he is doing. William Wordsworth.
Endorsements [19.830] A product endorsement is generally an opinion expressed in respect of a particular product. The opinion expressed by the endorser is misleading if not honestly held. An endorsement by a person with an expected or acknowledged expertise in relation to 842
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Chapter 19 Misleading or Deceptive Conduct
the product endorsed will be judged by a different standard than the anonymous consumer fronting the television camera.
IN CONTEXT
Endorsement advertising [19.840] The ACCC, Advertising and Selling Guidelines (1991), p 33 state that:
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The extent to which endorsement advertising will give rise to particular expectations by consumers depends largely on the contents of the advertisement. In many cases endorsement advertising amounts to nothing more than the use of prominent personalities to attract attention. Where the personalities express nothing more than a personal opinion, it is unlikely that representations of the kind with which the law is concerned will be made. Furthermore, the use of prominent persons or actors to make statements on behalf of a company and its products differs little from other advertising, in which those statements or representations are directly attributable to the company. In either case, statements of fact about the attributes of the goods should be accurate and capable of being substantiated. It is quite another matter, however, where persons having particular expertise make statements of fact and opinion based on that expertise. In that case, consumers may place great weight on the expertise and opinion of the person making the statement. Claims by leading personalities in a particular field that they use the advertised goods either to maintain their status in that field or because their experience suggests that the goods are superior may breach the law if those persons do not, in fact, use the goods. In many such cases the leading personality may not only be paid for making the particular announcement but also supplied with the goods free of charge for use in the particular field, for example, leading sports personalities associated with a particular brand of sporting equipment, leaders in motor sport associated with particular motor vehicles and/or associated products. Endorsements may go further than mere expression of opinion: there may be statements of fact about the attributes or performance characteristics of goods that need to be supportable on an objective basis of testing. For example, if a leading motor sports personality expresses a technical opinion about the performance characteristics or benefits (eg by way of fuel consumption) of a particular motor product, the claims would need to be capable of substantiation using acceptable test criteria. Where technical aspects of products are endorsed by persons who, although not widely known, are represented as possessing relevant technical or professional expertise (eg a dietitian or a food scientist), the facts presented should also be capable of substantiation using established and proven techniques of the particular field of technology. Endorsements claimed or represented to be unsolicited should not, in fact, have been solicited in any way. When used in advertising, such endorsements should be accurately represented. Even when no claim is made that the endorsement is unsolicited or unpaid there are some circumstances (eg endorsement by an expert association) where, in the context, silence may mislead most, if not all, consumers into believing the endorsement was unsolicited when in fact it was not.
It is only the innate gentility of the average company director, the natural sweetness of your natures, which generally restrains many of you from expressing the feeling that the law is unnecessarily obscure and that lawyers intentionally speak in riddles, disguising meaning in a mass of verbiage so as the better to mystify the unsuspecting layman. Sir Ninian Stephen, National Conference, Institute of Directors (1984).
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Business and the Law When a person produces a television commercial that not only boosts his own product but, as in this case, compares it critically with the product of another so that the latter is shown comparison, in my view he ought to take particular care to ensure that the statements are correct. Stuart Alexander & Co (Interstate) Pty Ltd v Blenders Pty Ltd (1981) 53 FLR 307 at 310 per Lockhart J.
Tests and surveys [19.850] The proposition that the use of tests and surveys to lend credence to a particular claim will be misleading or deceptive if the test or survey is not properly conducted or the test or survey does not support the advertised claim is uncontroversial. Reference should be made to cases discussed elsewhere in this section including Colgate-Palmolive Pty Ltd v Rexona Pty Ltd [1981] FCA 146. The ACCC’s Advertising and Selling Guidelines provide the following examples of the use of surveys and tests that may mislead or deceive: • Advertisements in which the claims made imply or say that they are based on a statistical survey (eg “Nine out of 10 homemakers prefer …”) when in fact such a survey has not been undertaken or the results of the survey are distorted. Advertisers should not make such claims unless supported by an objective survey, based on a recognised statistical method, preferably conducted by an independent organisation. The ACCC expects advertisers making such claims to be in a position to meet its request for full particulars of the survey on which the claims are based. • Claims that a product has been “tested” by an authority when only part of the product was tested, or another similar product was tested or the product failed the test. For example, a claim that an electrical appliance was “tested and passed by X” would be misleading if the test related only to the mechanical function of the appliance and not to the safety of its electrical system (unless this was clear from the advertisement).
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• Tests showing a particular performance result has been achieved by a product when the tests are not representative of what can be achieved by the average user. For example, attractive petrol-consumption figures may be achieved by specialist drivers in so-called “economy runs” but to quote such figures, without qualification, may lead people to the mistaken belief that they are likely to achieve similar results. • Claims that are supported by tests or surveys which suggest that they are unbiased and were conducted by an independent agency may be misleading if, in fact, the tests were carried out by a related organisation (unless the results could be confirmed by independent analysis).
Reviews and testimonials [19.860] Reviews and testimonials are popular tools used by businesses to promote their goods and services, particularly online, and are often used in several ways: • businesses use reviews and testimonials on their own websites or through other promotional material; • review websites allow consumers to leave reviews and ratings about businesses to help other consumers differentiate between a range of similar goods or services; and • reviews or opinions can be posted using social media, blogs, comment threads, and other channels of communication. The ACCC’s Advertising and Selling Guidelines warn that regardless of the advertising medium, any review or testimonial should reflect the genuine views and opinions of 844
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Chapter 19 Misleading or Deceptive Conduct Someone who knows too much finds it hard not to lie. Ludwig Wittgenstein.
the person that is represented to have made it: “Businesses must not misrepresent consumer opinions to dishonestly promote themselves. A fake review or testimonial is one which does not reflect the genuinely held opinion of the author. Using false or misleading reviews or testimonials in any advertising medium will risk contravening the ACL”.
ACCC v Meriton Property Services Pty Ltd (No 2) [2018] FCA 1125 [19.870] The Federal Court held that Meriton had engaged in misleading or deceptive conduct and made
false representations by implementing a practice of preventing guests. Meriton suspected would give negative reviews to TripAdvisor or by Meriton sending incorrect email addresses of such guests to TripAdvisor which meant that they did not receive an email from TripAdvisor advising them to post a review. In cases where there had been a major fault affecting all guests Meriton would withhold all addresses. A pecuniary penalty of $3 million was imposed for manipulating the TripAdvisor reviews which was in the words of the ACCC “misleading to potential customers who deserve the full picture when making a booking decision”.
ACCC v P & N Pty Ltd [2014] FCA 6 [19.880] A solar panel company published written testimonials on its website and published video testimonials on YouTube that were not made by genuine customers. The Federal Court ordered payment of penalties of $125,000, for publishing fake testimonials and also for making false or misleading representations. The ACCC notes that businesses may be engaging in misleading or deceptive conduct if they:
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• use fake reviews, including as a form of false advertising or to damage the reputation of a competitor; • use tactics to influence a consumer to provide a positive review or refrain from a negative review; or • selectively remove or edit reviews, particularly negative reviews, for commercial or promotional reasons. It advises that “businesses should check reviews and testimonials carefully and implement good record keeping practices to ensure they are able to show that reviews and testimonials are honest and accurate”.
Advertising through sponsored website links [19.890] The ACCC’s Advertising and Selling Guidelines note that there is a range of online advertising channels that businesses can use through mechanisms such as “AdWords” banner ads, pop-up ads and other types of advertisements. It warns that technology may be changing but the requirements of the ACL remain applicable and all businesses involved in placing advertisements on search engines must take care not to mislead or deceive consumers.
Remove advertising, disable a person or firm from preconising its wares and their merits, and the whole of society and of the economy is transformed. The enemies of advertising are the enemies of freedom. Enoch Powell.
Google Inc v ACCC [2013] HCA 1 [19.900] In the late 2000s, the Google search engine displayed two types of search results: “organic search
results” and “sponsored links”. Organic search results were ranked in order of relevance to the search terms entered by the user. A sponsored link was a form of advertisement, created by or at the direction of an advertiser, who typically paid Google each time a user clicked on the sponsored link.
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845
Business and the Law An advertising agency operated an advertising account with Google on behalf of a classified advertising business and for that account the agency’s staff member included a “keyword” of a magazine that was a competitor to its client. A Google search for the competitor magazine generated a sponsored link that listed the name of the competitor magazine with the website address of the classified ad’s business below it. Google was successful. In Celebrating 40 years of Making Markets Work (2014) p 44 the ACCC commented in relation to this decision that: The High Court unanimously held that Google had not engaged in misleading or deceptive conduct, or endorsed or adopted the representations which it had displayed on behalf of advertisers. The ACCC had considered that providers of online content should be accountable for misleading or deceptive conduct when they have significant control over what is delivered. However, the High Court reasoned that Google did not create or produce any of the four sponsored links, and to the extent that it displays sponsored links, the Google search engine is only a means of communication between advertisers and consumers. Nonetheless, it remains the case that all businesses involved in placing advertisements on search engines must take care not to mislead or deceive consumers.
Social media
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[19.910] There are no specific laws for social media which is subject to the same prohibitions on false or misleading advertising as other communications. In ACCC v Allergy Pathway [2011] FCA 74 the Federal Court held (at [32]-[33]) that: It has been shown, indeed it was not disputed, that Allergy Pathway knew that persons had published testimonials on its Twitter and Facebook pages and that it took no steps to have them removed. I infer that one reason Allergy Pathway did not remove the testimonials was that it wanted to take the benefit of the praise for its services. Another possible reason is that Allergy Pathway thought the testimonials added legitimacy to its business. While it cannot be said that Allergy Pathway was responsible for the initial publication of the testimonials (the original publisher was the third party who posted the testimonials on Allergy Pathway’s Twitter and Facebook pages) it is appropriate to conclude that Allergy Pathway accepted responsibility for the publications when it knew of the publications and decided not to remove them. Hence it became the publisher of the testimonials. In any event it is clear that it caused them to continue to be published from the time it became aware of their existence, which is enough to put Allergy Pathway in breach The director is really a watch dog and the watch dog has no right without the knowledge of his master to take a sop from a possible wolf. Re The North Australian Territory Co Ltd (1891) 61 L J Eq 129 at 135 per Bowen LJ.
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The ACCC gives the following advice (ACCC, Advertising and Selling Guide (2014)): Businesses using social media channels like Facebook, Twitter and YouTube have a responsibility to ensure content on their page is accurate, irrespective of who put it there. You can be held responsible for posts or public comments made by others on your social media pages which are false or likely to mislead or deceive consumers. The risks posed by social media are best dealt with through a clear and prominent moderation policy on your business’ homepage. A policy provides contributors with expectations around when their posts may be moderated. In relation to Facebook for example, businesses and “community managers” should refrain from removing all critical comments about the business posted on their Facebook page. As an open, two-way forum, there is an expectation that page moderators will only remove comments where necessary; for example offensive, unlawful or clearly untrue material. To protect themselves, businesses that use social media should display their moderation policy prominently so that consumers have a clear understanding of when and why content will be moderated, whether that be through editing or by removing them.
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Chapter 19 Misleading or Deceptive Conduct
IN CONTEXT
Liability of advertising agencies for misleading advertising [19.920] In Remedios v Kentucky Homes Pty Ltd [1987] ATPR 40-799 Pincus J, in award-
ing damages against the respondent for a misleading claim in an advertising brochure for kit homes, commented that the case “illustrated the danger, from the point of view of liability under s 52 of the TPA of entrusting the drafting of such brochures wholly to advertising agents”.
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In this case the action was taken against the advertiser. However, the misleading advertising net also catches the advertising agency. The Chairman of the ACCC has commented that: “The Trade Practices Act should be as prominent on an ad agency’s shelf as it is in a legal practice” and warned that the ACCC is “cracking down on advertising agencies that actively participate in false or misleading campaigns”: Fels A, “Advertising that Tests the Barriers” (21 February 2002) Business Review Weekly.
Well, as a member of the stock exchange, I would suck their brains out with a straw, sell the widows and go into South American zinc. Monty Python’s Flying Circus.
An advertising agency may be liable as an accessory in respect of misleading advertisements prepared for clients. If an agency aids and abets or is knowingly concerned in a contravention of the Act, it may face the same penalties as the client. In ACCC v Nissan Motor Co (Australia) Pty Ltd [1998] FCA 1048, for example, Nissan was convicted of a price misrepresentation. Proceedings were also taken against an individual –the advertising agent who aided and abetted Nissan in the misleading advertising. The contraventions were inadvertent but no less culpable for that reason. Nissan was fined $130,000 and the advertising agent was fined $10,000. Von Doussa J held that: I accept Mr Wightman’s evidence that he was under the belief at the time that the disclaimer would have the consequence that no breach of the law occurred. However, that belief was the result of a want of adequate thought or consideration of the circumstances on his part. In the advertising industry, advertising agents are “gatekeepers” who have a responsibility to consider whether advertising material prepared by them for their clients, complies with consumer protection legislation. I do not think that the basis for Mr Wightman’s belief, that such a disclaimer could be used in the case of a new vehicle, justified his belief. Had he reflected on the situation he should have realised that the disclaimer he inserted in the advertisement would not draw attention to the misleading or deceptive features of the representation of the vehicle. An agency’s liability as an accessory is dependent on it knowing of the matters which allow the representation to be characterised as misleading. However, liability as a principal is not subject to this qualification. In Cassidy v Saatchi & Saatchi Australia Pty Ltd [2004] FCAFC 34 the ACCC was unsuccessful in an action to hold an advertising agency liable as a principal in respect of an advertisement prepared by it but approved by the client’s legal department. Writing of this decision Mary Still notes that there were two reasons why the agency was found not to have made the representations (M Still, “Saatchi & Saatchi Court Win Good News for Advertising Industry” (March 2004) 20(1) Australian & New Zealand Trade Practices Law Bulletin p 9): First, the advertisements themselves did not convey to the relevant section of the public that the representations were made by the agency, taking into account:
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Business and the Law
• the terms of the advertisements; • Saatchi & Saatchi’s role in their preparations; • the significance of its name and key number appearing on the advertisements; and • the evidence of the only consumer put forward by the ACCC. Anyone reading the advertisements would think they were NRMA advertisements, not Saatchi & Saatchi advertisements. Second, Saatchi & Saatchi did not make the representations just because it prepared the advertisements, or because it provided them to NRMA expecting that NRMA would publish them or knowing that it was the natural and probable consequence of their preparation that they would be published. Still suggests that this is a welcome –and sensible –decision. An advertising agency’s day- to-day work will not turn it into a principal and hence liable for misleading or deceptive statements in its advertisements, unless it does more than merely prepare the advertisements. It is clear that: • An agency’s liability, either as a principal or accessory, for misleading statements will depend upon all the circumstances;
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• If an agency actually knew facts which could allow the advertisements to be characterised as misleading, it could be liable as an accessory; and • If an agency does more than prepare an advertisement, then it could also be liable as a principal – for example, by organising the distribution or taking final responsibility for the content.
Advertising is the whip which hustles humanity up the road to the Better Mousetrap. It is the vision which reproaches man for the paucity of his desires. The New Yorker calls it “our industrial chinook –keeping the fires of trade stirred up, keeping the Press defiant.” E S Turner, The Shocking History of Advertising (Penguin, 1965).
848
19.8 UNFAIR COMPETITION/PASSING OFF [19.930] The statutory misleading or deceptive conduct action provides a versatile and effective instrument for protecting trading and promotional goodwill in a range of circumstances. Prior to the introduction of the statutory misleading conduct action the common law tort of passing off was available to protect a trader’s goodwill and reputation in circumstances where a competitor’s use of similar names or other indicators was used to persuade customers that the goods or services had an association, quality or endorsement belonging to or associated with another. Today the leading conduct action is widely used as an alternative to the common law action. Section 18 is designed to protect consumers whereas passing off is designed to protect a trader’s goodwill but, as Mason J explained in Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44, the “remedy to prevent deception of the public [ie s 18] often has the incidental effect of protecting a competing trader’s goodwill which would be also injured by that deception (ie the prerequisite for passing off)”. In Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd [1978] HCA 11, Murphy J explained that “passing off is a classical example of misleading and deceptive conduct”. This application of s 18 is, of course, consistent with the consumer protection heritage of s 18. The applicant may be motivated by self-interest but the public interest is also vindicated (of course, if the misrepresentation
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Chapter 19 Misleading or Deceptive Conduct
which anchors both the s 18 and the passing off action involves infringement of a registered trademark or design, or breach of copyright, the statutory intellectual property regime provides the more effective action –see Chapter 24). Although s 18 and passing off provide versatile actions in a range of circumstances that can be collectively described as “unfair competition” they are subject to two particular restrictions.
A “misrepresentation” not a “misappropriation” action [19.940] In Twentieth Century Fox Film Group v The South Australian Brewing Co Ltd [1996] FCA 1484 (the “Duff Beer” case, see [19.930]), Tamberlin J accepted (at [128]) that:
What is the difference between unethical and ethical advertising? Unethical advertising uses falsehoods to deceive the public; ethical advertising uses truth to deceive the public. Vilhjalmur Stefansson.
An express disclaimer can, if sufficiently prominent, destroy any suggestion of association between a character and the product under consideration.
It was nevertheless held that a prominent disclaimer on the can of an association with the television series would not be effective in this case, as rather than indicating a dissociation the disclaimer would reinforce the conclusion that the beer was intended to be marketed with a keen awareness of the existence of “The Simpsons” programme and the force of “The Simpsons” association.
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The need for an established representation [19.950] The misrepresentation requirement can be made out only if the plaintiff has an established reputation in relation to which the respondent’s conduct can be characterised as misleading.
Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136 [19.960] The Full Federal Court held that a substantial and long-established US franchised system which operated in the United States under the name “Taco Bell” could not restrain a Sydney restaurant from carrying on business under that name. The Sydney company had used the name for four years before the US company commenced operations in Sydney. It was held that the Sydney restaurant’s use of the name was not misleading or deceptive. The US company’s reputation did not extend to Australia and the reputation in the name “Taco Bell” in Sydney resided in the local company. It was the US company which had engaged in misleading or deceptive conduct by using a name that was associated locally with that used by the Sydney restaurant: The conduct of the Bondi company in continuing to carry on its restaurant under its established name cannot properly be seen as the cause of any actual or likely misconception as to a connection between its Bondi restaurant and the Taco Bell chain. The cause of any such misconception is the use by the US company of the name “Taco Bell” in connection with the Sydney operations of a chain of Mexican food restaurants in circumstances in which the US company had no prior reputation in respect of the local use of that name and in which that name was, in respect of local operations, clearly associated with an established Mexican food restaurant at Bondi. Such conduct by the US company is misleading or deceptive [as it conveys] a significant section of the public the representation that there was a connection between the Bondi restaurant and the Taco Bell chain.
The passing off situations which will activate a s 18 action are virtually unlimited. There are nevertheless recurring themes which are addressed below. Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-23 21:46:27.
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Similar names Twentieth Century Fox Film Group v The South Australian Brewing Co Ltd [1996] FCA 1484 [19.970] The applicants (the creators of the animated television series “The Simpsons”) in misleading con-
duct and passing off actions succeeded in restraining the respondent from the unlicensed use of the name “Duff Beer”, the fictional beer brand much loved by Homer Simpson, the inept and bumbling but good-natured character in the television series. The court concluded that there had been a misrepresentation as to the association of the goods with “The Simpsons”. The brewery had (at [143]): engaged in a course of conduct calculated to achieve and exploit a strong association between their use of the name “Duff Beer” and “The Simpsons”, which in fact is deceptive, while at the same time, hoping to avoid legal liability. In fact, their hope of avoiding legal liability were (sic) not realised in that they have breached the Act [s 18] and the charge of passing off has also been made out.
Targetts Pty Ltd v Target Australia Pty Ltd [1993] FCA 191 [19.980] The opening words of Heerey J’s judgment clearly set out the nature of the dispute in this case
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(at [1]):
As its name might suggest, this case arises from a dispute between two traders using very similar names [and very similar logos]. The applicant Targetts Pty Ltd (Targetts) has for many years carried on a retail clothing and footwear business in Launceston. The respondent Target Australia Pty Ltd (Target) operates some 82 discount department stores throughout mainland Australia. It is about to commence trading in Launceston. Targetts claim that by so doing Target will contravene [s 18] and also commit the tort of passing off.
Targetts was successful (at [88], [90]-[91]): [W]hat Target is proposing to do is not lawful. It is proposing to use a name and logo deceptively similar to those to which the established reputation of Targetts has attached in such a way as to confuse or deceive members of the Launceston public. The fact that Target might honestly believe it can do this, or that it does not have any intention to injure Targetts, or at any rate not beyond such injury as might be inflicted by ordinary competition between traders, is not to the point… [T]he continued use by Target of the name “Target” and its logo in connection with the retail sale of clothing, footwear and manchester products is likely to mislead or deceive members of the public in Launceston. [and the] existence of the reputation of Targetts in Launceston and the likelihood of deception amongst its customers and potential customers by the use of a deceptively similar name and logo by Target [lead] to the conclusion that such conduct by Target would constitute the tort of passing off.
Other similar name cases are discussed elsewhere in this chapter – the Taco Bell case at [19.960], the Big Mac case at [19.610], and the Building Information Centre case at [19.640] where the High Court referred to the difficulty of protecting “eloquently descriptive trade names”.
Stone & Wood Group Pty Ltd v Intellectual Property Development Corporation Pty Ltd [2018] FCAFC 29 A Byron Bay boutique brewer (Stone & Wood) who brewed a craft beer called “Pacific Ale” sued a Melbourne- based boutique brewer (Elixer) who, five years later, brewed a craft beer called “Thunder Road Pacific Ale” for 850
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Chapter 19 Misleading or Deceptive Conduct passing off and misleading or deceptive conduct. The primary judge held that there was no misrepresentation of connection or association: A starting place in considering this alleged representation is the simple fact that nowhere on the relevant Thunder Road products is there any reference to Stone & Wood. Thus there is certainly no express representation that either of the Thunder Road products is Stone & Wood Pacific Ale. The next point to note is that… the labelling and packaging of the Thunder Road products are very different from the labelling and packaging of the Stone & Wood Pacific Ale. The dominant feature of the Stone & Wood Pacific Ale is the “Stone & Wood” brand name, while the dominant feature of the Thunder Road products is the word “Pacific”. The colours are different. There are many other differences as well. All in all, the overall “look and feel” of the Stone & Wood Pacific Ale is very different from the Thunder Road Pacific Ale/Thunder Road Pacific. In these circumstances, it is not established that the respondents represented that each of the Thunder Road products is the Stone & Wood Pacific Ale.
An appeal to the Full Federal Court was dismissed.
Similar shape Bodum v DKSH Australia Pty Ltd [2011] FCAFC 98 [19.990] Bodum bought proceedings for misleading or deceptive conduct and passing off against a rival
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manufacturer DKSH who had marketed a similar coffee plunger without adequately labelling or distinguishing it from the Bodum product. Bodum argued that it had acquired a reputation in the features and shape of its coffee plunger which was independent of the trademarks, brands or labels. Bodum’s action for misleading conduct and passing off was successful. In relation to the misleading conduct action Greenwood J noted that: (i)
the operation of [s18] is not constrained by common law principles of passing off which are concerned with the protection of goodwill. [Section 18] confers a wider field of protection on consumers than the common law integers relating to passing off;
(ii)
[Section 18] describes standards of conduct which manufacturers and traders must exhibit in their dealings with consumers. The breach of those standards are actionable at the suit of rivals, as well as consumers or a regulator;
(iii)
a rival trader can enter the market and copy precisely another’s product (in the absence of infringing intellectual property rights) so long as the rival does not mislead or deceive the public or pretend, by conduct, that its goods are the goods of another;
(iv)
whether impugned conduct conveys the making of a representation is a question of fact to be determined having regard to all the contextual circumstances within which something is said or done. Where that conduct involves representations to the public at large (or a section thereof), such as prospective retail buyers of a product, s 18 must be regarded as contemplating the effect of the impugned conduct on reasonable members of the class of prospective buyers;
(v)
in ascertaining whether a misconception has arisen or might arise among members of the relevant class, assumptions by persons whose reactions are extreme or fanciful should be disregarded;
(vi)
the issue is not whether the impugned conduct simply causes confusion or wonderment, but whether the conduct is or is likely to mislead or deceive;
(vii)
in the particular circumstances here, the evidence should be viewed objectively to determine whether the reputation subsisting in the Bodum plunger is such that members of the public (being ordinary or reasonable members of the relevant class excluding those making extreme or fanciful assumptions) would assume that a rival product exhibiting those features, without properly labelling or distinguishing
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Business and the Law the rival product, was a Bodum product or a product sold with the licence, sponsorship or approval of Bodum; (viii)
the relevant class was prospective retail buyers in the homewares/homewares market and the question is whether a not insignificant number within that class have been misled or deceived or are likely to be so by DKSH’s alleged conduct, whether in fact or by inference; and
(ix)
the phrase “a not insignificant number of persons” is taken to be a reference to a not insignificant number of reasonable or ordinary persons in the relevant class. Accordingly, if a not insignificant number of such persons would, or are likely to, be misled or deceived by the impugned conduct, [s 18] is contravened.
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In relation to the passing off action Greenwood J noted that: (i)
it protects the goodwill built up by the applicant’s activities. The injuries are not limited to loss of sales. The tort has developed to deal with new circumstances concerning the deceptive or confusing use of names or other indicia to persuade purchasers or customers to believe that goods have an association, quality or endorsement with those of a rival;
(ii)
passing off has the following three elements, namely:
(iii)
(a)
the applicant must establish a goodwill or reputation which attaches to the goods or services which it supplies in the mind of the purchasing public by association with the identifying “get- up” (whether that is simply a brand name or trade description or individual features of labelling or packaging), such that the get-up is recognised by the public as distinctive specifically of the applicant’s goods or services;
(B)
the applicant must demonstrate a misrepresentation by the respondent to the public (whether or not intentional) leading or likely to lead the public to believe that the goods or services offered by it are the goods or services of the applicant. Whether the public is aware of the applicant’s identity as the manufacturer or supplier of the goods or services is immaterial, as long as they are identified with a particular source which is in fact the applicant; and
(C)
the applicant must demonstrate that it suffers (or is likely to suffer) damage by reason of the erroneous belief engendered by the respondent’s misrepresentation that the source of the respondent’s goods or services is the same as the source of those offered by the applicant; and
there is no requirement of an actual or subjective intention to mislead, but such evidence can be of value … [and] a misrepresentation need only be likely to lead the public to believe that the goods are those of the applicant and there is no requirement for actual deception to be proven.
Similar get-up Moroccanoil Israel Ltd v Aldi Foods Pty Ltd [2017] FCA 823 [19.1010] The context for this case is set out in the opening paragraph of the judgment of Katzmann J: “Like brands, only cheaper” is both an advertising slogan used by the German supermarket giant, Aldi, and its business model. This proceeding brings these business practices into sharp focus, as its genesis lies in concerns that some of Aldi’s products are not just “like brands” but deceptively like a particular brand and so contravene Australian trade mark and consumer protection laws. That brand is Moroccanoil. The focus of the case is on both the labelling and get-up of Aldi’s “Moroccan Argan Oil” hair care products, brushes and tools, each of which contains some amount of argan oil. Argan oil is the oil extracted from the nut of
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Chapter 19 Misleading or Deceptive Conduct the argan tree, a tree native to Morocco, which has apparently been used for centuries by Moroccan women as a hair and beauty product. It is reputedly rich in antioxidants, essential fatty acids, and vitamin E.
The Applicant claimed that MIL had intentionally adapted a get-up for its oil treatment product – very similar style size, shape, colour and packaging –in order to “appropriate part of the trade or reputation of the Applicant”. This action failed: The “mere fact that one trader copies aspects of the get-up of another …” does not mean that the conduct contravenes the ACL or amounts to passing off as the Court must consider the difference as well as the similarities in making its assessment. The key differences in this case included the use of Aldi’s house mark PROTANE, the word NATURALS, the absence of the “M” used by the Applicant and the use of the plastic bottle instead of glass. The trade channels and pricing differences between the two products were also relevant. The trade channels and promotion used by the Applicant –salons and promoted through hair dressers, trade fairs and fashion magazines –differed from those used by Aldi being Aldi supermarkets promoted by advertising brochures and occasional TV commercials. The target markets were different –Moroccanoil’s products being high end, luxury or premium products whereas Aldi’s products were considered by witnesses to be “low end” products and priced accordingly.
Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd [2002] FCAFC 157
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[19.1020] At the time of the litigation there were about 25 energy drinks currently available for sale in
Australia and sold in 250ml cylinder cans with silver a prominent colour on most. Red Bull alleged misleading conduct and passing off by a competitor’s product, “LiveWire”, arising from (at [67]): (i)
the almost identical red, blue and silver colour scheme of the packaging of both products;
(ii)
the similar ingredient platforms of both products;
(iii)
the similar design and layout of the front panels for both products, each incorporating a diagonal thrust element counter-balanced by a horizontal line element;
(iv)
identical product container designs, being the distinctive 250 ml cylinder can; and
(v)
an almost identical positioning of both products in the minds of the target market, each conveying associations of “youth, energy, vitality, strength and the like”, due to their colour, packaging and labelling.
Although the names of the product were clearly different it was argued that the “gestalt” of the Red Bull brand –the “ ‘overall identity of the brand as it relates to consumers’ including, ‘not only the name, colour, physical properties and packaging, but also associations with the brand and branding defects used to create associations, including its advertising and the “channels” through which it sold’ ” (at [41]) –was a very significant factor. Red Bull’s expert witness argued that many buyers of packaged goods recognise and differentiate between brands on the basis of the overall look and feel of the product, and the total image of the product, where no single brand identity element is dominant, and where the whole is greater than the sum of the parts, such concepts falling within his description of the “gestalt” of the product. It followed that where the “gestalt” of two products is almost identical, “then without more information about such ‘look-a-like’ products, some consumers are likely to perceive them as comprising the same brand and/or as derived from the same source” (at [41]). The Federal Court of Appeal affirmed the trial judge’s decision that the actions for misleading conduct and passing off were made out.
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Similar packaging The Freeman Cosmetic Corporation v Jenula Trial Pty Ltd [1993] FCA 505 [19.1030] The applicant was granted injunctive relief to restrain the respondent from selling hair care prod-
ucts in white plastic bottles and printed with coloured representations of fruit and flowers which were “strikingly similar” to the applicant’s skin care products: My conclusion is that the display of the respondent’s hair care products for retail sale in the bottles in which those products have been contained constituted both contravention of [s 18] and the tort of passing off. Injunctive relief will be granted.
Similar colour Cadbury Schweppes Pty Ltd v Darrell Lea Chocolate Shops Pty Ltd (No 8) [2008] FCA 470 [19.1040] Cadbury brought proceedings against Darrell Lea alleging that the use by Darrell Lea of a shade
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of the colour purple in connection with its chocolate confectionery business amounted to the tort of passing off and also misleading and deceptive conduct in contravention of [s 18]. Heerey J held that each had distinct identities in the market and that Cadbury did not own the colour purple and did not have an exclusive reputation in purple in connection with chocolate. Darrell Lea was entitled to use purple, or any other colour, as long as it did not convey to the reasonable consumer the idea that it or its products have some connection with Cadbury. Heerey J was not persuaded that Darrell Lea, in using the colour purple, had passed off its business or products as those of Cadbury or engaged in misleading conduct (at [89]): I am not satisfied that such usage has resulted, or would result, in a hypothetical ordinary and reasonable member of the class constituted by prospective purchasers of chocolate being misled or deceived.
The unauthorised use of “images”
Pacific Dunlop Ltd v Hogan [1989] FCA 185 [19.1050] Pacific Dunlop’s unauthorised send-up of the famous knife scene in the film Crocodile Dundee in promoting their shoes constituted misleading or deceptive conduct and passing off through the suggestion of commercial connection between the parties. The words spoken in the knife scene –“He’s got a knife”/“That’s not a knife. That’s a knife” –were replaced in the advertisement (featuring a male actor dressed in clothing the distinctive elements of which were similar to the clothing worn by Paul Hogan in the film) with the words “He’s wearing leather shoes”/“You call those leather shoes? Now these are leather shoes”. Burchett J held (at [10]) that: The vagueness of the suggestion conveyed in this case is not sufficient to save it. That vagueness is not incompatible with great effectiveness. It would be unfortunate if the law merely prevented a trader using the primitive club
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Chapter 19 Misleading or Deceptive Conduct of direct misrepresentation, while leaving him free to employ the more sophisticated rapier of suggestion, which may deceive more completely. In my opinion, the deployment in circumstances of the present kind of techniques of persuasion, designed to influence prospective customers in favour of a trader or his products upon the basis of some underlying assumption which is false, may be held to be misleading or deceptive or to be likely to mislead or deceive within the meaning of [s 18], and may also be held to constitute passing off.
19.9 PRE-CONTRACTUAL MISREPRESENTATION Section 18 and negotiations The role of s 18 in negotiations
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[19.1060] The most significant development in the metamorphosis of s 18 from a residual consumer protection provision to a versatile instrument of commercial litigation has been its application to negotiations that lead to commercial contracts. The largest body of s 18 case law deals with pre-contractual representations in circumstances far removed from any “public” dimension and even further removed from traditional notions of consumer protection. This development is significant. The traditional actions available for pre-contractual misrepresentation have been transformed, even eclipsed, by the statutory action that provides an effective remedy in respect of misleading or deceptive representations which induce a contract but which are not expressly incorporated in the contract. The statutory action is available to both consumer and commercial applicants. This development is surprising and significant. It is surprising because the proposition that the private communications of parties to a commercial agreement could be within the scope of s 18 was not anticipated at the time of the enactment of the TPA. In the advertising and passing off situations there is an obvious public interest which is vindicated by the misleading or deceptive conduct action irrespective of whether the action is brought by a consumer, the ACCC or a competitor. Although a competitor may be motivated by private interest, the action is clearly consistent with the consumer protection objectives which are much more remote in cases in which commercial enterprises use the statutory action to provide a remedy in respect of representations made in the course of complex negotiations which resulted in a comprehensive written agreement. The application of s 18 to pre-contractual negotiations and other private communications in trade or commerce was nevertheless established beyond doubt by the High Court in Concrete Constructions (NSW) Pty Ltd v Nelson [1990] HCA 17.
IN CONTEXT
The key factual inquiries [19.1070] Section 18 lays down a norm of commercial conduct of general application. Any misleading or deceptive conduct in pre-contract negotiations is vulnerable. Given the myriad circumstances in which damages may be claimed for misleading or deceptive conduct, the resolution of such actions essentially involves a factual inquiry into the following issues.
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[The] law was not “made for the protection of experts, but for the public – the vast multitude which includes the ignorant, the unthinking and the credulous”. Charles of the Ritz Distributor Corp v FTC 143 F (2d) 676 (1944).
That which is misleading to one person may not be misleading to a person with different characteristics. Likewise, persons with differing characteristics are unlikely to attach the same significance to the statements of another. Pappas v Sake Pty Ltd (1983) ATPR 40-411 at 44,782 per Fisher J.
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“The only issue which this Court can decide is a legal issue.” The Commonwealth v Australian Capital Territory [2013] HCA 55 at [1]per French CJ, Hayne, Crennan, Kiefel, Bell and Keane JJ.
Underlying all judgments is the notion that it is not enough to establish a case under [s 18] … to show that there may have been misunderstanding or confusion in the minds of consumers. And that is so even where one manufacturer has deliberately copied the product of another. Conduct does not breach [s 18] merely because members of the public have cause to wonder whether it might not be the case that two products came from the same source. Fire Nymph Products Ltd v Jalco Products (WA) Pty Ltd [1983] ATPR 40-353 at 44,275 per Toohey J.
856
1.
Was the representation made to the applicant by or on behalf of the respondent?
2.
Was the representation misleading or deceptive or, in the case of a representation as to future matters, did the person making the representation have reasonable grounds for making it?
3.
Was the representation relied upon by the applicant, ie did it induce the applicant to enter the agreement and cause the applicant to suffer loss or damage?
If the court resolves these issues in the affirmative the quantum of damages, the amount of the loss or damages, must be determined. A further issue relates to the personal liability of those who, inter alia, are directly or indirectly knowingly concerned in or a party to the making of the representation. This is a particularly significant inquiry when the respondent company itself is not a viable defendant because eg it is in liquidation or receivership.
The impact of s 18 on negotiations [19.1080] This development is significant because the traditional common law relating to representations which induce contracts is complex, arbitrary, confusing and unsatisfactory. The primary issue is to determine whether or not the representation was intended to form part of the contractual obligations (in which case it is a term) or whether it was merely intended to induce the other party to enter the contract but without giving rise to any associated contractual obligation (in which case it is a mere representation). The problem is that the test of objective intention which governs the resolution of this issue is not easily applied. In practice, an action for breach of contract, and even the less satisfactory alternative of an action for misrepresentation, is unlikely to be available because of exclusionary devices included in the contractual document. If these devices are properly drafted, they are generally effective in excluding liability for oral representations influencing a party to contract. Under common law, plaintiffs who base their case on pre- contractual negotiations that have induced contracts but have not been included in them face significant hurdles. The effect of the misleading or deceptive conduct provision of the ACL in this area is therefore of the utmost importance. The advantages of the statutory action were succinctly summarised by Pincus J (“Trade Practices” (1988) 2 CLQ 15 at 15): What the parliament has done has been to cut through all the refinements and simply create a duty not to make misleading statements and provide a broad range of remedies for breach of that duty.
The editors of the CCH Australian Trade Practices Reporter refer to the: threaten[ed] … demolition [of] much of the edifice that is the law of contract, and [the construction] in its place [of] a notion of accountability for representations made by corporations in a commercial context.
The massive body of case law that today exists in relation to s 18 contains little to challenge this statement. A commercial representation which does not satisfy the two-fold test is vulnerable under s 18: • Is it the truth? • Does it create a truthful impression?
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Chapter 19 Misleading or Deceptive Conduct
The application of s 18 to negotiations [19.1090] The statutory action has been applied in a wide range of circumstances but some of the recurring themes concern the sale of businesses, shopping centre leases, franchising, real estate transactions, and advice provided by financial institutions. The efficacy of the action is enhanced and enlarged by s 4 of the ACL, which provides that once a party proves the making of a statement as to any future matter, it is deemed to be misleading or deceptive unless the maker of the statement can establish that there were reasonable grounds for making the representation. The efficacy is further enhanced by the now well-established proposition that an exemption clause cannot act to exclude liability for breach of s 18.
Corporations, which should be the carefully restrained creatures of the law and the servants of the people, are fast becoming the people’s masters. Grover Cleveland (1888).
Bateman v Slatyer [1987] FCA 58 [19.1100] The applicant franchisee had suffered substantial financial loss in a retail franchise operation
(Barbara’s House and Garden) that had been represented as a “completely proven concept”. Burchett J in the Federal Court noted (at [18]) that:
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In the circumstances, to invite persons to join the company as franchisees upon the basis that they would get the benefit of a proven concept was akin to the invitation to join in a treat which the Walrus and the Carpenter extended to the Oyster in through the looking glass.
In this early test of the efficacy of the misleading conduct action in the context of negotiations damages were awarded for this and another of other misrepresentations relating to turnover and profit projections, risk, site suitability and capacity to repay loans against the franchisor company and its directors, who had aided and abetted the company’s contravention. The decision reaffirms a number of propositions that indicate why s 18 places a formidable weapon in the hands of the franchisee and other commercial applicants who have been induced to enter contract through pre-contractual misrepresentation: • that contravention of s 18 does not require an intent to mislead or deceive and even though a corporation acts honestly and reasonably, it may nonetheless engage in conduct that is misleading or deceptive; • that a transaction must be looked at from a standard which may not be that of the “reasonable man” at common law. (The standard applied was that of a person who had acquired but “a little knowledge of apparently flourishing activities”.); • that a statement of opinion is not misleading simply because it is wrong or incorrect but it may nevertheless be misleading if there is no basis for it; or it is not honestly held. (Financial projections were not soundly based and thus misleading.); • that belief in a statement made by a person who claims to be an expert must be honestly held; and be based on relevant grounds involving the relevant area of expertise; • that the fact that a person who has been the subject of a misrepresentation has been careless or could have discovered the misrepresentation, had she or he made proper enquiries, does not absolve the maker of the misrepresentation from liability for breach of s 18; • that conduct is likely to mislead or deceive if that result is a “real or not remote chance or possibility regardless of whether it is less or more than 50%”; • that a “negation of representation” or “complete contract” clause in franchise documentation is of no assistance to a franchisor as a shield against a s 18 claim arising from misrepresentations made during negotiations; • that silence may be relied on in order to show a breach of s 18 when the circumstances give rise to an obligation to disclose relevant facts;
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Business and the Law • that a party is not obliged immediately to close a business when it is discovered to be less profitable than represented and can reasonably take the view that it is better to hold on to a business in the hope of improving it rather than selling it immediately; • that directors and others “involved in the contravention” may be held personally liable. We promise according to our hopes, and perform according to our fears. Francois VI, Duc de la Rochefoucauld.
The law reports are replete with similar examples that add little to the body of law on s 18 discussed above but simply provide further illustrations of the application of s 18 to different factual situations. In many of the cases discussed an action for breach of contract would have failed because the inducing representations were not intended to have contractual effect or were excluded by contractual exemption clauses.
RACV Insurance Pty Ltd v Unisys Australia Ltd [2001] VSC 300
Case Study
Background
[19.1110] Despite the massive influence of s 18 in commercial transactions there are few prece-
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dents for its use in complex computerisation projects characterised by highly technical subject matter. This decision of Hansen J in the Supreme Court of Victoria holding that Unisys had engaged in misleading or deceptive conduct in contravention of [s 18] as a result of its failure to deliver, as promised, an efficient online insurance claims management system for RACVI, has attracted considerable interest. Facts
Hansen J described the case as involving “a computerisation project that went wrong”. He summarised the facts as follows (at [2]): A substantial motor vehicle insurer seeks to reform its work processes to produce speedier and more efficient handling of claims, cost savings and increased client satisfaction. How is this to be achieved? The answer is: re-design the processes involved in handling claims and then implement the changes by way of a new computer-based system incorporating the imaging of documents and the electronic storage and retrieval of information. That leads the insurance company to deal with a corporation of substantial size and experience in computer technology and commercial solutions, which agrees to design, supply and install the desired workflow management system based on the imaging of documents.
Issues Unisys won the RACVI tender on the basis that it could store all claims online, access online claims with a retrieval time of up to four seconds and access near-line claims in up to 20 seconds. The significance of these performance criteria was communicated to Unisys and other potential vendors in a 71-page Request for Information document and a 60-page Request for Proposal document. However, the specific performance criteria were not expressly incorporated in the contract eventually entered into which incorporated Unisys’ 120-page Response to RACVI’s RFP as well as a 42-page Project Management Plan. Included in the 120-page document was the following clause: Unisys is not at this stage able to commit to any response time or availability levels as set out in this request for response as we will require further information regarding response time criteria including number of users, definition of what is being measured etc. With respect to availability we will need to review availability
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Chapter 19 Misleading or Deceptive Conduct
in the context of the support plan being contracted for and the configuration over which availability is being measured. Any response times or availability levels which are finally negotiated will only be measured on the system we are contracting to supply.
The project was unsuccessful as Unisys adopted an inappropriate configuration for its system with the result that claims information could not be accessed in accordance with benchmarks that RACVI argued were binding and which Unisys argued were not binding. The issue in the case was simply whether the contract which did not specify either the specific performance criteria as to retrieval times or that the system be delivered online (and which in fact excluded any such obligation) prevailed or whether Unisys had nevertheless engaged in misleading conduct by its failure to deliver as promised in the pre-contract negotiations an efficient online system meeting RACVI’s communicated requirements in relation to response times. Decision Hansen J held that Unisys had engaged in misleading conduct through its representations prior to the contract. RACVI’s statement of the mandatory response time set out in its original RFI and RFP document was “clear and understandable as fundamental to a system to meet RACVI’s need for a more efficient system”. Hansen J held that RACVI (at 504): would not have countenanced further discussions let alone contracting with Unisys if it had understood Unisys to be making no commitment to the matters represented.
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Implications The case clearly demonstrates that in deciding s 18 cases the courts will look beyond a contract to conduct and documents prior to a contract’s formation. Hansen J noted (at 140) that: If one was to look only at the Agreement itself one would not be informed as to the substance of the contract in the sense of being informed as to what the venture was that the parties were setting out on and the purpose they were seeking to achieve. Regard must be had to the RFP responses to seek to understand what the engagement was about and what Unisys and RACVI were setting out to achieve.
The case also illustrates that representations made during the sales process cannot be contracted out of through the convenient device of exclusionary provisions buried in the contractual documents. Hansen J stated (at [503]) that: The statement of the mandatory requirement in the RFP was clear and understandable as fundamental to a system to meet RACVI’s need for a more efficient system. In direct terms in the July response Unisys stated it would provide a system which “allows for the on-line and near-line storage requirements outlined in the RFP”, and that Unisys had “configured a system which can comfortably handle the committal and retrieval rates expected from the volumes outlined in the RFP [and RFI]”. Nothing could have been clearer. It seems a singular way to conducting business to then bring in aid some general statements as to the need for more precise information (which in itself was understandable) and a supposed qualification in a different section to negate the commitment. If that was truly the way in which Unisys approached the matter, to say one thing in direct response to induce the other party to have comfort in dealing with you, and at the same time, but without then and there squarely saying so, you use words elsewhere to give you the option of setting the system up how you like and contrary to the earlier commitment, then the seeds of contention were sown early. But that is not how the plaintiffs read the RFP and, in my view, that is not how it was reasonably to be read and understood. It seems difficult to countenance that Unisys intended by the qualification … to negate the earlier direct statement, and I have concluded against that construction. But if that was the intention there is room for the inference in my view that it was positioned where it was, up the back of the document and far removed from the earlier section, and obliquely expressed, in order that it not be seen for what it was and
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where it would not be expected. The misleading or deceptive nature of such a course is apparent. Further, in my view the other general words elsewhere in the July response were not reasonably to be understood, whether considered alone or in context with other Unisys statements, as negating the statements as to configuration as being statements of no intent or on which no reliance could be placed.
The case is a compelling example of the efficacy of s 18 in complex commercial dealings. From a vendor’s perspective it is an illustration of the dangers of marketing that is ahead of product development and of, in effect, promising more than can be delivered. From the purchaser’s perspective it also provides a lesson to enshrine those issues of fundamental significance clearly and directly in the contract. Hansen J at several stages commented that: “RACVI was not as attentive to its interests in the contract negotiation as it should have been”. RACVI’s successful s 52 [s 18] action was, of course, not without considerable cost to both parties. As noted by Hansen J, the events, from the 1993 contract to the litigation, were “years of wasted money and effort” concluding with “an unedifying and possibly pointless fight over past events, in a contest as to who was at fault”. Unisys’s appeal to the Court of Appeal was unsuccessful (Unisys Australia Ltd v RACV Insurance Pty Ltd [2004] VSCA 81).
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Promises, predictions, forecasts and representations as to the future The whole thrust of the law today is to attempt to give proper effect to commercial transactions. It is for this reason that uncertainty, a concept so much loved by lawyers, has fallen into disfavour as a tool for striking down commercial bargains. Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502 at 523 per Rogers CJ.
[19.1120] If there was a gap in the protection originally provided by s 18 it was its inability to deal with false or misleading statements, representations or predictions about future matters. In Famel Pty Ltd v Burswood Management Ltd [1989] FCA 204, French J explained that the ample authorities for the proposition that promissory or predictive statements cannot constitute misleading or deceptive conduct by reason only of their non-performance or non-fulfilment are related to the wider proposition that conduct cannot be misleading or deceptive unless it involves a representation of past or existing fact. One of the most important of those authorities is Thompson v Mastertouch TV Services Pty Ltd [1977] ATPR 40-027, in which Franki J held (at 17,366) that: A prediction or statement as to the future is not false if it proves to be incorrect unless it is a false statement as to an existing or past fact which may include the state of mind of the person making the statement or a person whose state of mind may be imputed to the person making the statement.
Franki J held that a promise, prediction or statement as to the future is not caught by the Act unless it can be shown that the defendant “did not believe that the forecast or prediction would be satisfied or was recklessly indifferent concerning the forecast or prediction”: at 17,366. [19.1130] The applicant’s position has been substantially strengthened by the enactment in 1986 of s 51A, now s 4 of the ACL, which deems representations with respect to future matters to be misleading if the maker of the statement cannot satisfy the court that there were reasonable grounds for making the representation. The significance of this provision is obvious.
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Chapter 19 Misleading or Deceptive Conduct 4 Misleading representations with respect to future matters (1) If: (a) a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and (b) the person does not have reasonable grounds for making the representation; the representation is taken, for the purposes of this Schedule, to be misleading. (2) For the purposes of applying subsection (1) in relation to a proceeding concerning a representation made with respect to a future matter by: (a) a party to the proceeding; or (b) any other person; the party or other person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary. (3) To avoid doubt, subsection (2) does not:
Business, more than any other occupation, is continually dealing with the future. It is a continual calculation, an instinctive exercise in foresight. Henry Luce, founder of Time and Fortune magazines.
(a) have the effect that, merely because such evidence to the contrary is adduced, the person who made the representation is taken to have had reasonable grounds for making the representation; or (b) have the effect of placing on any person an onus of proving that the person who made the representation had reasonable grounds for making the representation. (4) Subsection (1) does not limit by implication the meaning of a reference in this Schedule to: (a) a misleading representation; or Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
(b) a representation that is misleading in a material particular; or (c) conduct that is misleading or is likely or liable to mislead; and, in particular, does not imply that a representation that a person makes with respect to any future matter is not misleading merely because the person has reasonable grounds for making the representation.
Genex Corporation Pty Ltd v Bocove Pty Ltd, unreported, Supreme Court of New South Wales (13 May 1987) [19.1140] A subsidiary issue in this case (the main issue related to the competing demands of the fran-
chisor of the Rabbit mini-lab photographic processing system and one of its franchisees for possession of a retail outlet) concerned the franchisor’s liability for recommending a particular system that was allegedly inadequate. A negligence action was unsuccessful because the plaintiff could not prove the defendant’s lack of reasonable care in respect of statements as to the future suitability of a machine. But a [s 18] action was successful because [s 4] reversed the onus of proof –the defendant could not prove that there were reasonable grounds for making the statement.
Opinions [19.1150] An expression of opinion cannot be characterised as misleading or deceptive simply because it proves to be wrong or inaccurate. As the Full Federal Court explained in Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd [1984] FCA 180:
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Business and the Law When parties are dealing at arm’s length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would take a different negotiating stance. This does not of itself impose any obligation on the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice. Lam v Ausintel Investments Australia Pty Ltd [1990] ATPR 40-990 at 50,880 per Gleeson CJ.
An expression of opinion which is identifiable as such conveys no more than that the opinion expressed is held and perhaps that there is basis for the opinion. At least if those conditions are met, an expression of opinion, however erroneous, misrepresents nothing.
An expression of opinion may nevertheless be misleading or deceptive if it implies misrepresentations of fact that are false. Some valuable advice was provided by Woodward J in Greco v Bendigo Machinery Pty Ltd [1985] ATPR 40-521 at 46,223: If the vendor of the machine takes it upon himself to state that the machine is in good or very good condition, and then it proves not to be, he must bear the loss. This is to be contrasted with the case where all the vendor says is that he has carefully inspected the machine, and tested it, it seems to be working well and he can find nothing wrong. That was really the extent of [the vendor’s] knowledge here. If that had been the representation that had been made, it would not have given rise to damages, but because the [vendors] went beyond that and represented the equipment to be in good or very good condition, I must find that the case against them has been made out.
An opinion will be actionable if it was not honestly held or, as Burchett J explained in Bateman v Slatyer [1987] FCA 58 (at [15]), if: such an opinion [conveys] that there is a basis for it, that it is honestly held, and when it is expressed as the opinion of an expert, that it is honestly held upon rational grounds involving an application of the relevant expertise.
In that case the directors’ opinion as to turnover and profitability of a Barbara’s House and Garden franchised outlet constituted misleading or deceptive conduct. Although it was an opinion, it was expressed as the opinion of an expert and, lacking a rational basis, was held to be misleading. If the opinion relates to the future, the plaintiff’s position is greatly assisted by s 4 which reverses the usual burden of proof and deems representations to be misleading or deceptive if the representor cannot establish reasonable grounds for making the representation. A helpful summary of the principles in relation to opinions is contained in ACCC v Dukemaster [2009] FCA 682 (at [10]): Precisely the same principles control the operation of [s 18] to statements involving the state of mind of the maker when the statement was made (eg promises, predictions and opinions). A statement which involves the state of mind of the maker ordinarily conveys the meaning (expressly or impliedly) that the maker of the statement had a particular state of mind when the statement was made and, commonly, that there was a basis for that state of mind. A statement of opinion will not be misleading or deceptive or likely to mislead or deceive merely because it turns out to be incorrect, misinforms or is likely to do so … An incorrect opinion does not of itself establish that the opinion was not held by the person who expressed it or that it lacked any or any adequate foundation … An expression of an opinion which is identifiable as an expression of opinion conveys no more than that the opinion is held and perhaps that there is a basis for the opinion. If that is so, an expression of opinion however erroneous misrepresents nothing … However, an opinion may convey that there is a basis for it, that it is honestly held and when it is expressed as the opinion of an expert, that it is honestly held upon rational grounds involving an application of the relevant expertise. If the evidence shows that the opinion was not held or that it lacked any or any adequate foundation, particularly if the opinion was expressed as an expert, a statement of opinion may contravene [s 18].
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Chapter 19 Misleading or Deceptive Conduct
Jacques v Cut-Price Deli Pty Ltd [1993] FCA 88 [19.1160] A number of representations as to turnover, gross profit margins and profitability had been made
to the prospective franchisee during negotiations. It was held by Spender J that these figures were not presented as “optimistic, theoretical possibilities but … as realistically based estimations on which they could confidently plan”. It was implicit in the predictions that the franchisor knew facts that justified those predictions or estimates (at [30], [35]): It is clear that Mr Sgambellone had a very great deal of experience concerning the sale of franchises. I am satisfied that he would have been aware of the significance of his statements to prospective purchasers in their decisions to purchase. Mr Sgambellone would have known that where he made predictions as to what the likely turnover or profit margin might be, the persons to whom his statements were made were entitled to believe that, because of his very considerable experience, there was a reasonable and proper basis on which his predictions were proffered and that he not only believed in what he said about a particular franchise’s projected performance but that there was also a proper and reasonable basis for the claims that he made … If there was reason to be cautious about accepting the accuracy of his predictions, the circumstances called for that to be clearly expressed to the recipients of his predictions.
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Cut-Price Deli, and its director who made the representations, were held liable for misleading or deceptive conduct and the franchisee was awarded damages based on their actual losses –the difference between the price and the value of the business at the time of purchase plus other losses, including the time and energy expended by the franchisees in operating the business for which their drawings were an inadequate recompense. On appeal the Full Federal Court reduced the damages to exclude the additional capital the franchisees had contributed to the business: Cut-Price Deli Pty Ltd v Jacques [1994] ATPR (Digest) 46-128.
Relaying false information [19.1170] Actions for breach of s 18 can be brought against persons who engaged in the misleading or deceptive conduct (or, in the case of accessorial liability, persons who were involved in another’s contravention). A particular misrepresentation may involve a number of parties who are liable as principals and not simply as accessories. In the case of a misleading advertisement prepared by an advertising agency for an advertiser and disseminated through the media, the agency, the advertiser and the media may be liable. In the case of a misleading label on goods, the manufacturer who attaches the label to the goods and the retailer who displays them may both be liable. In the case of a misleading representation in relation to the sale of a commercial property, both the vendor and the real estate agent may be liable. Whether the media, the retailer or the agent in the three examples mentioned above are liable for contravening s 18 will depend on whether that person is acting as a mere “conduit” for information provided by another which is simply relayed to its audience, or whether that person has adopted the information. In Yorke v Lucas [1985] HCA 65, Mason ACJ, Wilson, Deane and Dawson JJ in the High Court observed (at [7]) that:
[Corporations] cannot commit treason, nor be outlawed, nor be excommunicated, for they have no souls. Re: Sutton’s Hospital Case (1612) 77 ER 960 Sir Edward Coke.
It is, of course, established that contravention of that section does not require an intent to mislead or deceive and even though a corporation acts honestly and reasonably, it may nonetheless engage in conduct that is misleading or deceptive or is likely to mislead or deceive … That does not, however, mean that a corporation which purports to do no more than pass on information supplied by another must nevertheless be engaging in misleading or deceptive
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The Germans are a cruel race. Their operas last for six hours and they have no word for fluffy. Ben Elton and Richard Curtis (Blackadder).
conduct if the information turns out to be false. If the circumstances are such as to make it apparent that the corporation is not the source of the information and that it expressly or impliedly disclaims any belief in its truth or falsity, merely passing it on for what it is worth, we very much doubt that the corporation can properly be said to be itself engaging in conduct that is misleading or deceptive.
Application of this test suggests that the media is not normally liable for advertisements published. In the case of the real estate agent, liability for misleading or deceptive conduct is well established (see Argy v Blunts [1990] FCA 51).
John R Glass Real Estate Pty Ltd v Karawi Constructions Pty Ltd [1993] FCA 295 [19.1180] The Full Federal Court held that a real estate agent which holds itself out as, among other things,
“consultant to institutional investors and to developers of major properties” would not be regarded by potential purchasers of properties as merely passing on information about the property “for what it is worth and without any belief in its truth or falsity”. Davies, Heerey and Whitlam JJ held (at 58,374) that: As part of its ordinary business the agent was providing information in a persuasive form with a view to achieving a sale of its principal’s property and of course earning commission.
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[19.1190] In the case of the retailer of goods manufactured and labelled by others, liability depends on
whether, in all the circumstances, the representation is adopted. In Gardam v George Wills & Co Ltd [1988] FCA 194, French J stated (at 49,581) that: The innocent carriage of a false representation from one person to another in circumstances where the carrier is and is seen to be a mere conduit, does not involve him in making that representation. Nobody would expect that the postman who bears a misleading message in a postal article has any concern about its content or is in any sense adopting it. The same is true of the messenger boy or courier service. When, however, a representation is conveyed in circumstances in which the carrier would be regarded by the relevant section of the public as adopting it, then he makes that representation. It will be a question of fact in each case, but in my opinion the wholesaler who resells goods labelled without attribution of authorship can be taken in ordinary circumstances to adopt the text of those labels. Whether the position is different where the labels disclose the author of their text does not arise in this case.
The danger for the “relayer” of false information is that even if the representation is not adopted by the relayer as its own, the act of relaying information often implies a belief in its truth which, if not held, amounts to a misrepresentation. The wisest course of action for the mere relayer of information provided by another is, in the words of the High Court in Yorke v Lucas, to “disclaim any belief in its truth or falsity merely passing it on for what it is worth”. In the John R Glass case referred to at [19.1180], the court held that the real estate agent had adopted the information and had incorporated it as a central and prominent feature of their selling efforts on behalf of the vendor (at 58,376-58,377): There was certainly no express disclaimer of the appellants belief in the truth of the information in the brochure – indeed there was an express assertion of such belief.
In that case the agent’s disclaimer stated that it had no reason to doubt the completeness or accuracy of the information provided.
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Chapter 19 Misleading or Deceptive Conduct
Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60
Case Study
Background
[19.1200] The “conduit” defence –that the respondent is merely passing on information without assuming responsibility for it –is frequently raised. A High Court decision in this area is Butcher v Lachlan Elder Realty Pty Ltd. Facts A real estate agent published a brochure containing an erroneous survey diagram of valuable Sydney waterfront property. The survey was provided by the vendor and had been made twenty years earlier by a professional land surveyor. The brochure was relied on by the purchaser. Issue The vendor was not liable for misleading or deceptive conduct as the representations were not made in trade or commerce. The issue was whether the real estate agent was liable. The brochure representations were, in relation to the agent, in trade or commerce but the High Court had to consider whether the disclaimers in small type in the brochure were effective to prevent liability in a situation where misleading advice was simply “passed on”.
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Decision The High Court, by majority (three to two), found in favour of the real estate agent who, in the absence of claiming expertise or acting dishonestly, did not engage in misleading conduct (at [67]): It does not seem quite correct to describe an estate agent which says it has no reason to doubt the accuracy of information but says it does not guarantee it, advises interested parties to make their own inquiries, and says interested parties have the responsibility of satisfying themselves in all respects, as making an “express assertion” of belief in the information.
Implications Because of the strong dissenting judgments of McHugh and Kirby JJ –that the agent had engaged in misleading conduct and that the disclaimer was inoperative –the issue of liability for passing on information remains contentious. Kirby J commented in relation to the agent’s responsibility for the conduct that (at [194]): It matters not whether the agent or someone else was the original source of the information in the pamphlet. It was by the conduct of the agent that the pamphlet was prepared and distributed in support of its corporate activity undertaken for its own profit. Under the Act, the agent was liable for that conduct. At least it was liable unless it made it plain that it was not the source of the information or that it was merely passing the information on “for what it is worth”. That was not the proper characterisation of the agent’s pamphlet and the diagram that the agent included in it.
Kirby J was particularly sceptical of the efficacy of disclaimers in such circumstances (at [200]): The disclaimer’s tiny typeface The disclaimers … appear in a typeface that can only be described as tiny … A youth with 20/20 vision could possibly read the disclaimers without undue difficulty. But I doubt that any ordinary adult could do so without some form of magnification. Presentation of the disclaimers
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Presentationally, these disclaimers do not appear as true communications to the readers of the pamphlet. They are placed symbolically outside the sphere of such communication. It is as if the agent (or the designer on behalf of the agent) is telling the reader of the pamphlet in its layout: “You don’t need to worry about this. If it had been important, we would not have put it where it is and printed it in such an unfriendly size.” … To suggest that such subscriptions constitute a communication of meaningful information is to defy common experience and half a century of legal efforts to discourage such ploys by denying them legal effectiveness.
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No oral reinforcement of disclaimers It was accepted on behalf of the purchasers that, by clear disclaimers, corporations such as the agent could exempt themselves from liability for “conduct that is misleading”. They could do so by clearly drawing to notice specific matters that should first be checked by the consumer. Alternatively, by clear communication, written or oral, they could indicate that the corporation is merely passing on information supplied by others “for what it is worth”. In the agent’s pamphlet, there were no such clear indications in writing or print. Nor were they ever offered orally, or separately in writing, by Mr Elder or anyone else on behalf of the agent. By holding that the printed disclaimers in this pamphlet were effective to exclude liability under the Act, this Court, in my respectful view, strikes a blow at the Act’s intended operation … corporations will be encouraged by this decision to believe that they can avoid the burdens of the Act by the simple expedient of tucking away in an obscure place in minuscule typeface a disclaimer such as now proves effective. The trend of authority on disclaimers I could find no case where an Australian court has upheld a printed exemption with an equivalent lack of prominence, content and communicative force to that now upheld. The pattern of past Australian decisions on this topic is unsurprising. The Act generally sets its face against contractual exemptions. Yet this, in effect, is what a printed disclaimer seeks to secure. To treat the disclaimers in the present case as effective is difficult to reconcile with the high national and economic purposes of the Act. At the very least, if a disclaimer is propounded to exempt a corporation engaged in trade or commerce in Australia from the important obligations of the Act, it is reasonable to demand that this be done clearly, emphatically and so as reasonably to impinge on the consciousness of persons who thereby lose protections enacted by the Parliament for their benefit. … The decision in the present case rewards illegible disclaimers and promises that, in the future, documents including them stand a real chance of avoiding the operation of the Act. Disclaimers and commercial reality In its nature, self-interest often inclines parties to attempt to limit proper warnings and to seduce consumers with attractive communications, unembarrassed by messages of restraint. Where the Act would otherwise attach, it is important for this Court, like virtually all intermediate courts before this case, to insist that, to be effective, written disclaimers must be clear, detailed and prominent. None of those adjectives applies to the two disclaimers in this case. So far as the written disclaimer on the reverse side of the pamphlet is concerned, a quick reading would suggest (as the joint reasons acknowledge) that it is aimed to let the designer off the hook, saying nothing at all about the agent. … Whatever they should do in theory, ordinary people cannot be converted to reading hidden messages contained in tiny print. It requires a large measure of judicial self-deception to say that the purchasers should have read the written disclaimers invoked here.
Half-truths, silence and non-disclosure [19.1210] In Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, the Full Federal Court made it clear that [s 18] “gives rise to no duty to provide information”. The court pointed out (at 467) that: Where the contravention of [s 18] alleged involves a failure to make a full and fair disclosure of information, the applicant carries the onus of establishing how or in what manner that 866
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Chapter 19 Misleading or Deceptive Conduct which was said involved error to how that which was left unsaid had the potential to mislead or deceive.
While it is clearly established that silence, or a “failure to make a full and fair disclosure of information”, can constitute misleading or deceptive conduct, the proposition of the Full Court that s 18 gives rise to no duty to provide information is the appropriate starting point. The “half-truth” situation is not controversial. Half-truths –the provision of incomplete information –will constitute misleading or deceptive conduct if an erroneous impression results. Although the information communicated may be literally correct, the true position is distorted because of the information withheld. What is left unsaid will render what was said misleading or deceptive. Misleading conduct is more difficult to establish from mere silence about the situation than from a half-truth about it. In this case the allegation is that the silence itself is misleading or deceptive. There is an initial problem with s 4(2) of the Competition and Consumer Act 2010 (Cth) which defines “engaging in conduct” to include refusing to do an act “otherwise than inadvertently”. An omission to disclose information is not within s 18 unless it is deliberate. As Cole J stated in Spedley Securities Pty Ltd v Bank of New Zealand [1991] ATPR 41-143 at 35,065:
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One cannot fail to inform of a matter of which one was not aware … There can be no actual or deemed decision making [to refuse to do something] in the absence of knowledge of facts in respect of which such decision is to be taken.
It just seemed to me, as a simple businessman, that it wasn’t necessary to state the obvious to the potential investor. Failed businessman Bob Ansett, on why Budget Corporation Ltd’s accumulated losses of $20 million were not mentioned in the company’s 1988 prospectus, Business Review Weekly (31 October 1994).
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd [1988] FCA 40 [19.1220] A restaurant which seated 128 people was licensed to seat only 84 people. The vendor’s failure
to disclose this information to the purchaser was held to be misleading or deceptive. There was a duty to disclose in this case which arose through the vendor’s deliberate concealment of information known to be important to the purchaser.
More recently an alternative basis has been suggested –that of a reasonable expectation. In Kimberley NZI Finance Ltd v Torero Pty Ltd [1989] FCA 280, French J stated at [71] that: Unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed, it is difficult to see how mere silence could support the inference that the fact does not exist.
Hai Quan Global Smash Repairs v Ledabow Pty Ltd [2004] FCA 1224 [19.1230] A vendor panel beater’s failure to inform an inexperienced purchaser of the business that repair
work for insurance companies required the written consent of the insurer –consent that was unlikely to be given having regard to the purchaser’s inexperience –was held to constitute misleading conduct: Here, Bob represented truthfully to Ken and Van that the business could and did earn $25,000 per annum and that it had insurance work which included NRMA work. But, as he knew and they did not, 19 per centum of that revenue was attributable to the NRMA insurance work, and it was very problematic, given the Dangs’ obvious unreadiness for management, that that work would continue to come in once they became the owners of the business. Bob also knew, of course, that Ken and Van expected takings of the level achieved by him to continue after they were
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Business and the Law masters of the business. Bob knew, I infer from the conclusion that he must have known, that the Dang brothers did not comprehend how difficult it would be to assume the continuation of the NRMA work. He remained silent. His silence was, as silence can be, eloquent. By his silence, Bob is likely to have deepened the force of Ken’s and Van’s mistaken assumption that the NRMA work would, as a matter of course, flow to them. By remaining silent in these circumstances, Bob caused his otherwise true representations about the availability to the business in his hands of the NRMA work and the turnover of the business in his hands to be misleading. The subject of Bobs silence was a specific factual matter within his actual knowledge. I believe that, by the time the contracts were exchanged, he became aware, as he must have, that the prospective purchasers mistakenly believed the contrary, and that they were, in general, remarkably naive and ignorant as to business affairs and the managerial aspects of a panel beating/spray painting business. There is, by general standards of commercial morality, no injustice in visiting the legal sanctions provided by the Act on a probable consequence of such misleading conduct, namely the Dangs continued willingness to buy at $175,000. To my mind, there was a reasonable expectation, in the circumstances of the case, that the particular matter of the fragility of the prospect of continuation of the NRMA work would be disclosed.
Exclusions, acknowledgements and disclaimers Better to remain silent and be thought a fool than to speak out and remove all doubt. Abraham Lincoln.
[19.1240] Commercial contracts generally include “complete contract” or “denial of representation” clauses which purport to prevent anything said in negotiations from having any legal effect by providing that the words of the contract constitute the totality of the arrangements between the parties. In Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd [1987] ATPR 40-782 at 48,539, Wilcox J commented that:
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whatever effect such conditions may have in an action for breach of contract, there is now abundant authority … that they do not operate to defeat a claim under [s 18].
The public policy enshrined in s 18 would be defeated if such contractual devices were given effect. There is nevertheless scope in appropriate circumstances for disclaimers that are directed at preventing conduct being characterised as misleading or deceptive rather than purporting to exclude liability for misleading or deceptive conduct that has already occurred. In the discussion above in relation to “passing on” information, the High Court itself in Yorke v Lucas suggested that a disclaimer may be effective to make it clear that the “relayer” was merely passing on the information for what it was worth and was not assuming responsibility for it. Although clauses excluding liability for contravention of s 18 are not effective, in Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd [2018] VSC 246 the Victorian Supreme Court held that a contractual provision which had the effect of excluding liability for damages for misleading or deceptive conduct if the complainant failed to give a notice of the proposed claim within a prescribed time limit was unenforceable. Riordan J held that any attempt to restrict the operation of s 18 by limiting the time in which an action can be brought is an “unacceptable interference with the public policy underpinning the provisions”. Until an appellate court considers this issue it nevertheless remains unsettled in the NSW courts, have taken the view that such time limit clauses simply regulate but do not exclude the operation of s 18 and are therefore enforceable (see eg Lane Cove Council v Michael Davies & Associates [2012] NSWSC 727). 868
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Chapter 19 Misleading or Deceptive Conduct
Lezam Pty Ltd v Seabridge Pty Ltd [1992] FCA 206 [19.1250] Lezam v Seabridge provides an example of the “disclaimer” and “passing on information”
defences both failing. A lessee of commercial property sought damages from the lessor and the real estate agent involved in the transaction because it claimed it had been misled into thinking that the total floor area which was to be leased was greater than was in fact the case. The lease was stated to be “subject to survey” and the schedule to the lease included “at the bottom of each page in print which is quite small, but nevertheless, reasonably legible” the following disclaimer: Jones Lang Wootton for themselves and the lessors/vendors of this property whose agents they are, give notice that:
(i) The particulars are set out as a general outline only for the guidance of lessees/purchasers and do not constitute an offer or contract;
(ii) All descriptions, dimensions, references to conditions and necessary permissions for use and occupation and other details are given in good faith and are believed to be correct but any intending tenant/purchaser should not rely on them as statements or representations of fact but must satisfy themselves by inspection or otherwise as to the correctness of each of them;
(iii) No person in the employ of Jones Lang Wootton has any authority to make or give any representation or warranty whatsoever in relation to this property.
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The Full Federal Court held that the “subject to survey” qualification provided no defence to either the lessor or the real estate agent. Burchett J held (at [82]) that: A misrepresenter does not obliterate the effect of a misrepresentation clearly made, which induces an assent to proposed terms, by adding as the time of final agreement approaches, a qualification capable of conveying merely that the misrepresentation, the substance of which is not withdrawn, may not be accurate in every detail and may require some, possibly quite minor, qualification. In the present case … it is apparent that Mr Kent would have been unlikely to have regarded the bare words “subject to survey” as intended by Mr Glenny to cover any qualification at all …
The agent’s disclaimers in fine print were also ineffective. Burchett J stated (at [83]) that: A disclaimer or qualification will frequently have little or no effect on the impact of a misrepresentation. A man may tell a lie loudly, while murmuring the truth inaudibly, unconvincingly, or so blandly that it is unlikely to receive any hearing. Much the same may be true of a disclaimer which is inconspicuous, or very general, or apparently merely formal. This court has, on a number of occasions, rejected defences based on clauses of the present kind in actions for contraventions of s 52. Once misrepresentation has been shown, the statute prevails over a formal disclaimer. If such a clause is to be effective, it must be by enabling the conduct as a whole (including in it the provision to the complainant of the document containing the clause) to be seen as not misleading. In the present case, the misleading conduct complained of was not rendered blameless by the words in small print at the bottom of a page otherwise reiterating the misrepresentation … If it were permissible to avoid the operation of the Trade Practices Act by such a clause, it would be all too easy to make representations in the confidence that they would be acted upon, and then withdraw them in the confidence (equally important for the securing of the desired business) that the withdrawal would not be acted upon.
The agent’s argument that it was simply relaying information provided by another also failed. Sheppard J at 40,353 held that the agent had not simply adopted a “passive” role: Mr Glenny was an estate agent of substantial experience who handled the conduct of the negotiations on behalf of the Pongrasses. He made statements in clear terms, qualified though they were by reference to the survey, about the area of the premises and about numerous other matters which were of concern to Mr Kent. In those circumstances I think the correct view is that JLW, through its employee, Mr Glenny, was itself guilty of misleading or deceptive conduct.
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Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd [2005] FCAFC 131 [19.1260] A franchisee failed in an action for misleading conduct based on allegedly misleading
representations as to sales/profitability and site quality in connection with the acquisition of a Lenard’s franchise which was unsuccessful. Because the Full Federal Court concluded that there was no contravention of [s 18] of the TPA it was unnecessary for the question of reliance to be considered. The court nevertheless gave a clear indication that reliance on the representations necessary for an award of damages could not have been established. There were “repeated statements in the document that the applicants were to make their own investigations of the profitability of the site, and to their acknowledgements that they would do so”, [and] “to this may be added the applicants’ express acknowledgements in relation to the disclosure documents and in the Franchise Agreement that they did not rely on any representation made about the profitability of the franchise”. The court cited Keen Mar Corporation Pty Ltd v Labrador Park Shopping Centre Pty Ltd [1989] FCA 46, in which a well-drafted disclaimer, drawn to the attention of the contracting party and acknowledged in writing to have been made, was sufficient to negate reliance and commented that: Here the disclosure contained numerous exhortations to [the franchisee] to make their own investigations of the potential profitability of the franchise. There were also acknowledgments in the disclosure documents and the Franchise Agreement in the clearest terms that the applicant did not rely on any representations as to the turnover or profits of the franchise. The acknowledgments were more numerous than in Keen Mar and were in clear words.
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QUESTIONS 1.
Arguably, the most significant development in the metamorphosis of s 18 of the ACL from a residual consumer protection provision to a versatile instrument of commercial litigation has been its application to negotiations which lead to commercial contracts.
What advantages does a s 18 action offer over a common law action in contract or tort in respect of pre-contractual misrepresentation?
2.
“Like most general precepts framed in abstract terms, [s 18] affords little practical guidance to those who seek to arrange their activities so that they will not offend against its provisions”: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44 at [7]per Gibbs CJ.
Discuss this proposition.
3.
Answer the following questions about s 18:
i. Does s 18 impose liability in respect of “opinions” as well as statements of fact? ii. Is a person who merely relays or passes on misleading conduct from another source liable under s 18? iii. What effect do exclusion clauses, acknowledgements and disclaimers have in a s 18 action? 4.
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Belinda is interested in buying a Harry Hotdogs franchise (Harry’s) – a system with over 100 outlets in Victoria and NSW –and has had a series of meetings with Harry, the franchise system’s founder and CEO. Harry has indicated that an outlet being built in a new shopping centre in Geelong is available and this is of great interest to Belinda
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Chapter 19 Misleading or Deceptive Conduct
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as she has family in Geelong. Not surprisingly, Belinda is particularly interested in the suitability of the site and the likely profitability but Harry, who has been sued for misleading conduct in the past, is reluctant to get into this conversation. He explains to Belinda that the site is new and therefore unproven and that turnover and profitability representations are difficult as so much depends on the site, the demographic area, the personality and commitment of Belinda and a range of other factors.
When Belinda says: “Mate, you know a lot more about this business than I do and if you can’t give me some comfort I’m off”. Harry reluctantly provides some information. He passes on to Belinda some data as to traffic flow in the food court provided by centre management which suggests that the food court will be one of the busiest in Geelong and comments that: “These are a good set of numbers mate but they are not my figures. Still, I guess they know what they’re talking about”. He also provides Belinda with financial data from three other Harry’s franchised outlets about the same size which are located in shopping centre food courts and says in relation to them that: “These guys are making more money than me but there is no guarantee you will do as well. Talk to your accountant, talk to other franchisees, talk to your bank and make up your own mind. It’s a serious business and you have to be sure”.
Belinda undertook comprehensive “due diligence” before signing the contract. She spoke to a range of people and became aware of some scepticism as to the quality of the site and the centre and the likely profitability of the shop. But, she had always wanted to get into business and this seemed to her to be a good opportunity despite her concerns.
Sadly the business was not successful. The shopping centre did not perform well as the traffic flow was below expectations and the business was never profitable. (The financial information provided to Belinda by Harry related to shops of the same size but in established locations and with very charismatic operators.) Belinda is keen to pursue a misleading conduct action but Harry referred Belinda to the contract which contains a number of contractual provisions which his lawyer says will protect him legally. One clause states that Belinda warrants that she has not entered into the agreement on the basis of any representation made to her that has not been expressly included in writing in the agreement. Another clause states that Belinda acknowledges that she has relied on her own judgement and inquiries in entering into the contract and has not relied on any information provided by Harry.
Advise Belinda.
WEB REFERENCES Australian Competition and Consumer Commission http://www.accc.gov.au The Australian Consumer Law http://www.consumerlaw.gov.au Competition and Consumer Law Education Programs http://www.ccaeducationalprogram.org
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20
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20
Unconscionable Conduct and Unfair Contract Terms Andrew Terry THE BUSINESS CONTEXT Traditional principles of contract law preclude the court from inquiring into the fairness or reasonableness of a contract. The classical doctrines of freedom and sanctity of contract delivered certainty but, in a marketplace increasingly characterised by disparity in bargaining power and standard form contacts which are imposed rather than negotiated, they have allowed a stronger contractual party to exploit the vulnerability of the weaker party. Over the last three decades there have been, nevertheless, massive changes in this area of law. A range of statutory reforms –in particular the prohibition of unconscionable conduct and unfair contract terms in trade or commerce under the Australian Consumer Law –have been introduced to redress the balance. This chapter discusses the common law and statutory developments that provide an antidote to the abuse of superior bargaining power and their impact on the manner in which businesses negotiate contracts.
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20.1 FREEDOM FROM FREEDOM OF CONTRACT .................................................................................................. 874 [20.10]
The retreat from freedom of contract ...................................................................................................... 874
20.2 UNCONSCIONABLE CONDUCT: THE EQUITABLE DOCTRINE ................................................................ 878 [20.60]
The equitable doctrine of unconscionable conduct .............................................................................. 878
[20.80]
The special disability “limitation” ........................................................................................................... 880
[20.110]
Statutory recognition of the equitable doctrine .................................................................................... 881
[20.120]
The role of the equitable doctrine today ................................................................................................. 881
20.3 UNCONSCIONABLE CONDUCT: THE STATUTORY DOCTRINE ............................................................... 883 [20.150]
Statutory unconscionability ...................................................................................................................... 883
[20.170]
The statutory formula ................................................................................................................................. 884
[20.190]
The meaning of unconscionable conduct ............................................................................................... 886
[20.230]
Unconscionable conduct in the B2C context ......................................................................................... 889
[20.300]
Unconscionable conduct in the B2B context .......................................................................................... 891
20.4 UNFAIR TERMS IN CONSUMER AND SMALL BUSINESS CONTRACTS ................................................ 896 [20.390]
Unfair terms v unconscionable terms ..................................................................................................... 896
[20.420]
The UCT law ................................................................................................................................................. 898
[20.450]
Examples of unfair contract terms ........................................................................................................... 900
20.5 OTHER UNCONSCIONABILITY LAWS .............................................................................................................. 905 [20.520]
Contracts Review Act 1980 (NSW).............................................................................................................. 905
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20.6 INDUSTRY CODES ................................................................................................................................................... 909
20.1 FREEDOM FROM FREEDOM OF CONTRACT The retreat from freedom of contract There is nothing new in the suggestion that the law of contract is no longer as flexible or as useful in meeting the new demands made upon it. New economic policies of governments and more refined aspirations for social justice have destroyed laissez- faire as a political ideal. D Roebuck, “The Crisis of Contract” (1969) 3(2) University of Tasmania Law Review 191 at 191.
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[20.10] The principle of freedom of contract –that parties are free to make their own contract on their own terms –is one of the fundamental and underlying assumptions of the law of contract. The role of the courts is simply to interpret and give effect to agreement of the parties. Over recent years inroads have nevertheless been made into this principle in recognition that, in practice, standard form contracts that are not negotiated, and marked disparities in the bargaining power of the parties, provide little freedom for the weaker party to negotiate the terms of the agreement. Provisions in the Australian Consumer Law (ACL) prohibiting unfair terms in consumer and small business contracts, and unconscionable conduct in relation to business transactions whether business-to- consumer (B2C) or business-to-business (B2B), have recognised this reality and prohibit inappropriate conduct. To the uninitiated, the Victorian Law Reform Commission’s proposition in its 1992 Discussion Paper, An Australian Conduct Code, that unconscionability was the theme underlying and unifying a disparate body of contract law, may have seemed unremarkable. The
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms
basic proposition of the overriding Article, Art 27: –“A person may not assert a right or deny an obligation to the extent that it would be unconscionable to do so” –may nevertheless be thought to have much to commend it. To the traditionalist the proposition is radical, revolutionary and remarkable. Until recently one of the fundamental and underlying assumptions of the law of contract has been the principles of freedom and sanctity of contract –that, in the words of Sir George Jessell MR in Printing and Numerical Registering Co v Sampson (1875) LR 19 Eq 462 at 465:
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If there is one thing which more than another public policy requires it is that men of full age and competent understanding shall have the utmost liberty of contracting and that their contracts when entered into freely and voluntarily shall be held sacred and shall be enforced by the courts of justice. Therefore you have this paramount public policy to consider –that you are not lightly to interfere with freedom of contract.
The classical theory accepted that parties were free to make their own contract on their own terms (freedom of contract) and that the role of the courts was simply to interpret the contract and not to rewrite contracts to accord to some standard of fairness (sanctity of contract). The common law’s adoption of these principles simply reflected the prevailing laissez-faire philosophy and the realities of the unsophisticated market place of the nineteenth century: “Freedom of contract was the legal corollary to economic laissez-faire” (Schmitthoff, Commercial Law in a Changing Economic Climate (2nd ed, Sweet & Maxwell, 1981) p 18). An inevitable result of the increasingly sophisticated marketplace over the last century has been the increasing disparity in bargaining power between the players. Sir George Jessell’s declaration that “you are not lightly to interfere with this freedom of contract” is obviously questionable if its basic justification, that of equality of bargaining power, was no longer valid. The rise of standard form contracts imposed particular pressures on the traditional principles. In 1949 Lord Denning (Freedom under the Law (Stevens & Sons, 1949) p 69), an unashamedly liberal judge, declared, albeit not from the bench: Oh, what abuses were not covered by this catchword “freedom of contract”! It mattered not to the judges of that day that one party had the power to dictate the terms of a contract and the other had no alternative but to submit. If he had submitted to it, however unwillingly, he was bound.
IN CONTEXT
Standard form contracts [20.20] Standard form contracts are pre-prepared contracts typically offered on a “take it or leave it” basis by a party with greater bargaining power. Generally, a contract is considered to be standard form if one of the parties has not had the opportunity to negotiate or change the terms of the contract when agreeing to it … [S]tandard form contracts are widely used in Australia when businesses and consumers purchase goods and services …
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[T]here are a number of benefits of standard form contracts, as they save businesses time and resources, particularly for repeated transactions. Lower costs associated with using standard form contracts can enable businesses to offer more competitive pricing on goods and services than if individual terms were negotiated with each customer. However, there are a number of drawbacks associated with the use of standard form contracts, particularly that they are not negotiated, often one-sided and include terms that are embedded in fine print. Further, some consumers and businesses signing the contract may not have the resources or skills to fully understand the implications of the terms they are presented. These factors can provide an incentive for the inclusion of unfair terms. Australian Government, Decision Regulation Impact Statement, Extending unfair Contract Term Protections to Small Businesses (2015)
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By 1974, Lord Diplock in A Schroeder Music Publishing Co Ltd v Macaulay (1974) 1 WLR 1308 acknowledged that in order to assess the fairness of a bargain (in this case a contract between a music publisher and composer) the court had “to decide whether [one party] had used his superior bargaining power to exact from [the other] promises which were unfairly onerous to him”. Lord Diplock commented that: It is, in my view, salutary to acknowledge that in refusing to enforce provisions of a contract whereby one party agrees for the benefit of the other party to exploit or to refrain from exploiting his own earning power, the public policy which the courts are implementing is not some nineteenth-century economic theory about the benefit to the general public of freedom of trade, but the protection of those whose bargaining power is weak against being forced by those whose bargaining power is stronger to enter into bargains that are unconscionable. Profits and socially correct behaviour are, today, inextricably linked. Consumers, through the channels of the free market, have loudly affirmed that they will no longer tolerate unconscionable behaviour by the corporate community. Businesses will heed this message, or they will wither. A Felder, Fortune International (30 November 1992).
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The principles of freedom and sanctity of contract preclude the courts from undertaking a more general inquiry into the “fairness” or “reasonableness” of the contract. They have the practical advantage of delivering convenience and certainty. The principles of freedom and sanctity of contract have, nevertheless, never been absolute. Well-established principles of duress (see [6.10]) and undue influence (see [6.11]) have developed to relieve the vulnerable party from contractual obligations but target particular, limited and extreme examples of actual or perceived exploitation which will arise only in exceptional circumstances in commercial dealings. Over the last few decades the specific equitable “unconscionable dealings” doctrine has developed into a more general unconscionability principle. However, its influence in commercial dealings has been restricted by its requirement of the exploitation by one party of another’s “special disadvantage” in such a manner that the former could not in good conscience retain the benefit of the bargain. [20.30] It is widely accepted today that the traditional doctrines of freedom and sanctity of contract require modification in the context of consumer contracts. This proposition was implemented federally, by the Trade Practices Amendment Act 1986 (Cth) (and mirrored in State and Territory fair trading legislation) to free the concept of unconscionability in the context of consumer transactions (where goods or services are acquired for personal, domestic or household use) from the “special disability” limitations of the equitable doctrine of unconscionability and enact a more liberal unconscionability regime in
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms
which inequality of bargaining power is a key consideration. The widening of the scope of unconscionability remedies in the commercial context is, of course, more controversial but was nevertheless achieved by amendments to the Trade Practices Act 1974 (Cth) in 1998 which introduced small business unconscionability protection. [20.40] Today the general prohibition of unconscionable conduct is codified in the ACL. The former separate provisions addressing unconscionability in business and in consumer contexts has been replaced by a single provision prohibiting any unconscionable conduct in trade or commerce. The unconscionability law has been supplemented by ACL now rendering void unfair contract terms in consumer and small business contracts.
What is morality in any given time or place? It is what the majority then and there happen to like and immorality is what they dislike. Alfred North Whitehead.
IN CONTEXT
From “certain injustice” to “uncertain justice”
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[20.50] The statutory unconscionability jurisdiction is now well established and relatively
uncontroversial in relation to consumer and small business transactions. It is appropriate that considerations of “justice” override the demands of “certainty” that are compromised to some extent by unconscionability provisions. The extension of such protection to commercial transactions presents a more complex equation. The ramifications of court interference in the arrangements between two substantial commercial enterprises, well resourced and advised, dealing in a large commercial transaction were clearly identified by Kirby P in Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 at 585-586: [At] least in circumstances such as the present, courts should be careful to conserve relief so that they do not, in commercial matters, substitute lawyerly conscience for the hard-headed decisions of business people. If courts do not show caution here they will effectively force on commercial parties terms which the court may think to be reasonable and as ought commonly to govern such a contract but which the parties have themselves held back from concluding. Moreover, the contract then enforced will not be that which the parties have concurred in but a different one, determined by the court … The wellsprings of the conduct of commercial people are self-evidently important for the efficient operation of the economy. Their actions typically depend on self-interest and profit-making not conscience or fairness. In particular circumstances protection from unconscionable conduct will be entirely appropriate. But courts should, in my view, be wary lest they distort the relationships of substantial, well-advised corporations in commercial transactions by subjecting them to the overly tender consciences of judges. Such consciences, as the cases show, will typically be refined and sharpened by circumstances arising in quite different relationships where it is more apt to talk of conscience and to provide relief against offence to it. The potential impact of the extension of unconscionability laws to commercial transactions is immense. Freedom and sanctity of contract – for centuries the fundamental and underlying assumptions of the law of contract –are undermined and the shift from “certain injustice” to “uncertain justice” is (to adopt, out of context, the terminology of Justice Kirby: M Kirby, Judicial Method, Discretion and Policy, Boyer Lecture (1983) p 38) not universally
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applauded. There is concern that there has been the development of an atmosphere in which “anything can be challenged” and this concern is widely felt within the legal and business sectors (with the exception of those small businesses likely to be the beneficiaries of the legislative benevolence).
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Question: My question is, do you suffer from any specifically diagnosed medical condition like Alzheimer’s disease or anything that would specifically contribute to the hampering of your memory? Answer. Not that I can remember. B Tait, Court in the Act: Humorous Moments from Australian Courts (Federation Press, 1992).
20.2 UNCONSCIONABLE CONDUCT: THE EQUITABLE DOCTRINE The equitable doctrine of unconscionable conduct [20.60] The basis of equity’s intervention is the exploitation by one party of another’s special disadvantage in such a manner that the former could not in good conscience retain the benefit of the bargain. In the leading Australian decision, Commercial Bank of Australia Ltd v Amadio [1983] HCA 14, the High Court, in setting aside a guarantee, held that equity will intervene to grant relief from unconscionable conduct when: • one party is under a special disability; • the other party knew or ought to have known of that special disability; and • the conduct was, in the circumstances, not consistent with good conscience.
Commercial Bank of Australia Ltd v Amadio [1983] HCA 14
Case Study
Background
[20.70] The Amadio case clearly illustrates the efficacy of the judge-made law in granting relief from unconscionable conduct. The requirement of a “special disability” which the High Court emphasised required more than mere inequality in bargaining power nevertheless prevents it from becoming a principle of more general application and had led to statutory intervention laying down a more liberal statutory unconscionability doctrine. Facts Elderly migrants with poor English language skills executed a mortgage and guarantee in favour of a bank to secure an overdraft facility granted to their son’s building company. They believed that their son’s company was sound and that their liability was limited in terms of time and extent. The bank was aware of the true circumstances but did not recommend or provide the opportunity for them to obtain independent advice. The bank manager had not misled the couple as to the terms of the guarantee and their liability: indeed their signatures were procured by their son who acted as an adviser/explainer and in whom they had total reliance. Issue Could the mortgage guarantee be set aside on the basis of unconscionable dealing? 878
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms
Decision The High Court, by a majority, set aside the contracts. Wilson J summarised the reason for this finding as follows (at [3]): The learned trial judge found that if the respondents had been fully informed of the company’s financial predicament they would not have executed the document. That finding has not been challenged. Indeed, it could not be, having regard to the fact that the immediate effect of its execution was to render their assets liable to be substantially swallowed up in meeting existing liabilities of the company and without any real assurance of benefit to anyone but the bank. The circumstances required that the respondents be acquainted with the true financial position of the company and thereby enabled to make an informed decision. Having regard to the special circumstances surrounding the bank’s relationship to [the couple’s son], [the Bank Manager was obliged either to ensure that his parents understood what they were doing or to advise them to seek independent advice and allow them the opportunity to do so. He was not entitled to assume that the son would already have informed them adequately.
The judgments of the majority considered the operation of the equitable doctrine in some detail. Deane J said (at [13]): Unconscionable dealing looks to the conduct of the stronger in attempting to enforce, or retain the benefit of, a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that he should do so.
Gibbs CJ stated (at [18]) that: A transaction will be unconscientious within the meaning of the relevant equitable principles only if the party seeking to enforce the transaction has taken unfair advantage of his own superior bargaining power, or of the position of disadvantage in which the other party was placed.
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On the requirement of a “special disadvantage”, Mason J commented (at [6]) that: I qualify the word “disadvantage” by the adjective “special” in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasise that the disabling condition or circumstances is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstances and of its effect on the innocent party.
The guarantee was set aside, the court holding that the respondents were under a special disadvantage. Deane J held (at [18]) that: T]he result of the combination of their age, their limited grasp of written English, the circumstances in which the bank presented the document to them for their signature and, most importantly, their lack of knowledge and understanding of the contents of the document was that … they lacked assistance and advice where assistance and advice were plainly necessary if there were to be any reasonable degree of equality between themselves and the bank.
Implications In the words of Mason J (at [3]): Relief on the ground of unconscionable conduct will be granted when unconscientious advantage is taken of an innocent party whose will is overborne so that it is not independent and voluntary, just as it will be granted when such advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest.
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The special disability “limitation”
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… whenever one party … is at a special disadvantage … because of illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affecting his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity. Blomley v Ryan [1956] HCA 81 at [8] per Kitto J.
[20.80] It is the element of a “special disadvantage”, that has restrained the equitable doctrine from having a wider influence in a commercial context. The mere disparity of bargaining power that categorises many commercial relationships such as retail leases and franchising does not constitute a special disadvantage on the part of the weaker party sufficient to set up the prerequisite for the operation of the unconscionability doctrine. A further limitation of the equitable doctrine is that its focus is on “procedural” unconscionability rather than “substantive” unconscionability –on the circumstances under which the contract was negotiated rather than the merits of the contract. Consequently the equitable doctrine has been used primarily in cases of traditional special disadvantages such as those referred to by Fullagar J in Blomley v Ryan [1956] HCA 81 at [9] –“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”. (It reflects the changed social circumstances over the last 50 years that a person’s sex is unlikely to be regarded as a special disadvantage today.) The list of “special disadvantages” that can activate the equitable doctrine is nevertheless not closed. In Amadio Deane J noted (at [13]) that: The adverse circumstances which may constitute a special disability for the purposes of the principles relating to relief against unconscionable dealing may take a wide variety of forms and are not susceptible to being comprehensively catalogued.
Vital Finance Corporation Pty Ltd v Taylor [1991] ASC 56-099 [20.90] Smart J held that there was a “special disability” as the defendants were in severe financial need,
and were “slow-witted … simple people … with a restricted level of skill and understanding” who did not appreciate the need to obtain independent advice before entering into a mortgage of their home to secure payments under a lease of a truck. They were “like putty” in the hands of the finance company which knew they could not afford lease payments. The transaction was set aside as unconscionable.
Kakavas v Crown Melbourne Ltd [2013] HCA 25 [20.100] Kakavas had lost $20.5 million over a year playing baccarat at crown casino in Melbourne and claimed that Crown has engaged in conduct that was unconscionable under the equitable doctrine. The action failed – the High Court did not accept that Kakavas’ pathological interest in gambling was a special disadvantage that made him susceptible to exploitation by Crown (at [135]): He was able to make rational decisions to refrain from gambling altogether had he chosen to do so. He was certainly able to choose to refrain from gambling with Crown.
The High Court added that if, contrary to the findings of the primary judge, Kakavas did suffer from a psychological impairment the issue would be “whether, in all the circumstances of the relationship between the appellant and Crown, it was sufficiently evident to Crown that the appellant was so beset by that difficulty that
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms he was unable to make worthwhile decisions in his own interests while gambling at Crown’s casino”. The court held that Kakavas did not show that his gambling losses were the product of the exploitation of a disability, special to the appellant, which was evident to Crown (at [161]): Equitable intervention to deprive a party of the benefit of its bargain on the basis that it was procured by unfair exploitation of the weakness of the other party requires proof of a predatory state of mind. Heedlessness of, or indifference to, the best interests of the other party is not sufficient for this purpose. The principle is not engaged by mere inadvertence, or even indifference, to the circumstances of the other party to an arm’s length commercial transaction. Inadvertence, or influence, falls short of the victimisation or exploitation with which the principle is concerned.
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Statutory recognition of the equitable doctrine [20.110] The equitable doctrine of unconscionability has now been given statutory recognition in s 20 of the ACL which prohibits corporations in trade or commerce from “engag[ing] in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories”. Section 20 does not extend the equitable doctrine of unconscionability beyond its current limits: it remains limited by the “special disadvantage” requirement. The profile of unconscionability, however, in a commercial context has undoubtedly been raised through the potential involvement of the ACCC, the availability of statutory remedies including the possibility of representative actions and class actions, and the educative and deterrent effect of a legislative prohibition. Cases such as ACCC v Samton (see [20.320]), and ACCC v CG Berbatis Holdings Pty Ltd [2003] HCA 18 (see [20.330]) are examples of the effect of the statutory prohibition –the ACCC was able to bring actions that in the past could have been brought only by the person affected by the allegedly unconscionable conduct. Such actions are nevertheless unlikely today. Section 20(2) provides that s 20 “does not apply to conduct that is prohibited by s 21” –which today is a broad prohibition of all unconscionable conduct in a business context, which places only listed public companies beyond its application. B2C unconscionability and B2B unconscionability are within the scope of the statutory unconscionability doctrine under s 21 of the ACL and thus beyond the scope of the equitable doctrine under s 20.
The recognition of the inequality in the bargaining power of the contracting parties made it necessary for the legislator to enact legislation aimed at protecting the economically weaker. C M Schmitthof, Commercial Law in a Changing Economic Climate (Sweet & Maxwell, 1981).
The role of the equitable doctrine today [20.120] As noted above the equitable doctrine has little influence today in a business context. Unconscionable conduct in trade or commerce is beyond the scope of s 20 of the ACL: it is not considered under the equitable doctrine of unconscionability recognised in s 20 but under the statutory doctrine in s 21. The role for the equitable doctrine is limited to private, that is non-business, conduct beyond the scope of the ACL. The following cases involve conduct that is not in trade or commerce and is thus beyond the scope of s 20 but which can nevertheless be challenged under the equitable doctrine.
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There is always an easy solution to every human problem – neat, plausible and wrong. H L Mencken.
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Louth v Diprose [1992] HCA 61 [20.130] The litigation resulted from “a deep and persistent, albeit unrequited, emotional attachment
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of the plaintiff to the defendant, the plaintiff’s bizarre behaviour in pursuance of that attachment and the defendant’s response to that behavior”. A solicitor who was infatuated with, and emotionally dependent on, a woman for whom he had purchased a house to protect her from a threat of eviction later found to be false, succeeded in having the transfer of the house set aside under the equitable doctrine of unconscionability. The High Court held by majority that the applicant’s manipulation of the respondent to obtain a transaction to her own advantage, believing and intending his emotional dependence would lead him to act to his own detriment, constituted the exploitation of a special disadvantage which activated the equitable doctrine. Brennan J noted that the relationship between the parties was “so different in degree as to be different in kind from the ordinary relationship of a man courting a woman”. Deane J emphasised that mere infatuation of the time of making the gifts was not enough to establish a special disability (at [13]-[14], emphasis added, references omitted): On the findings of the learned trial judge in the present case, the relationship between the respondent and the appellant at the time of the impugned gift was plainly such that the respondent was under a special disability in dealing with the appellant. That special disability arose not merely from the respondent’s infatuation. It extended to the extraordinary vulnerability of the respondent in the false “atmosphere of crisis” in which he believed that the woman with whom he was “completely in love” and upon whom he was emotionally dependent was facing eviction from her home and suicide unless he provided the money for the purchase of the house. The appellant was aware of that special disability. Indeed, to a significant extent, she had deliberately created it. She manipulated it to her advantage to influence the respondent to make the gift of the money to purchase the house … … the learned trial judge’s conclusion that the appellant had been guilty of unconscionable conduct in procuring and retaining the gift … was not only open to him. In the context of his Honour’s findings of fact, it was inevitable and plainly correct. On those findings, the case was not simply one in which the respondent had, under the influence of his love for, or infatuation with, the appellant, made an imprudent gift in her favour. The case was one in which the appellant deliberately used that love or infatuation and her own deceit to create a situation in which she could unconscientiously manipulate the respondent to part with a large proportion of his property. The intervention of equity is not merely to relieve the plaintiff from the consequences of his own foolishness. It is to prevent his victimisation.
Mackintosh v Johnson [2013] VSCA 10 [20.140] This case involved facts not dissimilar to those in Louth v Diprose –an older man paying money and other benefits to a younger woman he was infatuated with. The Victorian Court of Appeal nevertheless distinguished Louth v Diprose (at [82]-[84]): The facts of this case are a long way from those in Louth v Diprose. Mr Johnson was a wealthy, successful businessman who, although infatuated with Ms Mackintosh, was not emotionally dependent upon her in the way the donor was in Louth v Diprose. He made payments to her which were well within his means in the hope of an enduring relationship with her. Having regard to his wealth, the payments were not of a size which permit any inference of emotional dependence, or inability to make decisions in his own interests. This is a case of mere folly by Mr Johnson. Louth v Diprose was an extreme case … This is not. The trial judge set the threshold for a finding of special disability too low. On his findings and reasoning, any person who becomes infatuated with another, and has “clouded judgment” as a result, is suffering from a special disability. That is not in accordance with principle.
882
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms Mr Johnson was not affected by a special disability at the time he made the payments to Ms Mackintosh. It is accordingly unnecessary to decide whether Ms Mackintosh exploited him and thus acted unconscionably. The judge found that Ms Mackintosh acted deceitfully, by concealing the true nature of her feelings for Mr Johnson from him. In our opinion, conduct of that kind would not, on its own, be sufficient to amount to exploitation of the kind required to establish a case based on unconscionable conduct. It is the stuff of ordinary human relationships.
20.3 UNCONSCIONABLE CONDUCT: THE STATUTORY DOCTRINE
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Statutory unconscionability [20.150] Section 21 of the ACL enacts a more liberal and versatile unconscionability regime freed from the special disadvantage limitations of the equitable doctrine. It prohibits –in straightforward and uncompromising terms –conduct in trade or commerce that is, “in all the circumstances, unreasonable”. The current statutory unconscionability provision developed from a more limited provision prohibiting unconscionable conduct in consumer transactions added to the Trade Practices Act 1974 (Cth) in 1986 (s 51AB). In 1998 the Act was again amended to prohibit unconscionability in business-to-business transactions (s 51AC). The current provision in the ACL does not discriminate between B2C unconscionability and B2B unconscionability –s 21 simply prohibits “unconscionable conduct”. Section 22 sets out a non-exclusive list of discretionary unconscionability criteria for all cases in place of the former separate lists containing different factors for B2C and B2B unconscionability. Equivalent provisions also exist in the Australian Securities and Investments Commission Act 2001 (Cth) which apply to transactions involving financial products and services (ss 12CB and 12CC). Criminal proceedings cannot be brought for unconscionable conduct (s 217) but civil remedies including injunctions (s 232), damages (s 236) and pecuniary penalties not exceeding $1.1 million for companies or $220,000 for individuals (s 224) which were in 2018 substantially increased to $10 million or three times the value obtained from the breach or up to 10% of the annual turnover of the company (or, for individuals a maximum of $500,000).
IN CONTEXT
Statutory unconscionability [20.160] On the issue of statutory unconscionability, a rationally based system of law
needs to set out the limits of acceptable commercial behaviour in order that persons can order their commercial affairs in advance. Such a system cannot depend on the personal approach of a judge, based upon his or her view of commercial morality. Worse still, if there
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The object of the common law is to solve difficulties and adjust relations in social and commercial life. It must meet, so for as it can, sets of fact abnormal as well as usual. It must grow with the development of the nation. It must face and deal with changing or novel circumstances. Unless it can do that it fails in its function and declines in its dignity and value. An expanding society demands an expanding common law. Prager v Blatspiel, Stamp & Heacock Ltd [1924] 1 KB 566 at 570 per McCardie J.
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is the perception that the judge makes the law in any individual case and then applies it retrospectively. Conscience is the inner voice that warns us that someone may be looking. H L Mencken, Sementiae (1920).
Commercial law must keep up with the development of commerce, and hard and fast rules may readily become out of date. As many contemporary judges have stated, commercial values, norms and community expectations evolve over time. Rigid rules (as distinct from general principles) are often unable to withstand the pressure of change. The European civil law codes recognise the need for general principles directed to commercial behaviour, although there is an attempt to strike a balance between specificity and generality. However, no legislator can predict every individual dispute situation, and must resort to legislating in a proactive manner … Similarly, in the context of determining the content of statutory unconscionable conduct … the task of a court is to make an evaluation of the facts and an ultimate determination by reference to a statutory standard of conduct, guided by the text and structure of the statute and its purpose. This task is a familiar one undertaken in the course of the judicial process. This approach is not to be seen as any particular judge imposing his or her perception of desirable social goals as the basis for his or her ultimate determination. Nor does this process involve the court in determining policy. The legislature has enacted the law in pursuit of the community standard or expectation of commercial behaviour, which the court then applies in any given factual scenario. Paciocco v ANZ [2015] FCAFC 50 at [402]-[403], [405]-[406] per Middleton J
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The statutory formula Section 21 ACL Conscience: the still small voice that makes you feel still smaller. James A Sanaker, Reader’s Digest.
[20.170] Unconscionable conduct in connection with goods or services 1)
A person must not, in trade or commerce, in connection with:
a) the supply or possible supply of goods or services to a person (other than a listed public company); or b) the acquisition or possible acquisition of goods or services from a person (other than a listed public company);
engage in conduct that is, in all the circumstances, unconscionable.
Section 21 of the ACL prohibits persons in trade or commerce from engaging in conduct that is in all the circumstances unconscionable whether in relation to the supply or possible supply of goods or services or the acquisition or possible acquisition. Listed public companies are currently not eligible for relief but the government is expected to introduce legislation in 2018 extending the protection against unconscionable conduct to publicly listed companies. Unconscionability is not defined but, in determining whether 884
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms
the conduct in a particular case is unconscionable in all the circumstances, the court may have regard to the non-exclusive list of discretionary unconscionability criteria laid down in s 22. The court is entitled to consider circumstances existing before the commencement of the section but it must not have regard to circumstances that were not reasonably foreseeable at the time to the alleged unconscionable conduct: s 21(3). A person is not to be taken to contravene the section merely by instituting legal proceedings or referring a dispute to arbitration: s 21(2). The section clarifies Parliament’s intention in relation to s 21 several matters –that it is not limited by the unwritten law relating to unconscionable conduct, and that it is capable of applying to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged, and that in considering whether conduct to which a contract relates is unconscionable, a court’s consideration of the contract may include consideration of: (i) the terms of the contract; and (ii) the manner in which and the extent of which the contract is carried out; and is not limited to consideration of the circumstances relating to formation of the contract (s 21(4)). [20.180] Section 22 of the ACL specifies the discretionary unconscionability criteria which a court may have regard to in determining whether conduct is unconscionable:
It is the words of the statute that ultimately govern, not the many subsequent judicial expositions of that meaning … by using other words. Weiss v The Queen (2005) 224 CLR 300 at 305.
• the relative strengths of the parties’ bargaining positions; • whether conditions not reasonably necessary for the protection of the legitimate interests of the stronger party were imposed;
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• whether the weaker party was able to understand relevant documents; • whether undue influence or pressure, or any unfair tactics, were used; • whether and on what terms equivalent goods or services could have been acquired from or supplied to other persons; • whether the stronger party’s conduct was consistent with its conduct in similar transactions; • the requirements of any applicable industry code; • the requirements of any other industry code if there was a reasonable belief that it would be complied with; • whether the stronger party unreasonably failed to advise of intended conduct that could have a detrimental affect; • if there is a contract: –the extent to which the stronger party was willing to negotiate contract terms; –the terms of the contract; –the conduct of the parties in complying with the terms; –any conduct in connection with the relationship engaged in after they entered the contract; –whether the stronger party has the right to unilaterally vary a contract term; and –the extent to which the parties acted in good faith.
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These factors are not exclusive –the court may have regard to other matters. No special weighting is given to any criterion and an individual matter cannot be regarded as a gateway to relief. They have a crucial influence on unconscionability but do not offer clear guidelines for the concept of unconscionabiliy and are intended to offer a “better prospect for establishing an efficacious doctrine of unconscionabiliy” than simply granting the court a discretion to set aside unconscionable contracts without providing any guidance as to what unconscionability entails.
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The meaning of unconscionable conduct
In 1883 Lord Bramwell confessed his ignorance of the issues which parliament had asked him to resolve by a statute controlling the fairness of commercial terms in a contract. “Here is a contract made by a fishmonger and a carrier of fish who know their business, and whether it is just and reasonable is to be settled by me who am neither fishmonger nor carrier, nor with any knowledge of their business …” Since then, the circumstances in which judges have been required to apply such vague values or criteria on subjects outside their experience have expanded dramatically. D Pannick, Judges (Oxford University Press, 1988).
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[20.190] Unconscionable conduct can be a difficult concept to understand. Certain conduct may be unconscionable if it is particularly harsh or oppressive. It may also be unconscionable where one party knowingly exploits the special disadvantage of another. It needs to be more than just hard commercial bargaining; it must be against conscience, as judged against the norms of society. The Australian courts have found transactions or dealings to be unconscionable when they are deliberate, involve serious misconduct or something clearly unfair and unreasonable. The ACL does not define unconscionable conduct, but it does include a number of principles to help consumers and businesses understand the type of conduct that is likely to be considered unconscionable. These principles are, as explained by the ACCC: • Unconscionable conduct under the ACL is not limited by historical judge-made law. Importantly, this means that it is not necessary to show that the weaker party suffered from a special disadvantage or disability that the stronger party took advantage of. • A system of conduct or pattern of behaviour may amount to unconscionable conduct even if the party complaining of it suffered no loss or damage or where no individual “victim” is identified. • Unconscionable conduct is not limited to situations where there is a contract. However, where there is a contract, the courts can consider not only how the contract was entered into (eg, whether excessive pressure was used in negotiations), but its terms and how –and to what extent –the contract was carried out.
Statutory unconscionability: General principles IN CONTEXT
Statutory unconscionability [20.200] (a)
The meaning of unconscionable for the purposes of [s 21] is not limited to the meaning of the word according to established principles of common law and equity …
(b)
The ordinary or dictionary meaning of unconscionable, which involves notions of serious misconduct or something which is clearly unfair or unreasonable, is picked up
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms
by the use of the word in [s 21]. When used in that section, the expression requires that the actions of the alleged contravenor show no regard for conscience, and be irreconcilable with what is right or reasonable. Inevitably the expression imports a pejorative moral judgment … and (c)
Normally, some moral fault or moral responsibility would be involved. This would not ordinarily be present if the critical actions are merely negligent. There would ordinarily need to be a deliberate (in the sense of intentional) act or at least a reckless act … The above statements of principle provide useful guidance as to the content of the concept of unconscionability or unconscionable when used in [s 21]. Of necessity, the authorities … do not prescribe a precise definition which would be able to be applied to every set of circumstances presented to the Court for consideration. The application of the meaning accorded to the concept will always be a matter of judgment in every case and will depend upon a careful consideration of the circumstances of each case.
ACCC v Allphones Retail Pty Ltd (No 2) [2009] FCA 17 at [113] per Foster J
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IN CONTEXT
Unconscionability and the normative standard of conscience [20.210] The task of the Court is the evaluation of the facts by reference to a normative
standard of conscience. That normative standard is permeated with accepted and acceptable community values. In some contexts, such values are contestable. Here, however, they can be seen to be honesty and fairness in the dealing with consumers. The content of those values is not solely governed by the legislature, but the legislature may illuminate, elaborate and develop those norms and values by the act of legislating, and thus standard setting. The existence of State legislation directed to elements of fairness is a fact to be taken into account. It assists the Court in appreciating some aspects of the publicly recognised content of fairness, without in any way constricting it. Values, norms and community expectations can develop and change over time. Customary morality develops “silently and unconsciously from one age to another”, shaping law and legal values: Cardozo, The Nature of the Judicial Process (Newhaven, Yale University Press, 1921) pp 104-105. These laws of the States and the operative provisions of the ACL reinforce the recognised societal values and expectations that consumers will be dealt with honestly, fairly and without deception or unfair pressure. These considerations are central to the evaluation of the facts by reference to the operative norm of required conscionable conduct.
It is a mistake to use highfaluting language when you advertise to uneducated people. I once used the word obsolete in a headline only to discover that 43 per cent of the housewives had no idea of what it meant. In another headline, I used the word ineffable, only to discover that I didn’t know what it meant myself. D Ogilvy, Confessions of an Advertising Man (1963).
ACCC v Lux Distributors Pty Ltd [2013] FCAFC 90 at [23] per (Allsop CJ, Jacobson and Gordon JJ)
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IN CONTEXT Unconscionability is not found in matters of nicety or uncouthness of language but in the ends to which that language is deployed. ACCC v Seal-a-Fridge [2010] FCA 525 at [151] per Logan J. Looking at the Ten Commandments, it is worthy of note that only about three and a half are embodied in the criminal law. Sir John Wolfenden, Sydney Morning Herald (2 July 1960).
Unconscionability and moral obloquy [20.220] In Attorney- General (New South Wales) v World Best Holdings Ltd [2005]
NSWCA 261 Spigelman CJ used this “quaint and unusual” phrase “moral obloquy” to describe what was required to constitute unconscionable conduct. The comment has been made that: “Lawyers have ever since been trying to understand what that expression means (and be certain as to its spelling) and whether it is a touchstone of unconscionability”. (Michael Wise) Despite criticism of the expression it has been regularly cited although it is likely to be headed to legal oblivion in light of the criticism of Beazley P in Ipstar Australia Pty Ltd v APS Satellite Pty Ltd [2018] NSWCA 15 at [278]: “Moral” is a notoriously imprecise adjective… When combined with “obloquy”, which is scarcely a word in common parlance, the imprecision is heightened. To insist on the presence of a “high level” of such an imprecise quality does not, in my respectful opinion, assist in the task of giving legal meaning to unconscionable in … the Australian Consumer Law. But even if the epithet were less imprecise, there would be no warrant to construe [statutory unconscionability] as being subject to some threshold requirement. Instead the statutory language falls to be applied in terms. More guidance to the proper approach to the evaluative statutory standard of unconscionability was given by Allsop CJ in Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50 at [262]:
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It is … necessary to say something as to the relative standards or norms of unconscionability, unfairness and unjustness and the care needed in the use of other language to explicate those standards. In particular, the phrases “moral obloquy” and a “high level of moral obloquy” have been used to identify a feature of unconscionability … It is important to recognise that Spigelman CJ in World Best was using the phrase in a way to differentiate the moral or normative standard in unconscionability as higher than in unfairness or unjustness. At [121] of World Best, the Chief Justice said: The Ministerial Second Reading speech, … indicates a similar concern to distinguish what is unconscionable from what is merely unfair or unjust. Even if the concept of unconscionability … is not confined by equitable doctrine… restraint in decision-making remains appropriate. Unconscionability is a concept which requires a high level of moral obloquy. If it were to be applied as if it were equivalent to what was “fair” or “just”, it could transform commercial relationships in a manner which the Minister expressly stated was not the intention of the legislation. The principle of “unconscionability” would not be a doctrine of occasional application, when the circumstances are highly unethical, it would be transformed into the first and easiest port of call when any dispute about a retail lease arises. That a degree of morality lies within the word “unconscionable” is clear. “Unconscionability” is a value-laden concept. “Obloquy” is “the condition of being spoken against; bad repute; reproach; disgrace; a cause of detraction or reproach,”; “obliquity” is “a deviation from moral rectitude, sound thinking or right practice; a delinquency; a fault or error.” … That unconscionability contains an element of deviation from rectitude or right practice or of delinquency can be readily accepted, as long as
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms the phrase “moral obloquy” is not taken to import into unconscionability a necessary conception of dishonesty. The statutory language is “unconscionable”: that is, against conscience. A sense of moral obloquy or moral obliquity can be accommodated within the meaning or conception of unconscientious or unconscionable conduct. That said, an understanding of the meaning conveyed by the word “unconscionable” in the statute is not simply restated by substituting other words for those chosen by Parliament; danger easily lurks in the use of other words to capture the meaning of the statutory language. The task involved is not the choice of synonyms; rather, it is to identify and apply the values and norms that Parliament must be taken to have considered relevant to the assessment of unconscionability: being the values and norms from the text and structure of the Act, and from the context of the provision.
Unconscionable conduct in the B2C context
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ACCC v Acquire Learning & Careers Pty Ltd [2017] FCA 602
Case Study
[20.230] A pecuniary penalty of $4.5 million was imposed on Acquire – which received a fee from vocational education course providers for students recruited through aggressive telemarketing for making false or misleading representations, engaging in unconscionable conduct and breaching the unsolicited consumer agreement provisions of the ACL. In relation to unconscionable conduct it was held that Acquire, by the conduct of its Career Advisers, engaged in conduct that was unconscionable through the use of unfair tactics, undue pressure and false or misleading representations, in circumstances where Acquire: (i)
falsely represented during the telephone call that the primary or only purpose of the telephone call was for Acquire to find employment for the Job Applicant; (ii) stated that Acquire had an opportunity for the Job Applicant relating to potential employment; (iii) stated that placement in the course had been organised for him or her; (iv) stated that the Job Applicant had been “chosen” to participate in the course; (v) falsely represented that the education course would enable the Job Applicant to find employment in “any industry”; (vi) in one instance, encouraged and assisted the Job Applicant to withdraw from a competitor’s course for the purpose of enrolling him in a course offered through Acquire, without having a reasonable basis for doing so; (vii) told the Job Applicant that it was necessary to complete the enrolment process during the telephone call; (viii) directed the Job Applicant to complete the online application process and submit a request for VET FEE-HELP assistance during the telephone call without providing the Job Applicant with sufficient opportunity to consider the appropriateness of and relevant information about the course and about such assistance; (ix) suggested that Acquire was affiliated with the government; (x) did not adequately disclose the circumstances in which the Job Applicant would incur a Debt to the Commonwealth through enrolling in a VET FEE-HELP assisted course provided by a Client of Acquire; and
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(xi)
did not ascertain whether the Job Applicant understood the nature of his or her obligations under the VET FEE-HELP scheme.
In some instances it was held that Acquire’s conduct was particularly egregious because it was aware that applicants had difficulty speaking and reading English, and had learning disabilities. The career advisers nevertheless procured the job applicants’s enrolment in VET FEE-HELP assisted courses provided by one of Acquire’s Clients, usually a management course. Murphy J stated that, “In my view it is unlikely that these job applicants would have been able to complete the relevant course and, if they did, it is unlikely that it would have resulted in them obtaining such employment.”
ACCC v Craftmatic Pty Ltd [2009] FCA 972 [20.240] Craftmatic was found to have used misleading and unfair sales tactics to sell beds to elderly
people during the course of home presentations. Craftmatic’s sales and promotional methods were designed, scripted and conducted to unduly influence potential consumers and to create and take advantage of an unequal bargaining position and as a result its conduct was unconscionable.
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ACCC v Keshow [2005] FCA 558 [20.250] The court held that a marketer’s “way of operating”, when selling educational materials to indigenous people was unconscionable. The marketer’s “way of operating” included failing to offer consumers a written record of the contracts they entered into, which involved automatic and indefinite bank account deductions and other conditions which were not reasonably necessary to protect his legitimate business interests. The marketer was also aware of his consumers’ relative poverty, cultural differences and differing ability to communicate in English but did not notify the consumers about the excessive payments or that he would hold onto those payments until the educational materials had been delivered. He also failed to tell consumers how to stop the automatic payments.
Collings v HF Stevenson (Aust) Pty Ltd [1991] ATPR 41-104 [20.260] It was held that an indeterminate agency clause submerged in the fine print of an exclusive sole agency agreement was unconscionable. Nathan J stated that “It is unconscionable to embed in a pro forma contract, a term inconsistent with its stated purpose”.
ACCC v Capalabo Pty Ltd [2004] ATPR 41-976 [20.270] The Federal Court declared that Esanda had acted unconscionably and had used undue harass-
ment when debt collectors and tow truck operators entered a customer’s home and pinned him to the floor while they repossessed his car.
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms
ACCC v Lux Distributors Pty Ltd [2013] FCAFC 90 [20.280] The ACCC instituted proceedings alleging that Lux had engaged in unconscionable conduct when
selling vacuum cleaners to three elderly women. The sales occurred after a Lux sales representative called on the women in their homes under the premise of a free vacuum cleaner maintenance check, but with the purpose of selling a vacuum cleaner. The women were then subjected to unfair sales tactics, and pressed into purchasing a vacuum cleaner. Although the sales representatives had complied with the laws relating to door- to-door selling, their conduct was held to be unconscionable. In the later penalty proceeding Lux was ordered to pay pecuniary penalties of $370,000 for engaging in unconscionable conduct. In relation to the meaning of unconscionability the court held (at [41]) that: The word “unconscionability” means something not done in good conscience … Notions of moral tainting have been said to be relevant, as often they no doubt are, as long as one recognises that it is conduct against conscience by reference to the norms of society that is in question. The statutory norm is one which must be understood and applied in the context in which the circumstances arise. The context here is consumer protection directed at the requirements of honest and fair conduct free of deception. Notions of justice and fairness are central, as are vulnerability, advantage and honesty.
ACCC v Unique International Colleges [2017] FCA 727
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[20.290] The Federal Court held that Unique – a vocational education provider – had engaged in systemic
unconscionable conduct through targeted disadvantaged consumers by offering gifts of laptops, providing financial incentives to its sales representatives and holding sign-up meetings to enrol students. The use of gifts of laptops or iPads to enrolling students and holding introductory sessions known as sign-up meetings by themselves would not necessarily be unconscionable with the correct student cohort and management practices. But, when these practices are deployed against a targeted group of disadvantaged persons very different issues arise: The effect of the system was to supercharge the exploitation of the disadvantaged group which was being targeted (and also Unique’s remarkable profits). The system was unconscionable within the meaning of s 21.
Unconscionable conduct in the B2B context ACCC v Simply No-Knead (Franchising) Pty Ltd [2000] FCA 1365
Case Study
Background
[20.300] The Simply No-Knead case provided the first opportunity for the Federal Court to consider
the application of the new business unconscionability provision of s 51AC of the Trade Practices Act 1974 (Cth) (now s 21 ACL). Facts SNK was a franchisor that had signed up a number of small-business franchisees. The business involved bread making and related products. The operation of the franchise depended on the supply
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of products from the franchisor and group advertising for the franchise as a whole. A series of disputes developed between the franchisor and franchisees. The delegation of unconscionable conduct was based on the following conduct: • refusing to deliver franchise system products to franchisees; • refusing to negotiate with franchisees and to discuss matters of concern to franchisees; • deleting franchisees’ telephone numbers from Telstra’s 013 Telephone Directory Assistance Service without the consent or the knowledge of the franchisees; • producing and distributing advertising and promotional material which omitted the names of the franchisees and their franchised businesses; • selling and offering to sell its products in the territories of the franchisees and in areas proximate to their territories; and • refusing to provide current disclosure documents to franchisees in response to written requests. Issue The issue for Sunberg J was simply whether the franchisor’s conduct was “in all the circumstances, unconscionable” under s 51AC. Decision Sunberg J held that having regard to the discretionary unconscionability criteria and the circumstances of the case, the franchisor’s behaviour disclosed:
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an overwhelming case of unreasonable, unfair, bullying and thuggish behaviour in relation to each franchisee that amounts to unconscionable conduct by SNK for the purposes of s 51AC(1): (at [51]).
Implications Sunberg J held that statutory unconscionability under s 51AC was not confined by the equitable doctrine. The franchisor’s conduct in this case would not have been unconscionable within the traditional equitable unconscionability doctrine. The franchisees, although in a disadvantaged position, were not suffering from a “special disability” of the type demanded by equity (s 51AA). In relation to the question of whether the franchisor’s conduct should be categorised as “unconscionable”, Sunberg J expressly noted that “the Court is aided but not controlled by the [discretionary unconscionability factors]”. His Honour nevertheless carefully linked the franchisor’s conduct to the individual criteria (imposition of undue pressure and unfair tactics, a failure to negotiate, a lack of good faith and the failure to comply with an applicable industry code of conduct). The unconscionability factors clearly provided a significant checklist against which businesses should audit their conduct. The question nevertheless remains unanswered, given that there is no statutory definition of unconscionability, as to how serious the misconduct has to be to fall within the description “unconscionable”.
Automasters Australia Pty Ltd v Bruness Pty Ltd [2002] WASC 286 [20.310] Disputes that developed in an automotive servicing franchise system. The franchisor alleged that the franchisee had breached the franchise agreement, and obtained a temporary injunction preventing the franchisee from using the business name and trademarks. 892
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms When the franchisor sought a permanent injunction and damages for breach of contract, the franchisee filed a counter claim alleging that the franchisor had breached the good faith provision in the agreement and engaged in unconscionable conduct. The court found that the franchisor: • terminated the franchise agreement on the basis of information it was not sufficiently certain of; • proceeded to terminate the franchise immediately in spite of an independent quality assessment recommending otherwise; • withheld details of an independent quality assessment report that were favourable to the franchisee; • failed to comply with a term of the agreement requiring the franchisor to act in good faith; was motivated by irrelevant matters in seeking to terminate the franchise; • purported to terminate the franchise over an amount of money that “could not be said to impact on the (franchisor’s) legitimate commercial interests”; • failed to attend mediation, in breach of the Franchising Code of Conduct. The court found that the franchisor was determined to find fault in the way the franchisee’s business was being managed. It found that the franchisor was “not really interested in explanations and attempts to sort out matters … but was looking for an opportunity to bring the Franchise Agreement to an end”. The court found that the franchisor had engaged in conduct that was “serious, unfair and oppressive and showed no regard for conscience”. The court declared that the franchisor had engaged in unconscionable conduct in breach of s 51AC of the Trade Practices Act, and had breached the Franchising Code of Conduct. The Court declared that the franchise was not terminated and awarded damages to the franchisee. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
ACCC, Guide to Unconscionable Conduct (2004), p 13
ACCC v Samton Holdings Pty Ltd [2002] FCAFC 4 [20.320] A small-business tenant purchased a business in early 1997 with a three-month lease of
the business premises, with an option for a further seven- year term. Under the terms of the lease, the tenant was required to notify the landlords of his intent to exercise the extension option shortly after the purchase of the business. The tenant failed to formally notify the landlords of his intent to exercise the option until after the required date. Following the failure of the tenant to exercise the option on time, the tenant was required to pay $70,000 to secure the extension. The ACCC alleged that the landlord was aware that the tenant wished to continue trading in the long term before the option expired, and that imposing the condition upon renewal of the lease was unconscionable under the equitable doctrine. The trial judge held that the tenant was in a situation of special disadvantage and that the landlord knew of that special disadvantage. Carr J held that the landlord adopted an avaricious, opportunistic approach and struck a hard bargain, but decided that the landlord’s conduct “fell short, but not far short, of being the sort of conduct which equity would regard as unconscionable”. The Full Federal Court dismissed the ACCC’s appeal. The court accepted that the tenant was at a serious disadvantage “They had very little bargaining power. As a practical matter, they were not in a position to make any decision other than to pay the price demanded by the respondents”. However, the court held that this disadvantage was not a “special disadvantage” for the purposes of the equitable doctrine (at [64]-[66]):
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Business and the Law The disadvantage … had arisen from a combination of considered commercial judgment (the decision to borrow heavily in order to purchase the business) and [the tenant’s] oversight in neglecting to exercise the option in good time. These factors did not impair the [tenant’s] ability to make a decision about the best course of action in the circumstances. At least in the case of an experienced business person there must, in our opinion, be something more than commercial vulnerability (however extreme) to elevate disadvantage into special disadvantage. Characterisation of disadvantage as “special” involves the recognition that it would be unconscionable knowingly to deal with the person so affected without regard to his or her disability, be it constitutional, in the sense of inherent, or situational, in the sense of arising from a particular set of circumstances. In effect this may require some special conduct or care which is not necessary in the absence of such disadvantage. If, for example the disability relates to language, illiteracy or lack of education, conscientious dealing may ensure the bargaining deficit is compensated for by the provision of special assistance such as independent advice which will ether enable a proper understanding of the transaction or overcome the disadvantage arising from want of a proper understanding. … The [tenant’s] situation could not be characterised as one of special disadvantage only because the respondents failed to make an offer that they had no obligation to make. It cannot be the case that any tenant whose careless failure to exercise an option to renew a lease results in economic disadvantage would be entitled to a renewal of the term.
It should be noted that this case was brought under the predecessor of the current s 20 ACL which enables the ACCC to prosecute an equitable unconscionability case. Today it would be brought under the more liberal statutory unconscionability law of s 21 ACL which frees unconscionability from the “special disability requirement as s 20(2) provides that s 20 does not apply to conduct that is prohibited by s 21”.
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ACCC v CG Berbatis Holdings Pty Ltd [2003] HCA 18 [20.330] A tenant in a shopping mall who had operated a fish and chip business commenced proceedings against the lessor in relation to changes in the lease in the WA Commercial Tribunal. As a condition of granting a new lease and approving its assignment to prospective purchasers of the business the lessor required the tenant to withdraw the legal proceedings and sign a release clause. Without a new lease it would have been impossible to sell the business. The action was brought by the ACCC under the predecessor of s 20 of the ACL. The action was unsuccessful as the majority of the High Court held that the “special disadvantage” requirement of the equitable doctrine was not satisfied – mere inequality of bargaining power did not of itself establish “special disadvantage”: it did not impair their ability to make judgements in their own interests. Today the action would be brought under s 21. The “special disadvantage” requirement is no longer relevant but the determination of unconscionability is still a finely balanced inquiry. In Berbatis the High Court held, by majority, that the lessor’s conduct was not unconscionable. Gleeson CJ noted (at [16]) that: Parties to commercial negotiations frequently use their bargaining power to “extract” concessions from other parties. That is the stuff of ordinary commercial dealing. What is relevant to commercial negotiation is whatever one party to the negotiation chooses to make relevant. And it is far from self-evident that when a landlord is considering a tenant’s request to renew a lease, the existence of disputes between the parties about the current lease is commercially irrelevant to a decision as to whether, and on what terms, the landlord will agree to the request.
The majority pointed out that withdrawing the Commercial Tribunal action against the lessor would involve far less financial cost than not being able to renegotiate a new lease. Callinan J commented (at [173]) that: [The tenants] had a choice. It was a commercial choice with respect to which they had to make, and did make a judgment. Which was worth more, either in money or certainty: the pursuit of litigation which might or might not
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms involve an appeal, and the quantum of which could be (and did turn out to be) a few thousand dollars only; or a new lease which the respondent owners could not be obliged to grant, but which, if granted, would enable a prompt sale for tens of thousands of dollars to be effected? … The evidence shows in fact that the respondent owners too had a choice to make between competing commercial considerations of, for example, keeping [the tenants], or obtaining another responsible tenant, preserving their public image as non-oppressive landlords, fostering the goodwill of their tenants generally, and ridding themselves of irritating and no doubt expensive litigation when the opportunity to do so arose. The choice they too made was a commercial one. They used an entirely unexceptional and unexceptionable right that they had to grant or withhold a new lease upon a condition that enabled them to rid themselves of troublesome litigation.
ACCC v Dukemaster Pty Ltd [2009] FCA 682 [20.340] A landlord sought unreasonable rent for the renewal of a shop lease (which it represented as below
market value) and required a very short time frame for its tenants to respond to the proposed rental offer. The landlord’s conduct involved small business owners who had little or no ability to speak or read English and the landlord was aware of this. The landlord also failed to comply on an ongoing basis with Victorian retail leasing legislation and it threatened to evict or send letters of demand to certain tenants. The landlord’s conduct was unconscionable because its actions were deliberate (or at least reckless), showed no regard for conscience and were irreconcilable with what was right or reasonable.
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ACCC v Seal-A-Fridge Pty Ltd [2010] FCA 525 [20.350] A franchisor demanded and obtained from some of its franchisees a 50% weekly fee increase for access to a national telephone number those franchisees relied upon to receive consumer inquiries and work. The franchisor disconnected some of the franchisees from the telephone number when they failed to pay the full fee increase and it also required existing franchisees to vary their franchise agreements to include the fee increase.
The court found that the franchisor abused its position of strength and engaged in conduct that involved misstatements, non-disclosure of information, threats and intimidation. The court also found that the conduct amounted to unilateral profit gouging and all the elements together, demonstrated that the franchisor’s conduct was unconscionable.
ACCC v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405 [20.360] The ACCC instituted proceedings against Coles alleging unconscionable conduct through tak-
ing advantage of its superior bargaining position by obtaining money from suppliers that it was not lawfully entitled to. Coles accepted that, in broad terms, its conduct did not have a legitimate commercial basis, was inconsistent with acceptable business practice and took place in circumstances where Coles had substantial bargaining power and, by its conduct, took advantage of that bargaining position. It settled the case agreeing to pay a $10 million penalty and giving a court enforacble undertaking to appoint a former premier of Victoria, Jeff Kennett to resolve supplier disputes with Coles to achieve quicker and fairer resolutions.
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ACCC v Woolworths Limited [2017] FCA 1472 [20.370] The ACCC’s action against Woolworths alleging unconscionable conduct in contravention of s 21
was based on the design and implementation of a “mind the gap” scheme under which payments were sought from suppliers to make upon expected shortfall in Woolworths’ profit. But this scheme, which was similar to that held to be unconscionable in the Coles case, was held not to be unconscionable in the Woolworths case. There were key differences in the Woolworths case: • the ACCC alleged that Woolworths acted unconscionably in the design and implementation of the Scheme, rather than in respect to its dealings with particular suppliers • unlike Coles, Woolworths denied any wrongdoing and defended the matter through the trial • the ACCC did not call any supplier affected by the Scheme and ran the case on the basis of documentary evidence. Woolworths successfully defended the ACCC’s allegations largely because it was able to show that such requests are part of the ordinary course of business in the supermarket market and in dealings between suppliers and retailers. In addition to convincing the Court that its conduct was ‘business as usual’, Woolworths was able to show that its approach to, and methodology for, the Scheme was reasonable and considered. Woolworths’ successful defence was based on arguments that (per Yates J):
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It may be that some would see Woolworths’ conduct in making “asks” and seeking “payments” as unjustified, unfair or unjust according to their own standards of commercial propriety. This, however, is not the proscriptive standard that s 21(1) of the ACL imposes. I accept Woolworths’ submission that a party’s “legitimate interests” will extend to include its interest in pursuing its lawful business in a profitable way and in a manner that minimizes its costs.
I owe so much; the rest I leave to the poor. Francois Rabelais.
20.4 UNFAIR TERMS IN CONSUMER AND SMALL BUSINESS CONTRACTS Unfair terms v unconscionable terms [20.390] Although Australian consumers have been protected from unconscionable conduct under the provisions now enshrined in the ACL since 1986 –they have nevertheless been vulnerable to unfair contract terms. The unconscionability laws have not been spectacularly successful in protecting consumers in relation to contract terms. “Unconscionability has a ‘higher moral threshold’ than ‘unfairness’ ” (Paciocco v ANZ Banking Group Ltd [2015] FCAFC 50 at [356] per Allsop CJ). The standard of unconscionability is conduct which is so unreasonable that it goes against good conscience –such that the typical case alleging unfairness falls outside the prohibition. To remedy this, the new provision protecting consumers from unfair terms in standard form contracts has been included in the ACL (Pt 2.3 Unfair Contract Terms) and, for financial products or services, in the Australian Securities and Investments Commission Act 2001 (Cth) (Part 2, Div 2 Subdiv BA) referred to as the Unfair Contract Terms Law (UCTL). The unfair term is void, but because the making of unfair contracts is not prohibited no penalties can be imposed.
Rights matter most when they are claimed by unpopular minorities.
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms
Since 12 November 2016 the UCTL has been extended to small business B2B contracts –a logical extension as small businesses, like consumers, are vulnerable to the inclusion of unfair terms in standard form contracts: [S]mall businesses, like consumers, are vulnerable to the inclusion of unfair terms in standard form contracts. Like consumers, they can lack the time and legal or technical expertise to understand or critically analyse such contracts and the bargaining power to negotiate terms. Compared to larger businesses, small businesses often have a more limited capacity to manage certain risks when transferred to them by the other party …
Regulation Impact StatementA small business contract is a standard form contract where at least one of the parties employs less than 20 people, and where the upfront price of the contract does not exceed $300,000 or $1 million for contracts longer than 12 months. The model for Pt 2-3 of the ACL was Pt 2B of the Fair Trading Act 1999 (Vic) (now repealed). Victoria was the only jurisdiction in Australia with specific legislation protecting consumers against unfair terms in consumer contracts. The efficacy of the Victorian provision is clearly illustrated by comparing the outcome of cases in 2008 with similar facts involving gym memberships in NSW which at the time had no UCTL and Victoria which did.
In truth, there was no lack of ability on their part to make a judgment about anything. Rather there was a lack of ability to get their own way. That is a disability that affects people in many circumstances in commerce, and in life. It is not one against which the law ordinarily provides relief. ACCC v CG Berbatis Holdings Pty Ltd [2003] HCA 18 per Gleeson CJ.
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[20.400] The NSW decision in the Fitness First case clearly demonstrates that NSW consumers who did
not have the protection of unfair contract terms legislation were more vulnerable than Victorian consumers. The Consumer, Trade and Tenancy Tribunal of NSW had relieved Ms Chong from a contractual obligation to pay a $200 cancellation fee when she cancelled her gym membership because of poor health. The Tribunal member had stated (at [19]) that: I am satisfied that the applicant was instructed to sign here, here and here as outlined in her evidence and that at no time did she read the terms and conditions nor have them fully explained before signing the contract. A valid contract requires that the parties have the requisitive consensus ad idem (meeting of the minds) in that they each fully know and understand the terms and conditions of their agreement. I am satisfied that this applicant did know this. Accordingly, I declare that fee of $200 is not due and owing by the applicant to the respondent.
The Supreme Court upheld Fitness First’s appeal. The Court noted that the contract, membership terms and conditions and the notice of termination all stipulate that if a member terminates a 12-month membership, he or she is liable to pay a fee of $200 and that the application form and the notice of termination were signed by both parties. The Court (at [21]) cited the High Court in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52: The general rule which applies in the present case, is that where there is no suggested vitiating element, and no claim for equitable or statutory relief, a person who signs a document which is known by that person to contain contractual terms, and to affect legal relations, is bound by those terms, and it is immaterial that the person has not read the document.
The Court concluded that Ms Chong was bound by the conditions of the contracts and that the Tribunal erred in law when stating that a valid contract requires that the parties have the requisitive consensus ad idem in that each fully knows and understands the terms of their agreement.
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Director of Consumer Affairs Victoria v Craig Langley Pty Ltd & Matrix Pilates and Yoga Pty Ltd [2008] VCAT 482 [20.410] A standard form gym membership contract contained a number of terms including: • the gym membership was non cancellable and non refundable; • the gym could automatically debit funds from members’ bank accounts if they failed to make payments by due dates; • the gym could continue to receive monthly payments even after the expiry of the contract term, unless 30 days notice was given by the member; • the gym was released and indemnified from any negligence or breach of contract; and • if the customer wished to cancel their membership due to medical reasons or relocation, a cancellation fee of 50% of the outstanding balance was payable.
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Judge Harbison held that those terms were unfair and void under the unfair contract terms provisions of the Fair Trading Act 1999 (Vic). Her Honour expressly referred (at [44]) to the words of the Minister for Consumer Affairs in introducting Pt 2B – the legislation “will enable the government to step in where consumers sign take it or leave it contracts, not necessarily because of misleading, deceptive or unconscionable conduct by the trader, but which nevertheless contains terms that tip the balance unfairly and disproportionately in favour of the trader”.
The UCT law Basic research is what I’m doing when I don’t know what I’m doing. Wernher Von Braun.
[20.420] The UCTL is based on the now repealed provisions of the Fair Trading Act 1999 (Vic). The operative provisions of the UCTL as enshrined in the ACL are: 23 Unfair terms of consumer contracts and small business contracts (1) A term of a consumer contract or small business contract is void if: (a) the term is unfair; and (b) the contract is a standard form contract. (2) The contract continues to bind the parties if it is capable of operating without the unfair term. (3) A consumer contract is a contract for: (a) a supply of goods or services; or (b) a sale or grant of an interest in land; to an individual whose acquisition of the goods, services or interest is wholly or predominantly for personal, domestic or household use or consumption. (4) A contract is a small business contract if: (a) the contract is for a supply of goods or services, or a sale or grant of an interest in land; and (b) at the time the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms (c) either of the following applies: (i) the upfront price payable under the contract does not exceed $300,000; (ii) the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000. (5) In counting the persons employed by a business for the purposes of paragraph (4)(b), a casual employee is not to be counted unless he or she is employed by the business on a regular and systematic basis. 24 Meaning of unfair (1) A term of a consumer contract or small business 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. (2) In determining whether a term of a 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;
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(b) the contract as a whole. (3) A term is transparent if the term is: (a) expressed in reasonably plain language; and (b) legible; and (c) presented clearly; and (d) readily available to any party affected by the term. (4) For the purposes of subsection (1)(b), a term of a contract is presumed not to be reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term, unless that party proves otherwise.
Terms which define the main subject matter of the contract, or set the upfront price payable under the contract or which are required or expressly permitted by law, are exempted from the unfair terms provisions.
This contract is so one-sided that I am astonished to find it written on both sides of the paper. Lord Evershed (1961).
IN CONTEXT
Excluding terms that define the main subject matter of the conduct [20.430] By excluding terms that define the main subject matter of the contract, the legislation reflects a compromise between “the opposing aims of consumer protection and freedom of contract”. Thus, the decision-making autonomy of consumers is respected, and
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consumers are prevented from using the UCTL to renege on a bargain on the grounds of price quality. As stated by Harbison J in Director of Consumer Affairs Victoria v Craig Langley Pty Ltd & Matrix Pilates & Yoga Pty Ltd [2008] VCAT 484: It appears to me to reflect the commonsense view that terms of a consumer contract which have been the subject of genuine negotiation should not be lightly declared unfair. This legislation is designed to protect consumers from unfair contracts, not to allow a party to a contract who has genuinely reflected on its terms and negotiated them to be released from a contract term from which he or she later wishes to resile. It might not always be easy to determine what the main subject matter of a contract is. In a broad sense, all terms of a contract are in some way related to the price or remuneration, especially in the case when a bundle of services is provided. Dr Patterson (Unfair Contract Terms in Australia, 2012) gave the following example. Consider … a contract for a package holiday. In such a case, it’s the main subject matter the holiday destination, or also the transport to that destination and the tours and activities offered on arrival? H de Kock, Unfair Contract Terms under Australian Consumer Law, (March 2015)
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[20.440] In essence the UCTL provides that a term in a consumer contract is void if (a) the term is unfair and (b) the contract is a standard form contract. If a party to a proceeding alleges that a contract is a standard form contract, it is presumed to be a standard form contract unless another party to the proceeding proves otherwise (ACL, s 27(1)) and in making this determination the court may take into account such matters as it thinks relevant in addition to the following factors specified in s 27: • whether one of the parties has all or most of the bargaining power relating to the transaction; • whether the contract was prepared by one party before any discussion relating to the transaction occurred between the parties; • whether another party was, in effect, required either to accept or reject the terms of the contract (other than the exempt terms) in the form in which they were presented; • whether another party was given an effective opportunity to negotiate the terms of the contract, other than the exempt terms; Nothing could be simpler than the facts in this appeal; nothing more far- reaching than the discussion of the fundamental legal principles to which it has given rise. Read v J Lyons & Co [1947] AC 156 at 170 per Lord MacMillan.
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• whether the terms of the contract (other than the exempt terms) take into account the specific characteristics of another party or the particular transaction; and • any other matter prescribed.
Examples of unfair contract terms [20.450] The UCTL provides in s 25 a number of examples of the terms in a consumer contract that might be unfair: • a term that permits, or has the effect of permitting, one party (but not another party) to avoid or limit performance of the contract;
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms
• a term that permits, or has the effect of permitting, one party (but not another party) to terminate the contract. • a term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract; • a term that permits, or has the effect of permitting, one party (but not another party) to vary the terms of the contract; • a term that permits, or has the effect of permitting, one party (but not another party) to renew or not renew the contract; • a term that permits, or has the effect of permitting, one party to vary the upfront price payable under the contract without the right of another party to terminate the contract; • a term that permits, or has the effect of permitting, one party unilaterally to vary the characteristics of the goods or services to be supplied, or the interest in land to be sold or granted, under the contract; • a term that permits, or has the effect of permitting, one party unilaterally to determine whether the contract has been breached or to interpret its meaning;
Any proposition the result of which would be to show that the Common Law of England is wholly unreasonable and unjust, cannot be part of the Common Law of England. Emmens v Pottle (1885) 16 QBD 354 at 357 per Lord Esher MR.
• a term that limits, or has the effect of limiting, one party’s vicarious liability for its agents;
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• a term that permits, or has the effect of permitting, one party to assign the contract to the detriment of another party without that other party’s consent; • a term that limits, or has the effect of limiting, one party’s right to sue another party; • a term that limits, or has the effect of limiting, the evidence one party can adduce in proceedings relating to the contract; • a term that imposes, or has the effect of imposing, the evidential burden on one party in proceedings relating to the contract; • a term of a kind, or a term that has an effect of a kind, prescribed by the regulations.
ACCC v Bytecard Pty Limited [2008] VCAT 482 [20.460] The first court case brought by the ACCC based solely on the unfair contract provisions was against ByteCard Pty Ltd (ByteCard) (better known as NetSpeed Internet Communications). ByteCard is an Internet service provider that offers Internet connectivity, domain registration, hosting and web design services. On 24 July 2013, the Federal Court declared by consent that a number of clauses in ByteCard’s standard form consumer contracts were unfair and, therefore, void. The unfair terms: • enable ByteCard to unilaterally vary the price under an existing contract without providing the customer with a right to terminate the contract; • required the consumer to indemnify ByteCard in any circumstance, even where the conract has not been breached and the liability, loss or damage may have been caused by ByteCard’s breach of the contract; and • enable ByteCard to unilaterally terminate the contract at any time with or without cause or reason.
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Business and the Law The terms were considered unfair as they: • created a significant imbalance in the parties’ rights and obligations; • were not reasonably necessary to protect ByteCard’s legitimate interests; and • if applied or relied upon by ByteCard, would cause detriment to a customer. The chairman of the ACCC, Rod Sims commented that –“This is a positive outcome for consumers and acts as a warning to businesses. The ACCC won’t hesitate to take action against business who continue to include unfair terms in their standard form consumer contracts … The court’s declarations in 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”.
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ACCC, News Release NR 174/3 (2013)
Behind the constantly evolving laws, drawn up and revised to suit different societies and changing times, there are also higher, much less mutable, tenets held by the vast majority of our species. We call it morality, the unwritten or higher law, and more simply –justice. More than anything, a sense of justice defines human society, whether it is called primitive or civilized, as much in the breach as in the observance. P Hay, Harrap’s Book of Legal Anecdotes (Harrap, 1989). [Hire purchase is people being] persuaded by persons whom they do not know to enter into contracts that they do not understand to purchase goods that they do not want with money that they have not got. Lord Green MR, LJ News (1944).
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IN CONTEXT
How can I tell if a term in my contract is unfair? [20.470] The following questions can help you recognise a potentially unfair term, but it
is important to note that the final decision on whether a term is unfair can only be made by a court.
You should also be aware that the fairness of a term must be considered in the context of the contract as a whole. For example, a term that seems unfair in one context might not be unfair in another. • Does the term cause a significant imbalance between your rights and obligations and those of the business? – Does the business have more power than you? Are you penalised if the contract is terminated (through no fault of your own) but the business is not penalised? Can the business change important terms of the contract without asking you? Can only the business decide whether the contract has been breached? • Is the term reasonably necessary to protect the legitimate interests of the business? – While it may appear to you that a term is unfair, the business may have a genuine commercial reason for including it. However, it is up to the business to prove to the court that it has a good reason. – Would the term cause you detriment (financial or non-financial) if the business tried to enforce it? • How transparent is the term? – Can you understand what the term says? Is the term presented clearly and expressed in reasonably plain language? Or is it hidden in fine print or written in complex technical language? ACCC, Consumers and Unfair Contract Terms (2010)
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms
ACCC v JJ Richards & Sons Pty Ltd [2017] FCA 1224 [20.480] JJ Richards had made at least 26,000 standard form contracts to provide waste management services which included clauses to:
• renew the contract for a further term unless customers cancel the contract within 30 days before the end of the term • permit JJ Richards to unilaterally increase its prices • remove any liability for JJ Richards where its performance is “prevented or hindered in any way” • allow JJ Richards to change customers for services not rendered for reasons that are beyond the customer’s control • grant JJ Richards exclusive rights to remove waste from a customer’s premises • allow JJ Richards to suspend its services but continue to charge the customer if payments is not made after seven days • create an unlimited indemnity in favour of JJ Richards
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• prevent the customer terminating the contract if they have payments outstanding and entitle JJ Richards to charge customers equipment rental after the termination of the contract. It was held that these clauses were unfair and therefore void. They would cause a significant imbalance in the parties’ rights and obligations arising under the contract, were not necessary in order to protect the legitimate interests of the party who would be advantaged by the term, and would cause detriment to a party if applied or relied on. For example, the price variation clause allowed JJ Richards to unilaterally increase the price of JJR Waste Management Services for any reason: So it creates a significant imbalance because there is not any corresponding right given to the JJR Customer to terminate the contract or obtain a change in the scope or scale of the service provided by JJ Richards or a lower price.
ACCC v Servcorp Limited [2018] FCA 1044 [20.490] Servcorp supplied serviced office space and services to clients from 24 locations around Australia.
Its standard form contract included terms in relation to automatic renewal and unilateral price increases. The contract would automatically renew if the client failed to give notice to terminate the contract prior to the end of the existing term. Servcorp could then unilaterally vary the price payable under the contract for the next term in its absolute discretion. Servcorp was not required to give the client any notice of the price variation and the client was not given a corresponding right to terminate the contract at the commencement of the new term which meant that the client would automatically be locked into a further term with no opportunity to avoid the price increase by terminating the contract. The contract also included a limitation of liability clause to the effect that Servcorp could not be held responsible for any loss or theft of, or damage to, their client’s property howsoever caused –except in cases of gross negligence or willful misconduct –even if Servcorp may have caused the loss or damage to the client’s property.
The contract also contained a liquidated damages clause – Servcorp could demand a penalty of $15,000 from the client if that client persuaded any other client to leave Servcorp and move to a competitor regardless of whether Servcorp had suffered any loss or damage.
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Business and the Law It was held that as there was no corresponding benefit in relation to each of these clauses for Servcorp’s client and because Servcorp’s rights went far beyond what was necessary to protect its reasonable interests, the clauses were unfair and therefore void.
ACCC Calls for Major Changes to Strengthen the Unfair Contract Terms Law ACCC, Media Release (31 August 2018)
[20.500] ACCC Chair Rod Sims addressed the Council of Small Business Organisations Australia (COSBOA) National Small Business Summit 2018 today regarding business-to-business unfair contract terms in standard form contracts, advocating there is a strong case to both strengthen the law and introduce penalties for breaking it.
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“The business-to-business unfair contract term law is an extremely valuable law that works to protect small businesses against terms that just should not be found in contracts. However it does not go far enough, and its limitations really tie our hands as a regulator,” said Mr Sims.
The Australian Consumer Law currently allows a potentially unfair contract term to be challenged in a court so it can be declared void, but it does not prohibit such a term being included in a contract in the first place. Companies can include potential unfair contract terms in their contracts and when, and only when,
challenged by the ACCC, can companies remove them from their standard contracts. There is little the ACCC can do to hold them to account for prior conduct. Neither can the ACCC issue infringement notices for unfair contract terms. “The regime has two significant flaws: first, unfair contract terms are not illegal, and second the ACCC cannot seek penalties when the court has declared an unfair contract term void, nor can we issue infringement notices for contract terms that are likely to be unfair.” “The law simply isn’t strong enough. Unfair contract terms should be illegal. As it stands, no real incentive exists for businesses to ensure their standard contracts do not contain such terms, which really means they have incentive to include them and see if they can get away with it. This is out of step with other provisions in the Competition and Consumer Act 2010, and Australian small businesses are the ones paying the price,” Mr Sims said.
IN CONTEXT
Unfair contract terms in insurance contracts [20.505] While the UCT laws apply to most financial products and services they do not
apply to insurance contracts regulated under the Insurance Contracts Act 1984 (Cth). In June 2018 the government released for consideration a proposal paper –Extending Unfair Contract Terms Protections to Insurance Contracts. The objectives are to:
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms
• ensure that consumers and small businesses who purchase insurance have the same access to protection from unfair terms in insurance contracts as they do for other contracts for financial products and services; • increase incentives for insurers to impose the clarity and transparency of contract terms, and remove potentially unfair terms from their contracts; and • provide appropriate remedies for consumers and enforcement powers for the Australian Securities and Investments Commission. Extending the UCT laws to insurance contracts would bring Australia into line with comparable jurisdiction, including the United Kingdom, the European Union and New Zealand, where insurance contracts are not excluded from those jurisdictions’ UCT laws.
20.5 OTHER UNCONSCIONABILITY LAWS
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[20.510] The unconscionability laws discussed above are national laws of general application. They are supplemented by a range of other unconscionability laws –state and federal, general and particular. An important national law is the power to reopen unjust credit contracts mortgages or guarantees under the National Credit Code (prescribed under the National Consumer Credit Act 2009 (Cth)). Section 76 of the Code adopts the increasingly familiar statutory unconscionability formula of specifying matters to be considered by the court in determining whether a transaction is unjust. State and Territory laws increasingly provide protection from unconscionable conduct in specific contexts. Under the Retail Leases Act 1994 (NSW) lessors and leases are, in respect to a retail shop lease, prohibited from engaging in conduct “that is, in all the circumstances unconscionable”. A non-exclusive list of factors which can be taken into account is set out (s 62B). The Industrial Relations Act 1996 (NSW) empowers the industrial commission to void or vary any contract of work in any industry which is found to be “unfair” (s 106). The Motor Dealers and Repairers Act 2013 (NSW) addresses unfair contracts and unjust conduct in this industry sector (Pt 6).
“Write that down”, the king said to the jury, and the jury eagerly wrote down all three dates on their slates, and then added them up, and reduced the answer to shillings and pence. Lewis Carroll, Alice’s Adventures in Wonderland.
Contracts Review Act 1980 (NSW) [20.520] The Contracts Review Act 1980 (NSW) warrants more detailed consideration as it is of general application to unjust non-business contracts in New South Wales. Today we are quite familiar with legislation making inroads into the principles of freedom of contract and preventing stronger parties from abusing their superior bargaining authority but this was not the case 35 years ago. The Contracts Review Act was revolutionary and provided the model for the now familiar statutory unconscionability regimes, which incorporates a list of non-exclusive indicators of unconscionability to grade the determination of the underdeveloped unconscionability prohibition. In the words of the NSW Minister for Consumer Affairs during the second reading debate on the Bill (NSW, Parliamentary Debates (1980), p 5858):
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Business and the Law The Contracts Review Act 1980 (NSW) is intended to confer on the courts a new and wide discretion to determine the existence and extent of harshness in a contract, and thereby develop a doctrine of unconscionability suitable to present and future business and community needs and standards.
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The Contracts Review Act does not act as an anodyne – soothing every ill caused by contract. The jurisdiction of the Court to make orders under the Act is predicated on an evaluation, by the Court, that the contract was unjust. Suncorp-Metway Ltd v Bellairs [2009] NSWSC 135 at [52] per Rothman J.
[20.530] The Act provides for NSW courts and the Civil and Administrative Tribunal to grant relief in respect of certain contracts found to be “unjust in the circumstances relating to the contract at the time it was made” (s 7(1)). The Act is not of general application and, with minor exceptions, government bodies, companies and persons engaged in commercial enterprises cannot be granted relief. It is designed to protect individuals who enter contracts for private rather than business purposes, and in relation to such contracts it is of fundamental importance. The legislation overthrows the principles of freedom of contract and sanctity of contract –that “Chancery mends no man’s bargain” (per Lord Nottingham in Maynard v Mosely (1676) 36 ER 1009 at 1010) –which for so long represented the fundamental and underlying assumption of the law of contract. It had a revolutionary effect on the law of contracts in New South Wales. [20.540] The Act incorporates a list of non-exclusive indicators of unconscionability that assists the court by specifying guidance criteria to which the court is obliged to have regard in determining whether a contract is unjust. Section 9(1), which provides that in determining whether a contract or a provision of a contract is unjust in the circumstances relating to the contract at the time it was made, the court shall have regard to the public interest and to all the circumstances of the case, is supplemented by s 9(2) which provides that, without affecting the generality of s 9(1), the matters to which the court shall have regard shall, to the extent that they are relevant to the circumstances, include the following: (a) whether or not there was any material inequality in bargaining power between the parties to the contract; (b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation; (c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract; (d) whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract; (e) whether or not: (i) any party to the contract (other than a corporation) was not reasonably able to protect his or her interests; or (ii) any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented because of his or her age or the state of his or her physical or mental capacity; (f)
the relative economic circumstances, educational background and literacy of:
(i) the parties to the contract (other than a corporation); and (ii) any person who represented any of the parties to the contract;
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms (g) where the contract is wholly or partly in writing, the physical form of the contract, and the intelligibility of the language in which it is expressed; (h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act; (i)
the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect;
(j)
whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act:
(i) by any other party to the contract; (ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract; or (iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract; (k) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party; and (l)
the commercial or other setting purpose and effect of the contract.
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In determining whether a contract or a provision of a contract is unjust, the court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time the contract was made (s 9(4)). A range of orders is available to the court including orders voiding or varying the contract (s 7). [20.550] The Contracts Review Act conferred a radical new jurisdiction that was clearly acknowledged by Holland J in Sharman v Kunert (1985) 1 NSWLR 225 at 231:
Conscience and cowardice are really the same things. Conscience is the trade name of the firm. O Wilde, The picture of Dorian Gray (1891).
The Act seems to me clearly to call for a fresh and direct approach to the individual case, without preconceived notions of conditions on which a court may set aside or vary a contract derived exclusively from established doctrines, whilst at the same time giving due recognition to the public interest in generally holding parties to their bargains. The Act finds room for giving appropriate relief in the unusual as well as the common type of unjust contract. I have not approached the present case solely upon the basis of its similarity to cases in which equity relieves a victim of unconscionable conduct: see Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. Although I have found a degree of unconscientiousness in the plaintiff’s position here, I have not found it necessary to restrict a consideration of the present claim to relief under the Contracts Review Act, to a consideration of the principles discussed in that case.
The most direct expression of the manner in which the judges approach the discretion conferred by the legislation is that of McHugh JA in West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 620: Under s 7(1) a contract may be unjust in the circumstances existing when it was made because of the way it operates in relation to the claimant or because of the way in which it was made or both … In other cases the contract may not be unjust per se but may be unjust because in the circumstances the claimant did not have the capacity or opportunity to make an informed or real choice as to whether he should enter into the contract … More often, it will be a combination of the operation of the contract and manner in which it was made that renders the contract or one of its provisions unjust in the circumstances. Thus, a contract may be unjust
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Business and the Law under the Act because its terms, consequences or effects are unjust. This is substantive injustice. Or a contract may be unjust because of the unfairness of the methods used to make it. This is procedural injustice. Most unjust contracts will be the product of both procedural and substantive injustice. No generalization is wholly true, not even this one. Oliver Wendell Holmes.
[20.560] It is difficult, foolish and unnecessary to attempt general pronouncements as to the meaning of “unconscionable”. The conduct which is vulnerable may extend from fraud and misrepresentation inducing the contract to unjust terms included in the contract and to bad faith in its operation. No case is simple, but those involving a transaction between the two parties to the case are more straightforward than those involving a contract which is part of a wider transaction such as where a third-party guarantor with no financial interest in the primary transaction (the loan) seeks to have a guarantee exposing the guarantor to significant financial risk set aside.
St Clair v Petricevic [1988] ASC 55-688
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[20.570] The NSW Court of Appeal set aside a contract of sale of land because the vendor was seriously
ill and was subject to significant financial and emotional pressures. The vendor was suffering from cancer and had been undergoing chemotherapy treatment. She had been dispossessed of her home, had recently lost her business, was living with her daughter in a spare room at the Sydney Jesuit Mission and at the time had what seemed to be a short life expectancy. Following threats from an adjoining neighbour that he would demolish her verandah encroaching on his right of way (a threat no court would have allowed to be carried out) she agreed to sell her house to that neighbour at a price lower than she had originally asked of him. It was held that the contract was unjust in the circumstances and should be set aside.
HomeSec Finance Express Pty Ltd v Richardson [2012] NSWSC 1375 [20.580] A loan and attendant mortgage were held not to be unjust in the circumstances relating to the
contract at the time it was made. Although the defendant was under pressure from various sources she was an “experienced intelligent business woman” who “well understood the nature of the transaction into which she was entering” and who had received legal advice.
Cases involving third parties are more complicated.
Beneficial Finance Corporation Ltd v Karavas [1991] ASC 56-002 [20.590] The NSW Court of Appeal had to determine whether a guarantee supported by a mortgage could be enforced. The circumstances surrounding the making of the original contract to lend money to a group of directors who bought a failed airline business from the receiver were held to be circumstances relevant to the
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms separate contract of guarantee (secured by mortgages given by the families of the directors over their homes) being held unjust. In the Supreme Court, Giles J found that the mortgages were unjust in the circumstances in which they had been made since Beneficial’s provision of money to the airline could not properly have been made on the basis of the airline generating income and could only have been made on the basis of the substantial security offered. Although the terms of the guarantee were not unusual, the parents of the directors had not been given a true picture of the risk they were running and because of their limited education and business experience they were not able to make an informed judgment. In the Court of Appeal, Kirby P (at 56,764) addressed the heavy obligations imposed on financiers in such circumstances:
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The appellant is in a position to make informed business assessments about the risks involved in the extension of finance to particular borrowers. It can cover its position handsomely by taking mortgages such as were secured in this case. It then runs comparatively little risk of ultimate loss. But where the borrowers, or their guarantors and mortgagors, are ill-educated, inexperienced in business, related to those principally involved by blood or affection and involved in the purchase of a business with some apparent risks, the lesson of this case may indeed be that the financier will be well advised to ensure that the guarantors and mortgagors receive effective, independent financial advice on the risks they are running. If that means a divorce between the legal advice which the financier is receiving and that afforded to the borrowers and their supporters that, in my opinion would be no bad thing. If it meant that guarantors and mortgagors sometimes received effective, independent financial advice before imprudently putting their life’s savings and the roof over their head at risk, that too would be no bad thing. Indeed, these results appear to secure the kind of objectives which the Act, by affording provision for relief against unjust contracts, clearly contemplated. If that means that some ventures do not go ahead, that cost is added to financing transactions and that delays inevitably ensue, so much may be no more than the inevitable outcome of the operation of the Act.
20.6 INDUSTRY CODES [20.600] In 1998 the Trade Practices Act 1974 (Cth) –now the Competition and Consumer Act 2010 (Cth) –was amended by the introduction of Pt IVB to allow for industry codes to be prescribed and enforced. The 1997 Fair Trading Report –the Report of the Fair Trading Inquiry of the House of Representatives Standing Committee on Industry, Science and Technology entitled Finding a Balance –Towards Fair Trading in Australia –identified a range of problems for small business in its engagement with bigger business. One of the initiatives introduced in response to the report was the legal recognition of Codes of Conduct. The Second Reading speech introducing Pt IVB stated that: The government recognises that codes of conduct, or codes of practice, can offer flexible and efficient mechanisms to address issues of business practice. However, experience has shown that for some codes of practice legislative underpinning is necessary to ensure the effective operation of the code and to achieve the desired behavioural change in industry sectors. This bill will introduce into the Trade Practices Act a new part IVB which will enable the whole or a part of a code of practice to be underpinned legislatively as either a mandatory or a voluntary code after an appropriate impact assessment, consultation and approval process. This bill inserts new section 51AD into the Trade Practices Act to provide that a person bound by the act must not contravene an industry code that has been prescribed in the regulations. A code may regulate the behaviour of industry participants towards each other or the behaviour of the participants towards consumers in the industry. The bill allows for flexibility in the type of code that can be prescribed.
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909
Business and the Law The first types are mandatory codes. Once prescribed such codes will bind all participants in the relevant industry. The second types are voluntary codes. Once prescribed such codes will bind only those participants who agree to be bound by its provisions. It is proposed that the regulations will set out the methods by which a person may agree to be bound by a voluntary code. The proposed amendment will allow mandatory codes to be prescribed only where self- regulation has not worked or is inappropriate. A formal process of public consultation, which would include consumer and business representatives, will be required before any code may be prescribed. The requirements of the Legislative Instruments Bill and the regulation impact statement process are examples of what will be required prior to the prescribing of codes. A breach of a prescribed code may result in a range of sanctions under the Trade Practices Act, including injunctions, damages, requirements to give undertakings to the ACCC and orders to disclose information or publish corrective advertising. This measure will provide small business with dual advantages—the benefit of participation in the design of industry regulation addressing unfair conduct and meeting best practice and the security that mandated codes or provisions of codes may be directly enforced under the Trade Practices Act itself.
The Regulation Impact Statement identified the advantage of the proscribed codes system over traditional regulation: A tiered system of codes would have benefits of existing regulatory authorities over primary legislation. These include flexibility and greater industry involvement in addressing industry needs where market failure exists. There also are administrative advantages in terms of the level of parliamentary scrutiny in using subordinate legislation over primary legislation. In this context, the obligations imposed by the Legislation Instruments Bill are relevant to this option but not to option two. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
The benefits were stated to include: • providing enforceable protections against unacceptable business conduct reducing the societal cost of business failure; • providing two new mechanisms (mandatory underpinned codes and voluntary underpinned codes) for the regulation of business-to-business conduct. This will provide for more targeted solutions to business conduct issues, thereby reducing the risk of inappropriately pitched regulation; • allowing for a stagged transition to self-regulation of a sector once behavioural change has been secured through enforceable codes; • providing advantages over primary legislation in terms of flexibility and ease of amendment; and • retains industry involvement in developing codes and in their continuing operation. The current provisions are captured in Pt IVB of the Competition and Consumer Act. Five mandatory codes have been prescribed: • Franchising Code of Conduct (regulating the conduct of the parties to a franchise agreement); • Horticulture Code (regulating the conduct of growers and wholesale traders when buying and selling horticultural products); • Oilcode (regulating the conduct of wholesalers and fuel resellers who are involved in the sale, supply or purchase of petroleum products); 910
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Chapter 20 Unconscionable Conduct and Unfair Contract Terms
• Unit Pricing Code (requiring supermarkets and online retailers to provide unit prices of food based grocery products to enable consumers to compare the price of different sizes and brands); • Wheat Port Code of Conduct (regulating the conduct of bulk wheat terminal operators). A voluntary industry code for the food and grocery sector –the Food and Grocery Code of Conduct –has recently been prescribed. It addresses unfair practices by grocery retailers and wholesalers in their dealings with suppliers by, inter alia, requiring retailers and wholesalers to deal with suppliers in good faith during the bargaining stages of establishing grocery supply agreements, during the term of the agreement, and in dealing with any disputes. To date the major retailers –Coles, Woolworths and Aldi –have signed up to the Code, which is thus binding on them. The mandatory 2014 Franchising Code of Conduct, the object of which is to “regulate the conduct of participants in franchising towards other participants in franchising” (cl 2), is discussed in Chapter 14.
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QUESTIONS 1.
“The unconscionability laws under the Australian Consumer Law destroy the concept of freedom of contract”.
Discuss this proposition.
2.
What is the difference between “unconscionable” conduct and “unfair” conduct?
3.
How should “unconscionability” be defined?
4.
Jules, a middle aged business executive, was told by his doctor that he spent far too much time in planes, hotel rooms and meetings and that he needed to start exercising before it was too late. He decided to join Jim’s Gym. He was presented with a contract which he did not read. When he asked what it contained he was told “just the normal stuff” –“that we are not responsible for anything that happens to you and that you are committing to 2 years at $50 a week payable 3 monthly in advance”. Jules said that as he was overseas frequently this would not work for him and was told that if he let them know he was away for a week Jim’s would add these weeks already paid for but not used to the end of the contract. The sales person suggested that Jules “read the contract as its all in there in plain English and ask me if you have any questions”.
Jules signed the contract. He did not read it as he couldn’t see the point. From his experience in business you were stuck with the terms anyway and he had never changed terms just because the other party was not happy with them. On 30 occasions during the two years of the contract Jules rang up Jim’s to say he was going overseas for a week. On each occasion he was told “fine mate, have a good trip” or words to that effect. When at the end of the two years he sought to have the contract extended at no cost he was advised that he had not complied with the contractual requirement that notices of absence had to be given in writing. Jim’s explained that this was because phone messages often did not get properly catalogued because the people on the desk were frequently
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distracted by customers. When Jules said, curtly, “why does any of this matter” he was told that it was important that Jim’s knew that exact number of members who could be attending the gym in any week as the number impacted on licence conditions and staffing. Advise Jules.
WEB REFERENCES Australian Competition and Consumer Commission http://www.accc.gov.au
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Competition and Consumer Law Education Programs http://www.ccaeducationalprogram. org
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21
21
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Advertising and Sales Promotion Andrew Terry THE BUSINESS CONTEXT The Australian Consumer Law is a powerful and comprehensive charter of consumer rights. The general protections prohibiting misleading and unconscionable conduct are supplemented by a long list of specific protections addressing particular instances of inappropriate and unethical conduct and which have no unifying theme other than their fundamental unfairness. The Australian Consumer Law provides for a “level playing field” for business in Australia by prohibiting unfair practices that distort the competitive process by conferring an advantage on unethical traders. By encouraging fair trading, competition between traders for the consumer’s business is focused on price, quality and service to the benefit of both the consumer and the competitive process. Legal action for a breach of these rules can be taken not only by the public agency, the ACCC, but by private actions –by consumers or frequently by competitors who seek to restrain a company’s false or misleading advertising or sales promotion techniques. Contravention of the advertising/sales promotion laws attracts a range of civil penalties in addition to criminal consequences and individuals involved in the contravention may be liable as well as the companies on whose behalf they acted.
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21.1 IMPROPER BUSINESS PRACTICES ..................................................................................................................... 914 21.2 ADVERTISING ........................................................................................................................................................... 915 [21.20]
A red light over the desk of the advertising copyrighter ..................................................................... 915
[21.40]
The regulatory regime for advertising .................................................................................................... 917
[21.60]
Misleading or deceptive conduct ............................................................................................................. 917
[21.70]
The specific false representations provisions ........................................................................................ 918
[21.130] Defences ........................................................................................................................................................ 919 [21.140]
Playing to the lines ...................................................................................................................................... 919
[21.240]
Bait advertising ............................................................................................................................................ 926
[21.250]
Country of origin claims ............................................................................................................................ 926
[21.310]
Substantiation of advertised claims ......................................................................................................... 930
21.3 SELF-REGULATION OF ADVERTISING ............................................................................................................. 930 [21.320]
The AANA Code of Ethics ............................................................................................................................ 930
[21.340]
Consumer complaints ................................................................................................................................ 933
[21.350]
Competitor complaints .............................................................................................................................. 933
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21.4 UNFAIR PRACTICES ................................................................................................................................................ 940 [21.390]
Referral selling ............................................................................................................................................. 940
[21.410]
Harassment and coercion .......................................................................................................................... 941
[21.440]
Wrongly accepting payment ..................................................................................................................... 942
[21.450]
Offering rebates, gifts, prizes .................................................................................................................... 943
[21.470]
Pyramid selling ............................................................................................................................................ 943
[21.490]
Inertia selling ............................................................................................................................................... 945
21.5 SELLING PRACTICES .............................................................................................................................................. 946 [21.500]
Lay-by sales .................................................................................................................................................. 946
[21.510]
Door-to-door sales and telemarketing .................................................................................................... 947
[21.550] Receipts ......................................................................................................................................................... 949 21.6 PRICING ...................................................................................................................................................................... 950 [21.560]
Multiple pricing ........................................................................................................................................... 950
[21.570]
Component pricing ..................................................................................................................................... 950
[21.590]
Two price comparisons/dual pricing ....................................................................................................... 950
[21.640]
Cash back offers .......................................................................................................................................... 953
[21.650]
Unit pricing .................................................................................................................................................. 954
[21.670]
Excessive payment surcharges ................................................................................................................. 955
21.1 IMPROPER BUSINESS PRACTICES [21.10] Chapter 2 of the Australian Consumer Law (ACL) is headed General Protections and prohibits misleading and deceptive conduct and unfair contract terms. The general protections are supplemented by the Specific Protections of Ch 3 –a comprehensive chapter which deals with unfair practices (Pt 3-2), safety of consumer goods and product- related services (Pt 3-3), information standards (Pt 3-4) and liability of manufacturers for goods with safety defects (Pt 3-5). This chapter of the text is focused on the unfair practices of Pt 3-1, which replace equivalent provisions of the former state and territory laws that operated prior to the introduction of a single national consumer law under the ACL. 914
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Chapter 21 Advertising and Sales Promotion Chapter 3–Specific protections Part 3-1–Unfair practices Division 1–False or misleading representations etc 29 False or misleading representations about goods or services 30 False or misleading representations about sale etc of land 31 Misleading conduct relating to employment 32 Offering rebates, gifts, prizes etc 33 Misleading conduct as to the nature etc of goods 34 Misleading conduct as to the nature etc of services 35 Bait advertising 36 Wrongly accepting payment 37 Misleading representations about certain business activities 38 Application of provisions of this Division to information providers Division 2–Unsolicited supplies 39 Unsolicited cards etc 40 Assertion of right to payment for unsolicited goods or services 41 Liability etc of recipient for unsolicited goods 42 Liability of recipient for unsolicited services 43 Assertion of right to payment for unauthorised entries or advertisements Division 3–Pyramid schemes 44 Participation in pyramid schemes 45 Meaning of pyramid scheme 46 Marketing schemes as pyramid schemes Division 4–Pricing 47 Multiple pricing 48 Single price to be specified in certain circumstances Division 5–Other unfair practices 49 Referral selling 50 Harassment and coercion
This chapter also addresses the Unsolicited Consumer Agreements under Div 2 of Pt 3.2, and Country of Origin Representations in Pt 5.3. Contravention of most of the specific protection provisions is subject to criminal fines or civil pecuniary penalties, which were in 2018 increased substantially for corporate offenders to the greater of $10 million or three times the value of the benefit or 10% of the company’s annual turnover. The maximum penalty for individuals was increased to $500,000. The ACL provisions are mirrored for financial products and services in the Australian Securities and Investments Commission Act 2001 (Cth) (Part D, subdivision D).
21.2 ADVERTISING
According to one of Australia’s most successful advertising men, John Singleton, the only kind of objectionable advertising is that which does not work. D Grace and S Cohen, Business Ethics (Oxford University Press, 1996) p 120.
A red light over the desk of the advertising copyrighter [21.20] Few marketing executives would have enjoyed their breakfast on 17 April 1975 as they opened the Australian Financial Review to be greeted with the headline that the Sharp Corporation had been fined $100,000 under the Trade Practices Act 1974 (Cth) for falsely representing that its microwave ovens had been approved by the Standards Association of Australia, in breach of s 53 (now s 29 of the ACL). Joske J regarded Sharp’s behaviour as “a gross and wicked attempt to swindle the public of Australia” (Hartnell v Sharp Corporation [1975] ATPR 40-003). The case itself is not particularly profound, the only legal points of
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Business and the Law The essence of consumer law is don’t mislead consumers. Rod Sims, ACCC Chairman, Sydney Morning Herald (8 August 2015).
interest being the rejection of the defence of reasonable mistake provided by s 85 (now s 207 of the ACL) (“on the basis that it was a mistake this very go-ahead company was showing amazing negligence even to the point of recklessness in the way in which it carried on its business” per Joske J), and the holding that each publication constituted a separate offence. (The potential for massive penalties has since been somewhat reduced by a later amendment which provides that where a person is convicted of two or more offences of the same or a substantially similar nature which occurred at or about the same time, the court is not entitled to impose fines that in aggregate exceed the maximum fine that would be applicable in respect of one offence by that person: ACL, s 214.) The main significance of the case is symbolic. It was the first decision involving the then new consumer protection provisions of the Act and gave a clear and unambiguous message that the new standard of commercial morality required by the Trade Practices Act had real teeth. The regulatory environment had irrevocably changed. If Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 years earlier was a “red light over the desk of the advertising copywriter” (E S Turner, The Shocking History of Advertising (Penguin, 1965) p 97), Hartnell v Sharp Corporation was a brightly flashing neon sign cautioning truth in advertising. Life is very different today and a $100,000 penalty is unlikely to attract Australian Financial Review headlines. Civil and criminal penalties of up to $10 million for companies and $500,000 for individuals for breaches of the ACL now apply which clearly demonstrates that the ACL has real, sharp and effective teeth.
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IN CONTEXT
False advertising? [21.30]
http://www.personallicencescourses.co.uk/pub-management/52-funny-pub-chalkboards
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Chapter 21 Advertising and Sales Promotion
The regulatory regime for advertising [21.40] Misleading advertising is caught by the broad and general prohibition of “misleading or deceptive conduct” in s 18 of the ACL, which is supplemented by a number of further provisions prohibiting specific categories of misrepresentation (ss 29, 30, 31, 33, 34, 37). Section 18 and the specific misrepresentation provisions are not restricted to advertising and are of general application to misrepresentations in trade whether made in the course of private commercial negotiations, in brochures, on packaging or in advertising. Contravention of the specific misrepresentation provisions will always also be a contravention of the general prohibition of misleading conduct. However while contravention of s 18 gives rise to civil remedies, including injunctions and damages, pecuniary penalties and criminal fines are available only for contravention of the specific misrepresentation provisions.
IN CONTEXT
False advertising?
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[21.50]
Misleading or deceptive conduct [21.60] The primary analysis of misleading advertising in this text is in the context of misleading or deceptive conduct in Chapter 19 as it is in relation to s 18 that most of the general principles applicable to false representations generally have been laid down. In applying the specific misrepresentation provisions reference must be made to the general principles, in particular:
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The smell of soap, the texture of its suds, the whiteness of textiles treated thereby and the resulting esteem and prestige in the neighborhood are held to be of the highest moment. Housewives are imagined to discuss such matters with an intensity otherwise reserved for unwanted pregnancy and nuclear war. Similarly with cigarettes, laxatives, pain-killers, beer, automobiles, dentifrices, packaged foods and all other significant consumer products. J K Galbraith, The New Industrial State (2nd ed, New American Library, 1971).
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Business and the Law
• the identification of the target audience and the standard for determining a misrepresentation; • the significance of overall impression; • the irrelevance of fault; • liability for opinions; • liability for forecasts; and
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• the limited effect of disclaimers and qualifications. Competition in advertising and promotion has tended to displace price competition. The effects of this are not only to increase prices to the extent that the additional expenditure in his field is wasteful, but also … to keep new entrants out of the market, to weaken other competitive restraints on prices and profits, and to create a situation in which even the less successful of the two principal competitors can earn extremely comfortable profits, while those of the more successful are outstandingly high. Duggan, British Monopolies Commission.
Proceedings may be brought by the ACCC –it is only the ACCC who can obtain financial penalties –but private actions are nevertheless common –eg actions brought to restrain a competitor’s misleading advertising or to obtain damages in the case of an applicant who has suffered loss or damages by reliance on the misleading advertisement.
The specific false representations provisions Goods and services [21.70] Section 29 of the ACL prohibits a false or misleading representation that – • goods are of a particular standard, quality, value, grade, composition, style or model or have had a particular history or particular previous use; • services are of a particular standard, quality, value or grade; • goods are new; • a particular person has agreed to acquire goods or services; • purports to be a testimonial by any person relating to goods or services; • concerns a testimonial by any person; or a representation that purports to be such a testimonial, relating to goods or services; • goods or services have sponsorship, approval, performance characteristics, accessories, uses or benefits; • the person making the representation has a sponsorship, approval or affiliation; • is with respect to the price of goods or services; • concerns the availability of facilities for the repair of goods or of spare parts for goods; • concerns the place of origin of goods; • concerns the need for any goods or services; • concerns the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy; or • concerns any actual or implied requirement for a person to pay for a contractual right equivalent to a statutory consumer guarantee or any other statutory right or benefit that person may enjoy.
Land [21.80] Section 30 prohibits a range of specific false representations made in connection with the sale or grant of an interest in land. 918
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Chapter 21 Advertising and Sales Promotion
Employment [21.90] Section 31 prohibits conduct liable to mislead a person as to the availability, nature, terms or conditions or any other matters in relation to employment.
Nature etc of goods [21.100] Section 33 prohibits conduct liable to mislead the public as to the nature, manufacturing process, characteristics and suitability for their purpose or the quantity of goods.
Nature etc of services [21.110] Section 34 prohibits conduct liable to mislead the public as to the nature, characteristics, suitability for their purpose or the quantity of services.
Business activities [21.120] Section 37 prohibits false or misleading representations concerning the profitability, risk or other key aspect of certain business activities. These provisions are not individually analysed –they simply apply the general principles discussed in relation to misleading conduct in different contexts.
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Three other advertising sections which make special provision for particular cases are discussed in this chapter –bait advertising (s 35) (see [21.240]), country of origin claims (Pt 5-3) (see [21.250]) and unsubstantiated claims (Pt 5-1, Div 2) (see [21.310]).
Defences [21.130] Limited defences are provided for criminal proceedings but not for civil proceedings –viz that the contravention was caused by reasonable mistake of fact (ACL, s 207) or an act or default of another person beyond the defendant’s control despite reasonable precautions and due diligence being exercised (ACL, s 208). Neither defence can be made out if an employee or agent of the defendant was the person who supplied incorrect information (s 207) or whose act or default caused the contravention (s 208). It is also a defence to prosecution –but not to civil proceedings –if the defendant is a person whose business it is to publish advertisements in the ordinary course of business and who publishes the advertisement in the ordinary course of business and that the defendant had no reason to suspect that publication of the advertisement would amount to a contravention (ACL, s 209).
On Monday night, ABC TV’s top rating show The Investigators featured a case involving a not-so- miraculous herbal remedy produced in Bundaberg, Queensland. It was supposed to be a cure for arthritis, but investigator Chris Wordsworth produced an arthritis specialist who categorically rejected the product’s claims. End of story? Not on your bottle of snake oil. Yesterday The Investigators’ office received more than 30 requests for the manufacturer’s address by viewers who decided to give the remedy a try anyway. On moral grounds, the show refused to pass on any information. Sydney Morning Herald (13 March 1991).
Playing to the lines [21.140] In Henderson v Pioneer Homes Pty Ltd [1980] ATPR 40-168 at 42,327, Smithers J, in imposing a substantial penalty on a company for misleading advertising used a tennis analogy: If one embarks on an activity of this kind when you are … playing to the lines and a little over the lines, it is not unlikely that in the end someone will call your shot out. And that is what happened in this case.
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Business and the Law
Smithers J was referring to the “great care and ingenuity” that had been exerted in drafting advertisements which the company hoped would get as close as possible to misleading people without breaching the law. Smithers J displayed his contempt for the argument that the standards exhibited in that case were those current at the time (at 42,327):
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If that be the fact it is somewhat deplorable and it is in that context that I have to consider the purpose of the Trade Practices Act which has been to introduce what may be called a new commercial morality and accordingly offences of this kind must merit substantial penalties.
Apart from the question of penalty, nothing turns on whether the case concerned was misleading or deceptive conduct generally (ACL, s 18) or misleading or deceptive conduct in a particular context (ss 29, 30, 31, 33, 34, 37). The statutory requirement today is that advertising not only be truthful but also that it conveys a truthful impression. This requirement is formalised in the prohibition of misleading or deceptive conduct, and the discussion of the general principles which guide this norm of conduct which are discussed in Chapter 19 are obviously relevant to any consideration of advertising. In the advertising context it is of particular significance that the capacity of conduct to mislead or deceive is determined by its likely effect on those exposed to it, which (in most cases) is the general community. The standard by which the general public is judged is what may unkindly be called the lowest common denominator –those persons who are most likely to be misled. The advertiser takes its audience as it is and that audience includes not only the familiar persona of the “reasonable man” but also the gullible, uneducated, inexperienced, unsophisticated man, woman or child. Other principles of particular importance to advertisers are that there is no requirement of an intention to mislead, that statements literally true can nevertheless mislead, that opinions must be honestly held by those expressing them, that there must be reasonable grounds for making representations with respect to future matters, and that half-truths or silence can give rise to misleading or deceptive conduct.
ACCC v Apple Pty Ltd (No 4) [2018] FCA 953 [21.150] There is now a substantial body of case law in relation to misleading or deceptive representations
in relation to the rights that consumers are entitled to under the consumer guarantee provisions of the ACL. The highest profile case to date is the Apple Case in which a pecuniary penalty of $9 million was imposed in respect of Apple’s “routine refusal” to service devices that had been repaired by a third party –despite the ACL entitling the users to a range of consumer guarantees (see Chapter 22). In considering the appropriate penalty Lee J reflected on the issue of the size of Apple and its financial position: I referred above to the tension between the notion that: (a) the size of the corporation does not justify a higher penalty than what might otherwise be imposed; with (b) the principle that if a penalty does not impose a “sting” or burden, it will be unlikely to achieve the necessary deterrent effects. I did ask senior counsel for the ACCC to indicate whether any calculation had been undertaken as to precisely how many minutes it would take Apple Inc to generate the necessary revenue to pay a $9 million penalty. The question was not a facetious one. If a penalty is not to be seen as a cost of doing business, it must visit some appreciable burden upon the malefactor. It is difficult to escape the conclusion that a penalty of $9 million to a corporation such as Apple Inc might be regarded as loose change. Having said that, I am constrained by authority to have regard to the fact that the leviathan nature of Apple Inc cannot dominate the analysis and cannot justify a higher penalty than otherwise would be imposed. …
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Chapter 21 Advertising and Sales Promotion Notwithstanding that I have considerable hesitation in accepting the joint submission that the amount of $9 million will operate at a level sufficient to deter repetition of the contravening conduct by the contravener (and hence it will sufficiently serve the interests of specific deterrence), on balance, it seems to me that it can properly be described as an appropriate penalty in all the circumstances … One might think that this case is a paradigm example of the difficulties that can arise when a penalty regime fixes maximum penalties as to body corporates, without reference to size of the contravener.
Since this decision the penalties have been substantially increased –from $1.1 million to $10 million per contravention (with the opportunity for this to be increased by reference to the benefit obtained from the breach or the corporation’s annual turnover (see [21.10]) –thus better enabling the Court’s disapproval of the contravening conduct to be expressed, in the words of Lee J, in a way which “reflects the community’s concern to ensure that similar conduct by the contravener and others be deterred.”
Moroccan Oil Israel Ltd v Aldi Foods Pty Ltd [2017] FCA 823 [21.160] Aldi’s use of the word “naturals” in its Protane Naturals Moroccan Argan oil range was held to be
misleading or deceptive because it falsely represented that each of the labelled products contained only or substantially natural ingredients. The court held that there was no “logical reason” for why Aldi would choose to call a product line “natural” unless it was intended to convey the message that the product comprised substantially natural ingredients. It was misleading for Aldi to represent that a predominantly synthetic product was natural by including such products as part of a product range called “naturals”.
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In so holding the court held that the substantial use of water will not be enough to sustain a claim to “natural”, drawing the analogy that no reasonable consumer would consider Coca-Cola a drink containing substantially natural ingredients simply because it has a high water content.
ACCC v Coles Supermarkets Australia Pty Ltd [2014] FCA 634 [21.170] Coles promoted bread products as “Baked today, sold today” and “Freshly baked in-store” when
they where in fact partially baked and frozen off site by a supplier and transported and “finished” at in-store bakeries within Coles supermarkets. The Federal Court held that by representing that the bread products were entirely baked on the day on which they were offered for sale, Coles’ conduct contravened s 18 of the ACL (misleading conduct), s 29(1)(a) (false or misleading representation that goods have a particular history), and s 33 (misleading conduct as to the nature, manufacturing process and characteristics of goods). Allsop CJ stated (at [161]) that: It is not the place of the Court to provide an advice on evidence as to how Coles (or any other retailer) might sell bread that has been par-baked from frozen product, praising its virtues, but not misleading the public. A start would, however, be to make it tolerably clear to the public that the recent baking was the completion of a baking process that had taken place some time before, off site, and that “freshly baked” actually meant the completion of the baking process of frozen product prepared and frozen off site by suppliers.
In the later hearing to determine penalty (ACCC v Coles Supermarkets Australia Pty Ltd [2015] FCA 330) a civil pecuniary penalty of $2.5 million was imposed under s 224 of the ACL in respect of contraventions of ss 29(1)(a) and 33. Allsop CJ commented (at [60], [86]) that: The evidence before the Court showed that Coles had engaged in the campaign with the clear purpose of improving its market share vis-à-vis its competitors, being bakeries such as Baker’s Delight … It set out to do so by engaging in the conduct that, in fact, breached the Australian Consumer Law. …
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Business and the Law The contravening conduct in this case is substantial and serious. Notwithstanding the absence of any specific evidence as to loss or damage by a consumer or a competitor, it is clear that the significant potential to mislead or deceive and thus to damage competitors, the duration of the conduct, and the fact that the goods in relation to which the impugned phrases were used were “consumer staples” indicate that the objective seriousness of the offending conduct was considerable
Case Note [21.180] ACCC v Reckitt Benckiser (Australia) Pty Ltd (No 7) [2016] FCA 424 The Federal Court ordered Reckitt Benckiser to pay $1.7 million in penalties for contravening the ACL by making representations on its website and packaging that Nurofen Specific Pain products were each formulated to specifically treat a particular type of pain, when this was not the case. In fact, each product contained the same active ingredient, ibuprofen lysine 342mg, which treats a wide variety of pain conditions and is no more effective at treating the type of pain described on its packaging than any of the other Nurofen Specific Pain products.
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The Court accepted that consumers had been misled into purchasing Nurofen Specific Pain Products, and paying more for those products, in the belief that each product was specifically designed for and effective in treating a particular type of pain. Although the ACCC argued for a penalty of $6 million Edelman J held that a lower penalty was appropriate. While consumers potentially suffered financial loss due to the price premium attached to the products, they were still effective in treating the pain that they represented. In addition, although Reckitt Benckiser’s conduct was designed for profit, the profit made from the contravening conduct was unquantifiable and the products did not cause any physical harm to consumers. The penalty in the Nurofen Case was widely argued by the ACCC, and others, as a reason to increase the penalties available for ACL contravention. In September 2018 the maximum penalty for ACL breaches was increased 10-fold – to $10 million (see [21.10]) and similar conduct in the future is likely to attract a significantly greater penalty.
IN CONTEXT
Free Range Eggs [21.190] Where an egg comes from is not a matter of dispute – but whether it can be described as “free range” as opposed to “cage” or “barn laid” has been considered by the Federal Court on several occasions. ACCC v RL Adams Pty Ltd [2015] FCA 1016 This case was in the words of Edelman J, “yet another case concerning false and misleading conduct concerning ‘free range’ animals” (at [1]): Sellers of products such as chicken, duck, or eggs obtain a premium price by representing their products to be derived from animals that live or lived “free range”. The agreed facts in this case reveal that this premium is substantial in the case of 922
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Chapter 21 Advertising and Sales Promotion
chicken eggs. One possible reason why consumers pay a substantial premium may be a belief that the sellers of these products have treated the animals more ethically than would be the case if the animals had not lived with a reasonable freedom to roam. Unfortunately, cases in which “free range” representations are falsely made do not appear to be abating. The respondent had supplied eggs marketed and labelled as “free range” when in fact the laying hens had been continuously confined to barns and had never had access to the outdoors. The court found that by labelling and promoting eggs as “free range”, it was represented to consumers that the eggs were produced by hens which were able to move about freely on an open range each day, and that most of the hens did in fact do so on most days. In fact, the doors to its barns were kept shut at all times so that none of the laying hens were able to access or use the outdoor range. This conduct was held to contravene ss 18, 29(1) (a) and 33 of the ACL. A pecuniary penalty of $250,000 was imposed and the company was ordered to implement a compliance program and publish corrective notices in major metropolitan newspapers and on its website, and contribute to
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In the most recent case, ACCC v Snowdale Holdings Pty Ltd (No 2) [2017] FCA 834 a pecuniary penalty of $750,000 was imposed on an egg producer for its false or misleading representation that its eggs were “free range” as most of the hens did not go outside the sheds as the farming conditions –the number of pop holes, the number of birds, per metre of pop hole, the flock size inside the shed to the shed –significantly inhibited them from doing so. Such cases should be less likely in the future because of the introduction of National Information Standard on Free Range Eggs which came into effect in April 2018. Under the new Standard, egg producers cannot use the words “free range” on their egg cartons unless the eggs were laid by hens that: • had meaningful and regular access to an outdoor range during the daylight hours of the laying cycle; • were able to roam and forage on the outdoor range; and • were subject to a stocking density of 10,000 hens or less per hectare, and that outdoor stocking density is prominently on the packing or signage.
ACCC v Hillside (Australia New Media) Pty Ltd trading as Bet365 [2015] FCA 1007 [21.210] This case involved the magic word guaranteed to attract the interest of consumers –“free”. Bet365
advertised “$200 free bets for new customers”, which the ACCC argued conveyed the dominant message that new customers were entitled to $200 of free bets, without limitation or restriction. The facts are complicated but, in the words of the ACCC’s media release, “consumers must have gambled three times the value of their deposit and bonus within 90 days before being able to withdraw any winnings. As a result, a consumer who made an initial deposit of $200 and received $200 in bets was required to then gamble $1200 before being able to withdraw any money”. The Federal Court held (at [76]) that: Even if the effect of relevant advertising is, or is likely to be, dispelled prior to any transaction being effected, it may still be misleading or deceptive … a contravention may occur, not only when a contract has been concluded under
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Business and the Law the influence of a misleading advertisement, but also at the point where members of the relevant class have been enticed into “the marketing web” by an erroneous belief engendered by an advertiser. Such a contravention may be established even if the consumer may later come to appreciate the true position before a transaction is concluded. The tendency of advertisements to mislead is to be determined not by asking whether they were apt to induce consumers to enter into contracts, but by asking whether they were apt to bring them into negotiation
The conduct was held to be in breach of s 18 of the ACL (misleading conduct) and s 29 (false representation). The lesson that this case example is intended to convey is that companies cannot use the word “free” in offers to consumers where any conditions that seek to neutralise the “free” nature of the offer are not clearly identified, particularly in emerging markets where there are potentially vulnerable consumers. Although totally irrelevant to this lesson, the opening paragraph of Beach J’s judgment provides comfort to readers that among the usually dry analysis that characterises the law reports there are the occasional gems: Stoke-on-Trent is a city of modest size in rural Staffordshire, England. It was first formed from a “federation” of six towns in 1910. George V promoted it to the status of a city in 1925. Its claim to fame until relatively recently has been sourced to its pottery production and Primitive Methodism, a form of working class evangelism. Its location is the birthplace of Josiah Wedgwood and Josiah Spode. Not content with its traditional industries and peaceful setting some distance from the Welsh border, Stoke-on- Trent is now the home of an internet gaming enterprise [Bet365] that has metastasised to sites all over the globe. Annually, the virtual cash flowing through this new millennium operation well exceeds the economic value of the city’s production from more tangible activities.
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ACCC v TPG Internet Pty Ltd [2013] HCA 54 [21.220] TPG’s advertising prominently displayed an offer to supply broadband internet ADSL2+ service for
$299.99 per month. Much less prominently, the advertisements qualified this offer, stating that it was made on the basis that the ADSL2+ service was available only when bundled with a home telephone service, provided by TPG through landline technology, for an additional $30.00 per month. The disparity between the prominent headline offering TPG’s ADSL2+ service at an attractive price, and the less prominent terms qualifying that offer, was held to constitute misleading conduct and a false representation in breach of s 29(1) of the ACL. The High Court upheld orders for injunctions, corrective advertising, the implementation of a compliance program, costs, and a pecuniary penalty of $2 million. The ACCC has commented that, “this case is of great significance because it is important that penalties imposed for breaches of the ACLare set at a level that deters future breaches”.
IN CONTEXT
Scams [21.230] A scam is defined by the ACCC as “a form of dishonest action, based on an invi-
tation to participate in an activity [under which] victims are encouraged, misled or induced to voluntarily interact with the perpetrator, and ultimately to willingly surrender money, information or other valuable resources”. The Australian Bureau of Statistics estimates that approximately $1.4 billion is lost every year to scammers.
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Chapter 21 Advertising and Sales Promotion
The ACCC highlights the common scams targeting small business: Overpayment scams The scammer will contact you to purchase goods or services. They then send a payment by cheque, money order or credit card for far more than the agreed price. The scammer then asks you to refund the overpayment. The scammer is hoping you will transfer the refund before you discover that their cheque has bounced, or their money order or credit cards were phoney. Trademark publication scam The scammer sends you an unsolicited letter or invoice for a trademark listing. The scammer tries to give the impression that they are connected with the registration of trademarks by IP Australia or an overseas-based equivalent. Directory entry or unauthorised advertising scam The scammer sends you an invoice for a listing or advertisement in a magazine, journal, business register or directory which you didn’t request or authorise, hoping that under the pressure of business you won’t realise this. Scammers may also send a proposal for a subscription, disguised as an invoice or “renewal notice” for an entry in a trade directory. It may sound like a “free” entry, but charges can be hidden in the fine print, resulting in demands for payment later.
Half the money I spend on advertising is wasted, and the trouble is I don’t know which half. Lord Leverhulme.
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Investment scheme scams Investment scams can come in many forms –from an unexpected phone call offering an investment opportunity to an email encouraging you to buy shares that are about to go up based on “secret” information. You could be offered early access to your super, gambling software, or promised large tax deductions or refunds. Office supply scam With these scams, you receive goods you never ordered or are charged for goods you never received, or goods that aren’t the ones you agreed to buy. The scammer will call you pretending to be your “regular” supplier, telling you the offer is “available for a limited time”. Domain name scam With these scams, you’ll be sent an invoice or email for an internet domain name registration very similar to your own business domain name or a renewal notice for your actual domain name. The notice could be from a business that supplies domain names trying to trick you into signing up to their service, or from a scammer trying to take your money. Phishing scam Phishing scams are all about tricking you into handing over your personal and banking details to scammers. The emails you receive might look and sound legitimate but in reality genuine organisations like a bank or a government authority will never expect you to send your personal information by an email or online. Scammers can easily copy the logo or even the entire website of a genuine organisation. So don’t just assume an email you receive is legitimate. If the email is asking
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you to visit a website to “update”, “validate” or “confirm” your account information, be sceptical. Never send your personal, credit card or account information by an email or enter it on a website that you are not certain is genuine. Also make sure you delete phishing emails – they can carry viruses that can infect your computer. Do not open any attachments or follow any links in phishing emails.
Bait advertising Advertising nourishes the consuming power of men. It sets up before a man the goal of a better home, better clothing, better food for himself and his family. It spurs individual exertion and greater production. D Ogilvy, Confessions of an Advertising Man (Atheneum, 1963).
[21.240] There can be few more eloquently descriptive section headings than that for s 35 of the ACL –“Bait advertising”. The section prohibits bargain offers being used as “bait” to attract customers and sales in circumstances where the bargain is illusory. s 35 is directed at two types of conduct: • It prohibits the advertising goods or services at a specified price if there are reasonable grounds –of which the advertiser is aware, or ought reasonably to be aware –that it will not be able to offer those goods or services for a reasonable period and in reasonable quantities (s 35(1)). • It obliges the advertisers of goods or services at a specified price to supply those goods or services at that price for a reasonable time and in reasonable quantities (s 35(2)).
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If the advertisement makes it clear that the goods at a discounted price are in short supply or for a limited time only there may not be a contravention. It depends on reasonableness, which is determined having regard to the nature of the market in which the corporation carries on business and the circumstances –the nature of the advertisement. Two defences to prosecution (but not to civil proceedings) are provided (by s 157(4) –that the advertiser establishes either that it offered to procure the goods or services advertised within a reasonable time or that it offered to procure equivalent goods or services at the same price within a reasonable time.
Country of origin claims [21.250] Section 29(1)(a) and (k) of the ACL prohibit false or misleading representations concerning the place of origin of goods. Such representations also constitute misleading or deceptive conduct in breach of s 18. Country of origin advertising is common because phrases such as “made in Australia” appeal to consumers. In the words of the ACCC: They give the impression that Australian-based workers, producers and manufacturers will benefit from the purchase of the products involved. In an era of globalisation these phrases seem to allow the consumer to make a conscious choice to support the local rather than international economy.
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Chapter 21 Advertising and Sales Promotion
IN CONTEXT
ACCC acts on Chinese made “Aussie Beer” [21.260] The Independent Liquor Group (ILG) has paid a penalty of $10,200 following the
issue of an infringement notice by the Australian Competition and Consumer Commission in relation to its “Aussie Beer” product.
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From March 2014 to August 2014, ILG supplied a product named “Aussie Beer”, with labelling that incorporated the statement “100% owned” within a map of Australia and the statement “Australia’s finest malt”. The packaging also featured green and gold colours, which are colours closely associated with Australian sporting teams.
The ACCC considered that, by its packaging and labelling, ILG represented that its “Aussie Beer” product was a product made in Australia when in fact the product was made in China. The infringement notice was issued because the ACCC had reasonable grounds to believe that ILG had made false or misleading representations about the country of origin of the “Aussie Beer” product, in contravention of the ACL. “Country of origin representations, particularly those designed to grab the eye of the consumer by using well known symbols, colours, or slogans, must be truthful,” ACCC Chairman Rod Sims said. ACCC, Media Release 46/15 (30 March 2015).
Conversely, for particular goods, their origin in another country may be attractive.
IN CONTEXT
Country of Origin Food Labelling [21.270] In July 2016 the Country of Origin Food Labelling Information Standard was made under s 134 of the ACL and introduces new labelling requirements for most food sold in stores, markets, online and in vending machines under the standard country of origin
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A Budgewoi reader bought a tin of “Australian salmon” but when she looked at the label saw it said “Product of New Zealand”. She phoned the supermarket to inquire about the discrepancy and was told the salmon was “caught halfway between the two countries”. Sydney Morning Herald (31 March 1990).
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claims can be made using one of the four different categories: “Grown in”, “Product of”, “Made in” and “Packed in”. The Standard provides that information can take the form of a text statement or a text and graphic label known as a standard mark incorporating a bar chart indicating the Australian origin percentage. Standard mark
Text statement
Product of Australia Product of Australia
The Standard sets out three possible country of origin labels for food, each with its own mandatory text requirements: Three component standard mark –a graphic and text-based label which is mandatory for priority food items grown, produced or made in Australia. The label includes: • the kangaroo in a triangle symbol so you can easily and quickly identify the food’s Australian origin; • the minimum proportion, by ingoing weight, of Australian ingredients, indicated by a percentage amount and shown in a bar chart; and
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• a statement indicating what percentage of the food was grown or produced in Australia. Kangaroo logo
Bar chart
Explanatory text
Made in Australia from at least 60% Australian ingredients
Two component standard mark – a graphic and text-based label which is mandatory for most priority food items packed in Australia. It may also be used for imported priority foods that contain Australian ingredients. The label includes: • the minimum proportion, by ingoing weight, of Australian ingredients, indicated by a percentage amount and shown in a bar chart and • a statement indicating what percentage of the food was grown or produced in Australia.
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Chapter 21 Advertising and Sales Promotion
TWO COMPONENT LABEL BAR CHART
EXPLANATORY TEXT
Packed in Australia from less than 10% Australian ingredients
Country of origin statement – a text-only label which is used for non-priority food items. Imported priority foods must also, as a minimum, carry a country of origin statement in a clearly defined box. • Non-priority food
Made in the USA
• Imported priority food
Made in the USA
The ACCC gives the following examples:
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Examples of Marks under the Standard
Made in Australia from at least 50% Australian ingredients
Made in Vietnam from at least 75% Australian ingredients
Made in Italy Packed in Australia Product of Australia
Part 5-3 of the ACL provides a regime for determining when goods will and will not be regarded as made in or produced in Australia, for the purpose of determining whether or not such claims are false misleading or deceptive. Section 255 provides that the ACL is not breached if the requirements specified for particular representations are met. “Safe harbour” provisions are outlined below.
“Made in/manufactured in” claims [21.280] A safe harbour for a “made in” claim requires that the goods must have been substantially transformed in the country of origin being claimed. Goods are “substantially
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transformed” in a country if, as a result of one or more processes undertaken in that country, the goods are “fundamentally different in identity, nature or essential character from all of its ingredients or components” (ACL, s 255(3)). The method of calculating costs of production and manufacture is set out in ss 256 and 257. The cost includes the purchase price of the raw material and reasonably allocated labour costs including wages and overheads.
“Product/produce of” claims [21.290] Safe harbour for “product of” claims requires each significant component or ingredient of the goods originated in the country, and all, or virtually all, of the production processes take place in the country.
“Grown in” claims [21.300] A safe harbour for “grown in” claims requires that each significant ingredient or significant component was grown in the country of the claim and “all, or virtually all,” of the production or manufacturing process happened in that country. The “Grown in” safe harbour defence is only available if no other representation is made in relation to the country of origin of the goods.
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Substantiation of advertised claims If a business is unsuccessful it means that the public does not care enough for it to make it pay. If it is successful the public pays its expenses and something more. Arizona Employers’ Liability Cases 250 US Wot 433 (1919) per Holmes J.
[21.310] The ACL gives the ACCC the power to issue substantiation notices requiring business to substantiate claims made about their goods or services. The ACCC can send a written notice asking a business to provide credible evidence that supports specific claims made in its advertising, labelling or selling advice (s 219). The business has 21 days to respond (s 221).
21.3 SELF-REGULATION OF ADVERTISING The AANA Code of Ethics [21.320] Industry Codes of Practice play an important role as an alternative to or substitute for formal regulation. One of the most significant self-regulation schemes in Australia is the Code of Ethics adopted by the Australian Association of National Advertising as part of advertising and marketing self-regulation. Its object is to ensure advertisements and other forms of marketing communications are legal, decent, honest and truthful and that they have been prepared with a sense of obligation to the consumer and society and a sense of fairness and responsibility to competitors. The current code came into effect on 1 January 2012. The self-regulatory system is administered by Ad Standards (the rebranded Advertising Standards Bureau) and is funded by a levy applied to advertising spend (currently $500 per $1 million of media spend). While matters of “truth in advertising” are appropriately dealt with by the courts, matters relating to “taste and decency” are best dealt with by the industry itself. These
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Chapter 21 Advertising and Sales Promotion
matters are the focus of s 2 of the AANA Code of Ethics, which reaches beyond the law to enter the fields of social mores, morals, ethics, taste and decency. The legal responsibilities of advertisers are a matter for the ACL. The social responsibilities of advertisers are addressed in the AANA Code of Ethics, which is the overarching code setting out standards that apply to advertising or marketing communication across any medium but other AANA codes may also apply: • Food & Beverages Advertising Code • Environmental Claims Code • Wagers Advertising Code. A number of other codes are administered by Ad Standards. • AANA Code for Advertising & Marketing Communications to Children • FCAI Motor Vehicle Code • AFGC Responsible Children’s Marketing Initiative • AFGC Quick Service Restaurant Industry Initiative for Responsible Advertising and Marketing to Children.
A lot of people who are good with words make people cry. I make them buy. John Singleton, Business Review Weekly (28 March 1994).
In addition, there are a number of other advertising codes not administered by Ad Standards: • Alcohol Beverages Code • Therapeutic Goods Advertising Code Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
• ASTRA Code of Practice (including Television and Radio) • Commercial Radio Code of Practice • Commercial TV Code of Practice.
IN CONTEXT
The AANA Code of Ethics [21.330] Section 1 Competitor Complaints 1.1
Advertising or Marketing Communication shall comply with Commonwealth law and the law of the relevant State or Territory.
1.2
Advertising or Marketing Communication shall not be misleading or deceptive or be likely to mislead or deceive.
1.3
Advertising or Marketing Communication shall not contain a misrepresentation, which is likely to cause damage to the business or goodwill of a competitor.
1.4
Advertising or Marketing Communication shall not exploit community concerns in relation to protecting the environment by presenting or portraying distinctions in products or services advertised in a misleading way or in a way which implies a benefit to the environment which the product or services do not have.
1.5
Advertising or Marketing Communication shall not make claims about the Australian origin or content of products advertised in a manner which is misleading.
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Campbell Soup used to advertise that it produced 21 different kinds of soup, and listed them. But the list actually contained 22 brands. In some years as many as 700 people would write to the company about this discrepancy. Executives of the company were delighted with their deliberate mistake, because it caused the ads to be talked about and gave them feedback about how carefully their advertising was read. P Hay, Harrap’s Book of Business Anecdotes (Harrap, 1988).
Section 2 Consumer Complaints 2.1
Advertising or Marketing Communication shall not portray people or depict material in a way which discriminates against or vilifies a person or section of the community on account of race, ethnicity, nationality, gender, age, sexual preference, religion, disability, mental illness or political belief.
2.2
Advertising or Marketing Communication shall not employ sexual appeal: (a) where images of Minors, or people who appear to be Minors, are used; or (b) in a manner which is exploitative or degrading of any individual or group of people.
2.3
Advertising or Marketing Communication shall not present or portray violence unless it is justifiable in the context of the product or service advertised.
2.4
Advertising or Marketing Communication shall treat sex, sexuality and nudity with sensitivity to the relevant audience.
2.5
Advertising or Marketing Communication shall only use language which is appropriate in the circumstances (including appropriate for the relevant audience and medium). Strong or obscene language shall be avoided.
2.6
Advertising or Marketing Communication shall not depict material contrary to Prevailing Community Standards on health and safety.
2.7
Advertising or Marketing Communication shall be clearly distinguishable as such to the relevant audience.
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The Code of Ethics defines key terms. Advertising or Marketing Communication means: a. any material which is published or broadcast using any Medium or any activity which is undertaken by, or on behalf of an advertiser or marketer, • over which the advertiser or marketer has a reasonable degree of control, and • that draws the attention of the public in a manner calculated to promote or oppose directly or indirectly a product, service, person, organisation or line of conduct, b. but does not include: • labels or packaging for products, • corporate reports including corporate public affairs messages in press releases and other media statements, annual reports, statements on matters of public policy and the like, • in the case of broadcast media, any material which promotes a program or programs to be broadcast on that same channel or station. Medium means any medium whatsoever including without limitation cinema, internet, outdoor media, print, radio, telecommunications, television or other direct-to- consumer media including new and emerging technologies. Minor means a person under 18 years of age. Prevailing Community Standards means the community standards determined by the Ad Standards Community Panel as those prevailing at the relevant time in relation to Advertising or Marketing Communication.
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Chapter 21 Advertising and Sales Promotion
Consumer complaints [21.340] Consumer complaints in relation to matters of “taste and decency” under s 2 of the AANA Code of Ethics may be made to the Advertising Standards Board (ASB). The ASB cannot deal with complaints about truth in advertising –the ACCC and State/ Territory consumer agencies who administer the ACL are the appropriate authorities for these complaints. If the ASB upholds a complaint the advertiser is requested to modify or discontinue the advertisement. If the advertiser chooses not to modify or discontinue an advertisement in line with a determination, the Board may forward its Case Report to appropriate government agencies and media proprietors. It cannot ban advertisements or force advertisers to withdraw them. Ultimately its authority rests on the industry’s voluntary adherence to self-determined standards which “recognise that advertisers share a common interest in promoting consumer confidence in and respect for general standards of advertising”.
Competitor complaints
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[21.350] Competitor complaints –where an advertiser complains about the “legality” of a competitor’s advertisement –are provided for in s 1 of the AANA Code of Ethics. A complaint may be made to the Advertising Claims Board, which provides a system of alternative dispute resolution directed to addressing and resolving challenges in advertising that might otherwise lead to litigation.
IN CONTEXT
The 10 most complained about ads 2017
1. Ultra Tune Australia – 0042/17 –TV –Free to air
Two women are driving a car when the muffler falls off and starts a fire. They produce fire extinguishers and attempt to stop the fire, before leaping away as the car explodes.
Dismissed
No. of complaints: 359
Issues of concern: 2.1 –Discrimination or Vilification, 2.2 –Exploitative and degrading, 2.4 –Sex/sexuality/nudity and 2.6 –Health and Safety.
The One Who Has the Most Toys When They Die, Wins! Licence-plate holder, Los Angeles (1984).
2. Youfoodz – 0423/17 –TV –Free to air
A young boy impersonating Gordon Ramsay promotes the Youfoodz range, saying the word “forkin” twice in the advertisement.
Upheld
No. of complaints: 304
Issues of concern: 2.5 –Language
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A modified version of the Youfoodz advertisement where the “forkin” has been beeped out.
Upheld
No. of complaints: 232
Issues of concern: 2.5 –Language
4. Sportsbet – 0234/17 –TV –Free to air
The advertisement featured (prominently) Olympian and convicted drug cheat Ben Johnson (1988 games) talking about the “performance enhanced” app and included the line “puts the ‘roid’ in Android”.
Upheld
No. of complaints: 202
Issues of concern: 2.6 –Health and Safety
A man receives a telemarketing call and tells his partner that it is the office and he needs to take the call. He then moves to another room and asks the telemarketer to repeat their pitch while he uses the Ned’s app on his mobile phone.
Dismissed
No. of complaints: 186
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5. Neds – 0461/17 –TV –Free to air
Issues of concern: Wagering Code: 2.8 –Excess participation 6. Meat & Livestock Australia – 0406/17 –TV –Free to air
Various religious/mythical leaders/Gods/characters seated around a table enjoying a meal together. The figures include Thor, Aphrodite, Jesus, Moses, Buddha and Ganesha.
Dismissed
No. of complaints: 144
Issues of concern: 2.1 –Discrimination and Vilification 7. Neds – 0459/17 –TV –Free to air
A client follows up on the lack of progress of work on a house construction site with the site supervisor. The tradesmen on site comment that they are waiting for work to be finished on site by other tradesmen while using their phones.
Upheld
No. of complaints: 139
Issue of concern: Wagering Code: 2.8 –Excess participation
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3. Youfoodz – 0466/17 –TV –Free to air
8. Industry Super Fund – 0156/17 –TV –Free to air
A girl and her mother locking hens in a hen house before going in to their own home. We then see some foxes watching the hen house before a shadowy figure opens the door to let the foxes in.
Dismissed
No. of complaints: 126
Issue of concern: 2.3 –Violence
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Chapter 21 Advertising and Sales Promotion
9. AAMI – 0064/17 –TV –Free to air
A family who have broken down on a rural dirt road standing by their caravan with the father talking on their phone describing their location, noticing a sign which says “ship creek”.
Dismissed
No. of complaints: 96
Issue of concern: 2.5 –Language
10. iSelect Pty Ltd – 0165/17 – TV –Free to air
A television advertisement which shows a couple in bed. The woman switches her light on and off, each time revealing a different partner.
Dismissed
No. of complaints: 72
Issue of concern: 2.1 – Discrimination and Vilification and 2.4 – Sex, Sexuality and Nudity
(Ad Standards Review of Operations 2017)
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Case Example
ASB Case Report Re Youfoodz [21.360] 1. Case Number 2. Advertiser 3. Product 4. Type of Advertisement/media 5. Date of Determination 6. DETERMINATION
0423/17 Youfoodz Food and Beverages TV –Free to air 27/09/2017 Upheld –Modified or Discontinued
Man is a creature who lives not upon bread alone, but principally by catch-words. Robert Louis Stevenson.
Issues raised 2.5 –Language Inappropriate Language 2.5 –Language Strong or Obscene Language 2.6 –Health and Safety Within Prevailing Community Standards
Description of the advertisement This television advertisement features a young boy explaining how quick and easy YouFoodz products are to prepare before saying that he finds the freshness of Youfoodz meals unforkin-believable.
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The complaint A sample of comments which the complainant/s made regarding this advertisement included the following: The boy was using the term “forking” in what was a clear reference to the term “fucking” and We consider this totally inappropriate for the timeslot, the fact that The Block is a family show and that the boy in the ad should not be used in this way.
The advertiser’s response Comments which the advertiser made in response to the complainant/s regarding this advertisement include the following: We have addressed all parts of Section 2 of the AANA Advertiser Code of Ethics below: Section 2.1 – Discrimination or Vilification: Not agreed. This advertisement does not discriminate against age, men, women, gender, religion, sexual preference or on the grounds of disability or mental illness, ethnicity, race or nationality, physical characteristics, lifestyle choices or occupation. Section 2.2 –Exploitative and Degrading: Not agreed. This advertisement does not feature content of or depict children, men or women in any way that is exploitative or degrading.
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Section 2.3 – Violence: Not agreed. This advertisement does not feature violence, cruelty, bullying, graphic content or unacceptable behaviours. Section 2.4 – Sex, Sexuality and Nudity: Not agreed. This advertisement does not feature sex, sexuality or nudity. Section 2.5 – Language: Not agreed. This advertisement does not include any strong or obscene terms. The advertisement does feature the word “forkin” in a light-hearted, tongue- in-cheek manner that is appropriate in the context of a kitchen, and that we sell ready-made meal company and a fork is needed to consumer our meals. It is not used in conjunction with offensive imagery or in an aggressive way. Section 2.6 –Health and Safety: Not agreed. This advertisement does not include a depiction of drugs, smoking, drinking or gambling. Nor does it include bullying, unsafe driving, unsafe behaviour, fantastical elements, safety in the home, protective gear or any other health and safety issues. Section 2.7 –Distinguishable as advertising: Not agreed. It is clear to the relevant audience that the content is commercial in nature.
The determination The Board considered whether this advertisement breaches Section 2 of the AANA Advertiser Code of Ethics. The Board noted the complainants’ concerns that the advertisement depicts a young boy saying “forking” in a manner designed to make it appear he is saying “fucking” which is not appropriate language for a young boy, and not appropriate
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Chapter 21 Advertising and Sales Promotion
for children to hear. The Board viewed the advertisement and noted the advertiser’s response. The Board considered whether the advertisement was in breach of Section 2.5 … The Board noted that the current advertisement opens on the text, “Forkin’ Fresh” on screen in large black letters against a white background and that the actual word used by the boy is “forkin’ ”. A minority of the Board noted that the manner in which the boy speaks the word “forkin’ ” does sound very close to the word, “fucking” but considered that the opening text makes it clear that the descriptor is “forkin’ ” and not “fucking” and overall the advertisement is playing on the well-known behaviour of celebrity chef Gordon Ramsey but it is clear that the boy is not actually swearing. The minority of the Board noted that advertisers should take care when using children in advertisements to mimic the behaviour of adults but considered that the actual content of the advertisement does not use strong or obscene language and overall the language used is not inappropriate in the circumstances. The majority of the Board however noted that whilst most members of the community would not expect a child to actually say the word “fucking” in a television advertisement, in the Board’s view the way the young boy says the word “forkin’ ” makes it sound very close to the strong swear word it is clearly imitating. … Finding that the advertisement did breach Section 2.5 of the Code, the Board upheld the complaints.
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The advertiser’s response to determination Although Youfoodz disagrees with the Board’s determination, Youfoodz will take measures to modify the advertisement and continue to air the modified version of the advertisement. This change is planned to take effect from 8 October 2017. Note: Perhaps not surprisingly the modified advertisement with the offending word bleeped out attracted almost as many complaints and was also held to breach Section 2.5 of the Code.
IN CONTEXT
Self-regulation compliance outcomes [21.370] Advertisers across Australia continue to take a responsible approach and are willing to adhere to community standards with a compliance rate of almost 100 percent.
Overall, statistics show that the majority of non-compliance cases are small and medium size businesses with local and own premises signage. Expansion of ASB jurisdiction to cover this form of advertising and marketing communication has presented challenges, but most advertisers act responsibly and comply with Board determinations.
If voluntary compliance worked, Moses would have come down from Mount Sinai with the Ten Guidelines. William Davis.
Where an advertiser does not comply with the Board’s decision the ASB has sought assistance from industry bodies and Federal, State, and Local Government authorities. In 2014,
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Facebook agreed to take the approach that Facebook pages need to comply with determinations of the Standards Board. Facebook will review all complaints that the ASB refers to them in relation to content that is posted on Facebook for compliance with their policies. In the very few cases where an advertiser does not comply voluntarily with a determination by the Standards Board, Facebook has agreed it will remove an advertising or marketing communication in line with its advertising guidelines. MEASURING OUR IMPACT
5,735
17%
6,472
5,529 4,430
INCREASE FROM 2016
2,773 2013
2014
2015
2016
2017
COMPLAINTS Record number of complaints received
15.98%
84.02%
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UPHELD
DISMISSED
Outcome of cases 2017 Ad Standards, Review of Operations (2017).
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Chapter 21 Advertising and Sales Promotion
IN CONTEXT
Advertisements that will never run again
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[21.380]
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Business and the Law
21.4 UNFAIR PRACTICES Referral selling [21.390] Referral selling is a sales technique under which consumers are induced to buy goods or services at a set price on the basis that after their supply they will receive a rebate, commission or other benefit “in return for giving the [supplier] the names of prospective customers or otherwise assisting the [supplier] to supply goods or services to other consumers”. The ACCC’s Advertising and selling guide explains that referral selling is prohibited by s 49 of the ACL because “any benefit flowing to the consumer is contingent on an event occurring after the sale. Consumers, having paid the ‘full price’, often never hear from the supplier again”. 940
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Chapter 21 Advertising and Sales Promotion
The factor which distinguishes referral selling from legitimate practices is that in referral selling the benefit is “contingent on an event occurring after [the] contract is made”. If the benefit is given at the time of the sale there is no breach of s 49. Thus, to represent in negotiations leading to a “consumer” (as defined in s 4B of the Competition and Consumer Act 2010 (Cth)) entering into a contract for the installation of a spa that commissions will be paid for any person who inspects the spa after it is installed contravenes s 49. If the negotiations result in a benefit, such as a discounted price being given in return for the consumer allowing the spa once installed to be inspected by prospective customers, there is no contravention of s 49. Similarly, there is no contravention of s 49 if, after the contract is signed, an arrangement is made for commissions to be paid for prospective customers referred by the purchaser.
If the package doesn’t say “New” these days, it better say “Seven Cents Off”. Spencer Klaw.
IN CONTEXT
Referral selling [21.400] It is common for a business to seek to persuade a consumer to buy goods or
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services by promising benefits if they help the business supply goods or services to other consumers. The ACL makes such a practice illegal if receipt of the benefit (for example, a rebate or commission) is dependent on the other consumers also acquiring goods or services. The consumer may never receive the benefit in these circumstances, which is why the practice is illegal. Example: A sales assistant offers a customer 10 free DVDs to go with their new plasma TV on the condition that they give the business the names of five of their friends and that these friends all buy plasma TVs from the business. This type of offer is illegal. ACCC, Advertising and Selling Guide (17 April 2014) (https://www.accc.gov.au/publications/ advertising-selling).
Harassment and coercion [21.410] The use of “physical force or undue harassment or coercion” in relation to the supply of goods or services or the payment for goods or services by a consumer, or the sale of, or payment for, an interest in land is prohibited (ACL, s 50). Practices that involve criminal behaviour such as the use of threats or violence to persons or property or the use of abusive, threatening or obscene language, refusing to leave premises after being requested to or using documents made up to look like court documents clearly contravene the section. However, non-criminal behaviour such as repeated phone calls, calls at unreasonable hours, after-hours visits, threats to disclose information to third parties such as employers and neighbours and misleading threats about the future consequences of not paying may also contravene the section.
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ACCC v McCaskey [2000] FCA 1037 [21.420] The Federal Court held that a debt collection agency and its former agent had engaged in
undue harassment, undue coercion and misleading conduct while collecting debts from consumers through making an excessive number of phone calls to debtors, adopting a threatening aggressive and abusive manner and misleading debtors and others about recovery procedures and the consequences of not paying the debts.
IN CONTEXT
Harassment and coercion [21.430] Harassment means persistent disturbance or torment. Undue harassment is
where the frequency, nature or content of unwelcome approaches is such that they are calculated to intimidate or demoralise, tire out or exhaust a person.
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Coercion can occur in the course of aggressive selling. A seller may try to exploit known facts about, circumstances of, or statements made by a consumer, to force them to agree to a purchase. A debt collector makes an excessive number of telephone calls to debtors over the course of two days. The tone of the calls is threatening, abusive and aggressive. The collector gives false information to debtors and others about debt recovery procedures and the consequences of non-payment. This conduct is likely to contravene the harassment provisions of the ACL. A business is entitled to take reasonable steps to pursue a debt. In such circumstances a debtor is entitled to be treated fairly, with respect and courtesy, and not be unduly harassed or coerced. ACCC, Advertising and Selling Guide (17 April 2014) (https://www.accc.gov.au/publications/ advertising-selling).
Wrongly accepting payment [21.440] • Section 36 of the ACL prohibits a person from accepting payment for goods or services if at the time of acceptance either: the person intends not to supply the goods or services or to supply goods or services materially different from the goods or services for which the payment or other consideration is accepted;
The Invisible Hand, if it is to be found anywhere, is likely to be found picking the pockets of the poor. Edward Nell Economist.
or • there are reasonable grounds, of which the person is aware or ought reasonably to be aware, for believing that the person will not be able to supply the goods or services 942
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Chapter 21 Advertising and Sales Promotion
within the period specified by the corporation or, if no period is specified, within a reasonable time. If a person exercises reasonable precautions and due diligence and the failure to supply within a reasonable time is beyond their control, they will not be liable under s 36. There is also no liability under s 36 if the customer agrees to receive different replacement goods or services. The question of “material difference” in s 36 is a question of degree. In Dawson v World Travel Headquarters Pty Ltd [1980] ATPR 40-187, it was held in relation to s 58, the predecessor of s 36, that a holiday itinerary which was changed by two consecutive full days in Singapore being reduced to one full day and a night, was materially different from the itinerary agreed to: “[The consumers] saw two consecutive full days in Singapore as a significant feature of the tour and as an attractive offer to a prospective purchaser”.
Offering rebates, gifts, prizes [21.450] Offering rebates, gifts, prizes or other free items in connection with the supply of goods or services or land is prohibited if the person intends not to supply the rebates, gifts, prizes or other free items at all, or to not provide them as offered within the time specified or a reasonable time (ACL, s 32).
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TPC v Calderton Corporation Pty Ltd [1994] ATPR 41-306 [21.460] A retailer of stereo equipment and its director (who was responsible for the company’s management) were fined for breaching the predecessor of s 32. The company conducted a competition in which it offered nominated prizes to the 10 contestants who saved the most “prize dollars” at the close of the contest. Prize dollars were awarded for purchasing goods, visiting the store and introducing new customers. Because the competition was not a financial success for the company, fictitious names were awarded sufficient prize dollars to make them the winners. Consequently no prizes were awarded. Neaves J was extremely critical of this conduct (at 42,116): It shows a lack of integrity. To continue to operate the competition and to advertise and promote it knowing that steps were to be taken to ensure that no prizes advertised were to be awarded was reprehensible conduct. It not only amounted to a fraud upon those who were induced to enter into the competition upon the understanding that the prizes advertised were to be awarded to those who accumulated the most “prize dollars” but it demonstrated a lack of business morality. Those circumstances alone call for substantial fines to be imposed.
If a person exercises reasonable precautions and due diligence and the failure to supply within a reasonable time is beyond their control, they will not be liable under s 32. There is also no liability under s 32 if the customer agrees to receive a different free item.
Pyramid selling [21.470] Section 44 of the ACL prohibits a person from participating in a pyramid scheme (whether as a promoter or as one who otherwise takes part in the scheme) or inducing or attempting to induce a person to participate in one and s 46 provides guidance to the courts for differentiating between unlawful pyramid schemes and legitimate
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multi-level marketing schemes. A pyramid scheme is, in essence, one in which a person makes payments with the prospect of receiving payments for the introduction of other participants to the scheme. The ACCC’s Advertising and Selling Guide (17 April 2014) explain the mischief in such schemes: Pyramid schemes make money by recruiting people rather than by selling actual products or services, even if the scheme includes the selling of a product. These schemes work by asking new participants to make a payment, known as a “participant payment”, in order to join. New members are promised payments for recruiting other investors or new participants. … The reality of pyramid selling is that it tends to heavily reward the very top of the pyramid at the expense of everyone below. The vast majority who join the scheme later are led to believe that they will also benefit financially, when this is often not the case.
The originators of a pyramid selling scheme can profit only if there is large-scale recruitment of others. Unfortunately, the more who join the more who will be eventually hurt by the inevitable collapse. Under s 45(1) a pyramid scheme is a scheme with both of the following characteristics: (a) to take part in the scheme, some or all new participants must provide, to another participant or participants in the scheme [a participation payment]
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(b) the participation payments are entirely or substantially induced by the prospect held out to new participants that they will be entitled, in relation to the introduction to the scheme of further new participants, to be provided with [a recruitment payment]
Australian Communications Network Pty Ltd v ACCC [2006] FCAFC 221 [21.480] ACN provided retail telecommunications services to business and domestic customers using a multi-level marketing arrangement under which individuals could become independent representatives of ACN upon payment of a participation fee and annual fee. Independent Representatives (IR) earned commissions and bonuses for signing up customers and introducing potential independent representatives. The Federal Court held that these arrangements constituted pyramid selling – the participation payment was substantially induced by the prospect held out to individuals that they would be entitled to recruitment payments. The Full Federal Court allowed the appeal holding that there must be a material connection rather than merely a casual connection between “recruitment” payments and the introduction of new participants (at [46]): The real vice inherent in pyramid selling schemes appears to be that the rewards held out are substantially for recruiting others, who in turn get their rewards substantially for recruiting still more members, and so on. If there is no underlying genuine economic activity the scheme must ultimately collapse and many people will have been induced to pay money for nothing. We see the purpose of the legislation as directed at proscribing schemes where the real or substantial rewards held out are to be derived substantially from the recruitment of new participants, as distinct from rewards for genuine sales of goods or services. In the present case, there is not present the requisite relationship between the payments in question (CABs and residual override commissions) and the introduction of further new IRs. The receipt of any payments by IRs is dependent on the activities of IRs themselves, and/or of the IRs downstream of them signing up customers for ACN and those customers acquiring ACN’s telephone services. If an IR does no more than recruit other IRs there is no
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Chapter 21 Advertising and Sales Promotion entitlement to any payment. The quantum of remuneration essentially turns on the volume of customers’ business with ACN regardless of whether those customers have been signed up by an IR or a downstream IR. There is no suggestion that the services provided by ACN to its customers are of poor quality or are not commercially competitive. Further, what is payable by the new IR on recruitment is the participation fee, which is not large. The recruiter does not get any benefit from the recruit’s participation fees; they go to ACN. The benefits an IR recruiter gets come not from new recruits but from customers and ACN. We accept that there is a casual connection between the rewards held out to participants and their introduction of IRs in that the reward is based on sale of ACN’s services to the customers of the downstream IRs who form part of the upstream IR’s organisation. However, for the reasons set out above, we do not regard that connection as a relevant, material or sufficient connection [to constitute a “substantial” inducement]. It follows that the appeal must succeed.
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A scheme may be a pyramid scheme whether or not it involves the marketing of goods or services and whether or not the entitlement to payment or other benefit is legally enforceable (ACL, s 45(4)). One of the most difficult issues that arises in relation to the interpretation of pyramid selling laws is to distinguish illegal pyramid selling schemes from legal multi-level marketing schemes. Both multi-level marketing and pyramid schemes encourage members to recruit others by upstream commissions. The difference is that “legitimate multi-level marketing relies on actual products being sold [whereas] illegal schemes typically only sell recruitment fees, meaning that the scheme collapses when more members cannot be recruited” (Matt Drummond, “ACCC Loses Pyramid Bid”, Australian Financial Review (7 June 2007)). Section 46 attempts to clarify this distinction: Marketing schemes as pyramid schemes (1) To decide, for the purpose of this Schedule, whether a scheme that involves the marketing of goods or services (or both) is a pyramid scheme, a court must have regard to the following matters in working out whether participation payments under the scheme are entirely or substantially induced by the prospect held out to new participants of entitlement to recruitment payments: (a) whether the participation payments bear a reasonable relationship to the value of the goods or services that participants are entitled to be supplied with under the scheme (as assessed, if appropriate, by reference to the price of comparable goods or services available elsewhere); (b) the emphasis given in the promotion of the scheme to the entitlement of participants to the supply of goods or services by comparison with the emphasis given to their entitlement to recruitment payments. (2) Subsection (1) does not limit the matters to which the court may have regard in working out whether participation payments are entirely or substantially induced by the prospect held out to new participants of entitlement to recruitment payments. The hardest thing in the world to understand is the income tax. Albert Einstein.
Inertia selling [21.490] Division 2 (“Unsolicited supplies”) of Pt 3-1 (“Unfair practices”) of the ACL prohibits various forms of “inertia selling” –the practice of sending or supplying goods
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or services to someone who has not requested them and asserting a right to payment for them. It is illegal to – • request payment for unsolicited goods or services (s 40); • request payment for unauthorised entries or advertisements (s 43); and • send unsolicited credit cards or debit cards (s 39). The prohibition on sending unsolicited credit and debit cards is a particularly paternalistic provision. Its rationale is not only the possibility of fraud if such cards fall into the wrong hands but also to protect the recipient of the card from her-or himself, which presupposes insufficient strength of character to destroy the card rather than use it. The ACCC has explained that when these cards first emerged, and for some years thereafter, banks and lenders sent out millions of unsolicited credit cards. The expectation was that many consumers would take up the offer of credit, and consumer lending would increase. Many consumers either did not want cards or could not really afford to use them. Hence, the provision of credit (and debit) cards is now closely controlled. The prohibition against claiming payment for unsolicited directory entries is aimed at “pseudo-invoice” scams that surface from time to time. As explained in The Laws of Australia, vol 35.3 at [74]: The form in which a solicitation is sent to businesses for entries in trade directories may be designed to mislead the recipients into believing that they are being invoiced for the entry or a renewal. Payment may be made by clerical staff or the accounts department on the assumption that someone else in the organisation had placed the entry. Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
The prohibition on asserting a right to payment for unsolicited goods or services applies unless the person “has reasonable cause to believe there is a right to payment”. The sending of unsolicited goods or the performance of unsolicited services is not prohibited; s 40 prohibits the asserting of a right to payment for the goods or services. Section 41 limits the liability of the recipient of unsolicited goods. The person who receives unsolicited goods is not liable for any payment or for any loss or damage caused to them, other than that resulting from her or his own wilful or unlawful act during the “specified period” which is one month from the date the sender is notified or, if no notice is given to the sender, three months from receipt of the goods. After expiry of the specified period, the goods become “the property of the person to whom the goods were sent, freed and discharged from all liens and charges of any description” provided that the sender or the owner has not taken possession of the goods or the recipient has not unreasonably refused to permit the sender or owner to take possession of them.
21.5 SELLING PRACTICES Lay-by sales [21.500] A lay-by agreement is an agreement between a supplier and a consumer, where: • the consumer does not receive the goods until the total price has been paid, and • the price is paid in at least three instalments or in two instalments if the agreement specifies that it is a lay-by (ACL, s 96(3)). 946
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Chapter 21 Advertising and Sales Promotion
A lay-by agreement must be in writing and a copy given to the consumer (s 96(1)). The agreement must be “transparent” (s 96(2) –which the ACCC interprets to mean being expressed in plain language, legible and presented clearly; an agreement may not be transparent if terms and conditions are hidden in fine print or schedules, phrased in legal jargon or given in complex or technical language. A consumer can cancel a lay-by agreement and is entitled to a full refund but may have to pay a reasonable termination charge specified in the agreement (ss 97, 99). A supplier may cancel a lay-by agreement only if: the consumer has breached a term of the agreement; the supplier is ceasing to engage in trade or commerce; or the goods are no longer available (s 98).
Door-to-door sales and telemarketing
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[21.510] High-pressure selling is generally unpleasant. In the consumer’s own home it is particularly unpleasant. Div 2 “Unsolicited consumer agreements”) of Pt 3- 2 (“Consumer Transactions”) of the ACL has its origins in the now repealed Door-to-Door Sales Act of the States and Territories –legislation originally enacted to address what the UK Committee on Consumer Protection (1962) referred to as a “serious social evil”. The main feature of the legislation was a “cooling-off” period providing the consumer with an opportunity to withdraw without penalty from the contract after an opportunity for mature, sober and considered reflection and for second thoughts as to the wisdom of the transaction proposed. The ACL introduces a national law on unsolicited selling covering unsolicited sales practices, including door-to-door selling, telemarketing, and other forms of direct selling which do not take place in a retail context. An unsolicited consumer agreement is one in which: • a supplier, their salesperson or dealer approaches or telephones a consumer without invitation from that consumer; • it results from negotiations by telephone or at a location other than the supplier’s premises; and
For once Benjamin consented to break his rule, and he read out to her what was written on the wall. There was nothing there now except a single Commandment. It ran: ALL ANIMALS ARE EQUAL BUT SOME ANIMALS ARE MORE EQUAL THAN OTHERS After that it did not seem strange when next day the pigs who were supervising the work of the farm all carried whips in their trotters. George Orwell, Animal Farm (1945).
• The total value is more than $100, or the value was not established when the agreement was made.
IN CONTEXT
Unsolicited consumer agreements [21.520] This type of agreement occurs when: • it results from negotiations by phone or at a location other than the seller’s place of business, and • a seller, or their sales agent, approaches or calls you uninvited, and the total value is more than $100 (or cannot be determined when the agreement is made).
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The most common forms of sales methods that can lead to an unsolicited consumer agreement are: • door-to-door selling • telemarketing being approached by a sales agent in a public place such as a shopping centre. Unsolicited agreements can also occur if: • you provide your contact details to a business for one purpose, for example a competition entry, and the seller contacts you for a separate purpose, to sell another product or service to you you return a missed call from a seller or respond to any unsuccessful attempt by them to contact you. ACCC, Consumers (http://www.accc.gov.au/consumers/sales-delivery).
[21.530] Sales people who initiate unsolicited contact with consumers must comply with: • limited hours for contact with consumers; • disclosure requirements when making an agreement; and
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• criteria for the sales agreement, which must be in writing. Permitted hours of contact are prescribed. Sales people cannot contact consumers on a Sunday or public holiday, before 9 am or after 6 pm (8 pm for telemarketers) on a weekday, and before 9 am or after 5 pm on a Saturday. Consumers have 10 business days to change their mind –to “cool off” – and then cancel the contract within three months (or in some cases six months) if the supplier has not met certain obligations. Non-compliance attracts civil and criminal penalties (up to $50,000 for a body corporate and $10,000 for an individual).
ACCC v Origin Energy Electricity Ltd [2015] FCA 278 [21.540] The Federal Court ordered Origin Energy to pay $2 million in penalties, and its marketing com-
pany SalesForce Australia Pty Ltd, to pay $325,000 in penalties, in relation to unlawful selling practices which included unconscionable conduct, undue harassment or coercion, false or misleading representations and breaches of the unsolicited consumer agreement provisions of the ACL through failing to advise of the purpose of the visit, failing to leave premises or on request, calling of consumers outside permitted hours and failing to inform consumers of their cooling off period. In addition to the pecuniary penalties the parties were ordered to maintain compliance programs, contribute to the ACCC’s costs and jointly publish a corrective response notice in the following form:
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Chapter 21 Advertising and Sales Promotion
A MESSAGE TO CONSUMERS ABOUT DOOR-TO-DOOR ENERGY SALES The Australian Consumer Law protects your rights as a consumer when a door-to-door salesperson comes to your home. When they come to your door, a salesperson must: • tell you the purpose of their visit before they start to negotiate • state their name and the name and address of the company supplying the goods or services they are offering you • tell you that they must leave immediately if you ask them to • leave immediately if you ask them to –whether verbally or by displaying a “do not knock” sign expressing that unsolicited door knocking by salespeople is unwelcome at your home • tell you about your rights to cancel the agreement and explain how you can exercise those rights
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• give you a written copy of any agreement before you sign it, which has on it the full contact details of the supplier of the goods or services
A salesperson selling gas or electricity services must not create the impression or represent that: • you are being overcharged by your current electricity supplier, when that is not the case • they are investigating price increases or checking you are being billed correctly by your current electricity supplier, when that is not the case • they have sponsorship with, approval of or affiliation with a government when that is not the case • they are from your existing energy supplier, when that is not the case • you are required to change your electricity supplier due to changes implemented by the government, when that is not the case • you are not entering into a contract for the supply of electricity or gas, when in fact you are
Origin Energy Electricity Limited and SalesForce Australia Pty Ltd have been ordered to publish this message following court action by the ACCC If you think a door-to-door salesperson has not followed these rules, please contact the supplier. If you are not satisfied with their response, you can call the ACCC Infocentre on 1300 302 502 Origin Energy stopped using door-to-door sales to sign up potential customers from 27 September 2013. For more information visit http://www.accc.gov.au
Receipts [21.550] A supplier of goods or services must provide a consumer with a proof of transaction for supplies valued at or above $75 (excluding GST) or, if below that value, on the consumer’s request (ACL, s 100(1)). A proof of transaction is a document, including a GST tax invoice, identifying the supplier (name and ABN or ACN) and starting the date of supply, the goods or services provided and the price (s 100(2)). A consumer has the right to an itemised bill showing how the price was worked out if relevant, the number of labour hours and hourly rate and if relevant, a list of materials
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used and the amount charged for them. The request for an itemised bill must be made within 30 days of the date of the supply or the receipt of a bill. The itemised bill must be provided free of charge within seven days of the request (s 101).
21.6 PRICING Multiple pricing Corporations, which should be the carefully restrained creatures of the law and the servants of the people, are fast becoming the people’s masters. Grover Cleveland (1888).
[21.560] It may happen that different prices are displayed for the same goods on a website, in a catalogue or advertisement and on the goods themselves. A supplier who displays multiple prices for the same goods must sell the goods for the lowest displayed price (ACL, s 47).
Component pricing [21.570] The price presented to the consumer must be the total price for the goods or services. Section 48 of the ACL prohibits the making of representations with respect to “an amount that, if paid would constitute a part of the consideration for the goods or services unless the person also specifies, in a prominent way and as a single figure, the single price for the goods or services”.
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ACCC v AirAsia Berhad Company [2012] FCA 1413 [21.580] An airline displayed airfares on its website which did not include all taxes, duties, fees and other
mandatory charges in a prominent way and as a single figure. The Federal Court imposed a pecuniary penalty of $200,000 for the contravention of s 48.
Two price comparisons/dual pricing [21.590] A comparison between two prices is a commonly used advertising technique. The ACCC’s Advertising and Selling Guide notes that: Business often make comparisons between the prices they are currently charging for a product and: • The business’ own previous pricing (including “was/now” or “strike through” pricing or by specifying a particular dollar amount or percentage saving) • The “cost” or “wholesale” price • A competitor’s price • The recommended retail price (RRP). Businesses that use such statements must ensure that consumers are not misled about the savings that may be achieved.
Dual pricing is not governed by a specific prohibition but by the general prohibition of misleading or deceptive conduct and the prohibition on false representations in s 29 of the ACL. 950
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Chapter 21 Advertising and Sales Promotion
A business can of course compare its current prices with its own previous or normal prices but, in the words of the ACCC, so long as the latter are genuine and actually applied to a sufficient and reasonable number of items concerned: If these other prices were the actual prices of the products for a reasonable period before the comparison is made, it will be proper. However, if these other prices did not actually apply for a reasonable period, the comparison will likely mislead consumers and breach the Act. What is a reasonable period may depend upon factors such as the type of product or market involved, and the usual frequency of price changes.
IN CONTEXT
Comparisons with own previous pricing (“was/now” or “strike through” pricing) [21.600] The use of “was/now” or “strike through” price statements (such as “was $150/ now $100” or “$150 now $100”) is likely to represent that consumers will save an amount (being the difference between the higher and lower price advertised) by purchasing the product during the sale period.
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In determining whether the represented saving will be achieved, a critical issue is whether relevant consumers would have paid the “was” or “strike through” price to purchase that item for a reasonable period before the sale commenced. What’s considered to be a reasonable period in the circumstances will vary from case to case and will depend on the type of product or market involved and usual frequency of price changes for that product or in that market. Statements such as “was $150/now $100” or “$150 now $100” are likely to be misleading if product had not been offered for sale at the specified “was” or “strike through” price of $150 before the sale commenced, but had instead been offered for sale at a lower price. In such circumstances, a consumer would not make the represented saving of $50 by purchasing the product for $100 during the sale.
Ripping off your customers is apparently far worse than killing one of your employees through negligence. TPC Commissioner Jeffrey Rae, (on the relatively low level of fines for occupational health and safety breaches), Business Review Weekly (24 April 1995).
Offer prices are not, however, the end of the enquiry. If a business offered a product for sale at a certain price before the sale, but rarely or never sold the product at that price, it should still exercise caution when deciding whether to use “was/now” or “strike through” pricing for this product. Using the “was” or “strike through” price could be misleading, unless the business is able to show in some other way that the relevant consumers would have bought the product at the “was” or “strike through” price. This could be very difficult to do, particularly if the business has an established practice of discounting its products because, intuitively, this would suggest that no or very little of its products are ever sold at the “was” or “strike through” price. The business would need to point to other indicators that suggest that the relevant consumers would have bought products at the “was” or “strike through” price. Every case will turn on its facts and it’s important to bear in mind that using “was/now” or “strike through” pricing, where there were very little or no sales at the “was” price, is likely
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to be a risky choice of advertising for businesses. It is recommended that businesses seek legal advice before doing so or alternatively, to consider some other way of promoting and selling their products. The guidance above applies equally when a business uses a dollar or percentage amount (such as “60% off”) that a consumer will save if they purchase the product at the time the representation is made. ACCC, Advertising and Selling Guide (17 April 2014) (https://www.accc.gov.au/publications/ advertising-selling).
TPC v Cue Design Pty Ltd [1996] FCA 1343 [21.610] The company’s pricing strategy had been changed to coincide with the release of a range of
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clothing prior to Christmas. The price at which the items would normally be sold was crossed out and a discounted price was displayed. Because the new range had never been sold at the higher price it was held that consumers were misled into believing they were buying a discounted item. A fine of $75,000 was imposed. O’Loughlin J held (at [19]) that: In my opinion, the natural and probable consequence of a dual-priced swing tag is that members of the buying public would assume that the garment had previously been offered for sale at the higher of the two prices and was now available at the lower price. I regard the conduct of the defendants as serious breaches of the TPA. It was conduct that preyed on the gullibility of the public. I believe that this type of conduct is viewed with distaste by the public. So much is evident from the significant drop in sales that the defendants suffered: their conduct calls for penalties that will reflect that distaste and constitute a deterrent to others.
ACCC v Nissan Motor Co (Australia) Pty Ltd [1998] FCA 1048 [21.620] It was held that a television advertisement stating that consumers would save “a whopping $6,290 on a brand new RX Turbo Patrol at only $39,990 including free airconditioning” was misleading because that model had not been sold at the price from which the discount was computed for over a year. $39,990 had been the standard price for last year. The only benefit was free airconditioning. A fine of $130,000 was imposed.
The Jewellery Group Pty Ltd v ACCC [2013] FCAFC 144 [21.630] This case concerned dual pricing in the form of “strike through/sale pricing” and “was/now pricing”. The trial judge described the dual pricing in this case in the following way (at [7]):
In some of the catalogues, the higher price in characters was struck through with a line (strike through price), and a lower price in larger and heavier typeface was described as the “sale price” (sale price). In the other catalogues and the flyer, the higher price was struck through with a line preceded by the word “was” (was price), and a lower price in larger and heavier typeface was preceded by the word “now” (now price). Both forms of pricing, “strike through/ sale pricing” and “was/now pricing”, are sometimes referred to as “dual pricing”.
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Chapter 21 Advertising and Sales Promotion The trial judge found that, as explained in the ACCC’s media release, • Zamel’s (the business name of the appellant) made false or misleading representations by its use of two price advertising such as Was $275 Now $149 or $99 $49.50. • The catalogues were directed to consumers who were unaware of their ability to obtain discounts outside Zamel’s sales periods. • The two price statements conveyed to those consumers that they would save the difference between the two prices if the jewellery item was purchased during the sale period when that was not the case. • Those consumers would not have made the saving represented because Zamel’s had not sold the item at or near the “was” or “strikethrough” price, or had sold it in limited numbers at or near that price, in the 4 months prior to the sale period. • Zamel’s had a vigorous discounting policy outside sale periods which meant the “was” or “strikethrough” price was rarely paid by a Zamel’s customer. Zamel’s was penalised $250,000 and the court also ordered that Zamel’s publish corrective notices in newspapers and on its website, implement a trade practices compliance program and pay the ACCC’s costs.
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The Full Federal Court upheld this decision (at [69]-[70]): Once the conclusion is reached that the trial judge did not err in concluding that the Savings Representation was made to a significant unaware audience, we think it follows, bearing in mind the prior sales at or near the Strike Through or Was price and the appellant’s aggressive discounting policy established by the evidence and, in particular, its own Pricing Guidelines, that it was open to the trial judge to conclude the respondent had negated the represented counterfactual. It was put to the Court that the approach of the trial judge was erroneous because it would mean that a trader could not engage in the Was price/Now price form of advertising in circumstances where the trader had difficulty selling goods over a reasonable period and reduced their price in order to sell them. We do not think that is correct because the result will depend on all the circumstances. If there were no sales of the goods over an appropriate period and nothing more, then it is difficult to see how the represented counterfactual would be shown to be false. In other words, it is difficult to see how, in the case of an assumed sale, it could be inferred to the requisite standard that it would not have been at the Strike Through or Was Price. On the other hand, falsity might be shown if there was such a practice of aggressive discounting that it could be safely inferred that the hypothetical sale would not have been at the Strike Through or Was Price. These observations underscore the point that the critical matters in this case were both the lack of sales at the Strike Through or Was Price and Zamel’s aggressive discounting policy.
Cash back offers [21.640] Cash back offers are a form of discounting. Instead of marking down product prices, manufacturers and retailers maintain the price but offer to return some of the consumer’s money after purchase. While there are no problems with this marketing approach the ACCC warns that care should be taken in using it as any conditions, limitation or restrictions should be made clear to the consumer before the purchase. They give the example of an electrical retailer selling a television with a cash back offer. The price of the television is $3,000 and consumers that purchase it can claim $500 cash back after the sale. When advertising the television, the retailer should advertise the price of the television as $3,000 (not $2,500), as this is the price a consumer must pay to acquire the television.
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Unit pricing [21.650] Unit pricing –displaying the price of a grocery item as a standard unit of measurement alongside the selling price –allows consumers to meaningfully compare prices across brands and packaging size. Unit pricing is governed by the mandatory Unit Pricing Code.
IN CONTEXT
Unit Pricing Mandatory Code of Conduct [21.660] Unit pricing means displaying the price of a grocery item as a standard unit of
measurement alongside its selling price. It allows your consumers to quickly compare the value of products of varying size and brands. The Unit Pricing Code is mandatory for: • retailers – who sell a minimum range of food-based groceries in premises that are used primarily for the sale of those items and have more than 1,000 square metres of floor space • online retailers –who sell the minimum range of food-based grocery items. Unit pricing information must be: • prominent –it must stand out so that it is easily seen
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• proximate –it must be positioned close to the selling price for the grocery item • legible –it must not be difficult to read • unambiguous –the information must be accurate and its meaning clear. Some items are exempt from the Unit Pricing Code, including books, flowers, manchester, toys and some marked-down products. The unit pricing requirements apply to advertisements in the print media but do not apply to advertisements on television, radio or other electronic media (other than a website). Example:
ACCC, Advertising advertising-selling).
and
Selling
Guide
(https://www.accc.gov.au/publications/
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Chapter 21 Advertising and Sales Promotion
Excessive Payment Surcharges [21.670] Since 1 September 2017 all businesses are banned from imposing excessive surcharges for card payments. The changes introduced by a new Part IVC added to the Competition and Consumer Act 2010 (Cth) bans merchants from charging customers excessive surcharges for the use of a credit or debit card. Surcharges are excessive when they exceed the permitted surcharge amount in a Reserve Bank of Australia Standard or as specified in regulation. The ACCC explains that: In short, the new provisions limit the amount businesses can surcharge customers for use of payments methods such as credit and debit cards. The limit will be linked to the direct cost of the payment method such as bank fees and terminal costs.
QUESTIONS 1.
Outline the liability of the following parties in respect of a false and misleading advertisement: • the advertiser; • the advertising agency; • the media; • the radio announcer who reads the advertisement;
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• the celebrity who endorses the product (but who has never used it); • the retailer who displays the advertisement in the form of a poster provided by the manufacturer. 2.
“Advertising self-regulation is a failure and the issues of ‘taste and decency’ addressed in the AANA Advertising Code of Ethics should be given legal effect in the ACL.”
Discuss this proposition.
3.
Multilevel marketing is legal. Pyramid selling is illegal. How does the law draw the distinction?
4.
Very Nice Stuff Pty Ltd, a manufacturer and importer of furniture, advertises its products through a variety of media. A billboard beside Canberra Freeway advertises a new range of leather lounges at a “not to be beaten price of $2,000”.
An asterisk adjacent to these words refers to a qualification in much smaller print at the base of the advertisement which requires other products to the value of $1,000 to be bought to obtain a lounge at this price. A motorist, or passenger, travelling at the speed limit would be unlikely to be able to read the qualification but at peak hour the traffic is frequently at little more than walking pace.
A similar advertisement also appears in a range of popular magazines sold by subscription and through newsagencies.
Advise the ACCC, which is considering action against Very Nice Stuff Pty Ltd despite not having received any complaints from the public.
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WEB REFERENCES Advertising Standards Bureau http://www.adstandardsbureau.com.au Australian Association of National Advertisers http://www.aana.com.au Australian Competition and Consumer Commission http://www.accc.gov.au Australian Consumer Law http://www.consumerlaw.gov.au Australian Consumers Association http://www.choice.com.au Australian Government Business Entry Point http://www.business.gov.au Australian Government Scamwatch http://www.scamwatch.gov.au Australian Treasury http://www.treasury.gov.au Competition and Consumer Law Education Programs http://www.ccaeducationalprogram.org Standards Australia http://www.standards.org.au
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22
22
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Supply of Goods and Services Susan Carter THE BUSINESS CONTEXT This chapter deals with that most common of commercial exchanges: the sale of goods. Any sale of goods is a contract, and so this exchange is governed by the law of contract. However, this common law must be understood in the context of two significant legislative schemes: The Sale of Goods Acts of the various States, which imply terms into any contract for the sale of goods, and the Australian Consumer Law, which governs the supply of services as well as goods, and imposes obligations on parties independently of the law of contract, when those goods or services have been supplied to consumers. Historically, the common law has been keen to protect the freedom of parties to a contract –including contracts for the sale of goods –to decide the terms of the contract for themselves. So why has parliament singled out this one area of contracts –those for the supply of goods and services – and chosen to intervene? Why is there legislation in this important area of contract law? Because government has been concerned to protect the consumer, who is often seen to be in a weaker position than the supplier, and not in a position to truly bargain freely. The Sale of Goods legislation focuses very much on the transaction of the sale of goods. The Australian Consumer Law operates much more broadly, and the concept of the consumer who is protected by this law encompasses business –especially small business –as well as customers. The Australian Consumer Law should be seen as a code of conduct which regulates commercial
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transactions rather than simply a set of obligations imposed on businesses selling their goods. Thus it is important to consider not just the general law of contract, but also the relevant legislation when considering the law around the sale and purchase of goods. This chapter aims to provide readers with an appreciation of the particular legal rights and obligations that buyers and sellers of goods have in Australia, and which legislation will govern which transactions. Critically, this facilitates an appreciation of the legal framework which provides for the efficient transfer of property from sellers to buyers. A solid appreciation of the rights and obligations of buyers and sellers of goods is a vital component in managing a business, which will necessarily involve both the purchase and sale of goods and services. This is an area which has changed significantly since the introduction of first, the Trade Practices Act 1974 (Cth), and later its successor the Australian Consumer Law. It is appropriate to begin our discussion by tracing briefly the historical development of this legislation.
22.1 HISTORICAL DEVELOPMENT ............................................................................................................................. 959
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22.2 AUSTRALIAN CONSUMER LAW OR SALE OF GOODS ACT? ................................................................... 961 [22.50]
Definition of “goods” and “services” ........................................................................................................ 961
[22.60]
Definition of “consumer” ........................................................................................................................... 962
[22.100]
Summary –Which legislation to choose? ............................................................................................... 964
22.3 THE CONSUMER GUARANTEES ....................................................................................................................... 965 [22.150]
Overview of responsibilities imposed by Consumer Guarantees ..................................................... 967
22.4 GUARANTEES IN RELATION TO THE SUPPLY OF GOODS ........................................................................ 968 [22.170]
Guarantee as to title .................................................................................................................................... 968
[22.200]
Guarantee as to undisturbed possession ............................................................................................... 969
[22.220]
Guarantee as to undisclosed securities ................................................................................................... 969
[22.230]
Guarantee as to acceptable quality .......................................................................................................... 970
[22.360]
Guarantee as to fitness for purpose ......................................................................................................... 977
[22.440]
Guarantee as to correspondence with description ............................................................................... 981
[22.450]
Guarantee as to correspondence with sample or demonstration model ......................................... 982
[22.460]
Guarantee as to repairs and spare parts ................................................................................................. 982
[22.470]
Guarantee as to express warranties ......................................................................................................... 983
22.5 GUARANTEES IN RELATION TO THE SUPPLY OF SERVICES .................................................................... 984 [22.490]
Guarantee as to due care and skill ........................................................................................................... 984
[22.500]
Guarantee as to fitness for purpose ......................................................................................................... 985
[22.510]
Guarantee as to time of supply ................................................................................................................. 985
22.6 EXCLUDING THE CONSUMER GUARANTEES ............................................................................................... 985 22.7 MANUFACTURER TO INDEMNIFY RETAILER ................................................................................................ 987 22.8 REMEDIES FOR BREACH OF THE CONSUMER GUARANTEES ................................................................. 988 22.9 CROSSOVER WITH SALE OF GOODS LEGISLATION ................................................................................... 993 [22.630]
958
The seller’s obligations under the implied terms ................................................................................. 994
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Chapter 22 Supply of Goods and Services
[22.640]
Buyer’s remedies ......................................................................................................................................... 995
[22.650]
Seller’s remedies ......................................................................................................................................... 995
22.10 STRICT LIABILITY OF MANUFACTURERS AND IMPORTERS FOR DEFECTIVE GOODS .................. 996 [22.680] Manufacturer ............................................................................................................................................... 997 [22.710]
Defective goods ........................................................................................................................................... 998
[22.730]
Liability for loss ......................................................................................................................................... 1000
[22.740] Defences ...................................................................................................................................................... 1000 [22.750] General ........................................................................................................................................................ 1001 [22.760]
Exclusionary provisions void .................................................................................................................. 1001
22.11 PRODUCT SAFETY AND INFORMATION ....................................................................................................... 1001 [22.790]
Safety standards ........................................................................................................................................ 1002
[22.800]
Product recall ............................................................................................................................................. 1003
[22.820]
Safety Warning Notices ............................................................................................................................ 1004
[22.830]
Product information ................................................................................................................................. 1004
[22.840]
Remedies and offences ............................................................................................................................ 1004
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22.1 HISTORICAL DEVELOPMENT [22.10] The earliest legislation governing the sale of goods was the Sale of Goods Act 1893 (UK). Drafted by Sir Mackenzie Chalmers, and in important respects unchanged to this present day, it set out to give legislative form to a number of the terms routinely implied into contracts for the sale of goods by the courts. All Australian States and Territories based their Sale of Goods Acts (SOGAs) on the English model of 1893, and this legislation still operates today. While this legislation still governs a number of commercial transactions, in the latter half of last century there were growing concerns that while it may be appropriate to govern transactions between parties of equal bargaining power, it was not effective when there was an imbalance of power between the parties. While this can be the case between different businesses, it is always the case between businesses and consumers. In particular, there were concerns that: • Its provisions could be easily excluded by the parties –and in fact stronger parties could use their position to exclude the operation of the legislation, often without the weaker party to the transaction fully understanding what had occurred. Realistically, most consumers dealing with large corporations lack negotiating power over anything except perhaps price and time of delivery. When business also made widespread use of standard form contracts, then the consumer had no real opportunity to negotiate the terms of the contract. The average consumer probably has little, if any, idea of what rights are implied into sale of goods contracts by the relevant legislation. Most would have signed pre-printed contracts containing exclusion clauses which deprived them of their rights. A typical exemption clause used in such contracts would be worded so as to exclude liability for “all conditions and warranties whether express or implied”. A person who had just concluded such a purchase would probably have had no idea
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The remedies of injured consumers ought not to be made to depend upon the intricacies of the law of sales. The obligation of the manufacturer should not be based alone upon privity of contract. It should rest, as was once said, upon “the demands of social justice”. Ketterer v Amour & Co 200 F 322 (1912) at 323 per Noyes J.
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that they were effectively agreeing to waive away the right –given by legislation –to a remedy if the goods did not work properly or were not fit for purpose –and instead were effectively buying a chance that the goods might work, with no remedy if they did not.
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• Its provisions were restricted to the provision of goods –but the provision of services was becoming of increasing economic importance. There were also definitional problems under the SOGAs –was engaging an artist to paint your portrait, or paying a dental technician for a set of dentures a contract for goods or services? If there was a contract for a kitchen renovation which included the supply of white goods, was there any recovery if the dishwasher broke –or was it excluded because the contract was for services, not goods? • It required a contract –a direct legal relationship with the retailer. But modern manufacturing and retail processes had developed so that it was the manufacturer who really was responsible for the quality and safety of goods –and the retailer usually did nothing to the goods other than unpack, shelve and sell them. While the retailer was held accountable by the SOGAs –the manufacturer was not. This was so, even when the manufacturer provided a direct guarantee for their products. Many businesses offer guarantees –and this is usually presented as a direct benefit of buying that particular product. A guarantee given by the retailer could be enforced by the purchaser in contract –but consider a guarantee given by the manufacturer. Unless there was a direct contract with the manufacturer –unusual in retail situations –the doctrine of privity of contract would ensure that such guarantees were not enforceable. They may have formed part of a manufacturer’s marketing plan and influenced purchase decisions, but they conferred no enforceable rights on the purchaser.
Liability for defects in goods should be borne by the manufacturer rather than the retailer because of modern methods of packaging, labelling, distribution and promotion. Zaravinos v Dairy Farmers Cooperative Ltd [1985] ATPR 40- 559 at 46,504 per Lockhart J.
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[22.20] Responding to these concerns, the Commonwealth Government introduced the Trade Practices Act 1974 (Cth) (TPA) in 1974. Part V, Div 2 of the TPA was modelled very closely on the existing sale of goods legislation, and provided for a number of implied warranties in consumer contracts for supply of both goods and services. These warranties were non-excludable. The legislation was further amended in 1978 with the addition of Pt V, Div 2A. This addressed the position of manufacturers, and imposed liabilities directly on them, without the need for a contract. For the first time, consumers were given direct legal rights against the manufacturer of faulty goods independent of any contract between them and independent of any proof of negligence. The TPA was amended yet again in 1992 to further protect consumers by introducing a product liability regime. Part VA allowed a person injured by a defective product to claim against the manufacturer without proof of negligence. Manufacturers were required to comply with a community safety standard in respect of all their products. These amendments recognised that in modern retail practice it is the manufacturer, rather than the retailer, who should bear responsibility for the safety and quality of the products they produce. [22.30] However because of the limitations of federal constitutional power over commercial law, the TPA provisions were based principally on the corporations power, and thus had limited application (s 4). Sellers were covered by the TPA if they were corporations engaging in trade or commerce (s 6), but also if they were non-corporate but traded across State or Territory boundaries, or in some other way which invoked a Commonwealth
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Chapter 22 Supply of Goods and Services
power such as the post and telegraphs power or the Territories power. While this caught a number of commercial entities, some were excluded and so protection was not uniform. To deal with this issue a number of States and Territories either amended their SOGAs or introduced other statutory provisions –usually in the form of Fair Trading Acts –to provide similar levels of consumer protection. However, these were not uniform, and this created two problems: businesses had to deal with different legal environments in different States and customers did not enjoy the same protections in each State. This issue was dealt with by the introduction of the Australian Consumer Law (ACL) in 2010, so there are now uniform provisions throughout Australia. The ACL is in substantially the same form as the earlier TPA. The ACL sits alongside the continuing SOGAs in each State. The range and complexity of the legislation in this area has led to this chapter being divided into the following sections: • Which legislation applies: When to use the ACL or the SOGAs. • The consumer guarantees under the ACL
– Crossover with the SOGAs. • Strict liability of manufacturers and importers for defective goods; and • Product safety and information.
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22.2 AUSTRALIAN CONSUMER LAW OR SALE OF GOODS ACT? [22.40] When to use which legislation can be a difficult question, and often both Acts may cover the same situation. When this happens, this does not create a practical problem, as they both offer very similar protections. And of course, these statutory protections will be in addition to the separate legal protections offered by the law of contract and often the law of negligence. The default position is that the ACL should be used, and the SOGAs only referred to if the ACL does not offer protection. Accordingly, we will focus our discussion on the provisions of the ACL. The ACL covers the supply of goods and services to consumers. It is broader than the SOGAs as it extends to services, not just goods, and does not require the existence of a contract. So it catches supply by manufacturers as well as retailers and imposes obligations upon them equally.
Definition of “goods” and “services” [22.50] When using any legislation, it is important to look closely at the words used, and how terms are defined. Legislation can use concepts in a particular way, and the intention expressed by Parliament through its choice of language must be adhered to. Even if you are familiar with a definition, you should always check the actual words of the legislation for any changes or updates. So even though we generally understand what is meant by “goods” –moveable personal property –we need to see how the legislation defines this, and other terms.
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… every day millions of purchases are made to the satisfaction of the shopper; and … every week thousands (probably) of transactions of which the customer complains, are adjusted to meet his point –whether it be a meritorious point or not. The most potent influence operating in favour of the consumer is the desire of the retailer to retain his custom and to preserve the general good name of the establishment; and, it might be added, the retailer’s sense of decency and morality which readily comes into play without any threat of resort to law. Great Britain, Board of Trade Final Report of the Committee on Consumer Protection (Cmnd 1781, 1962).
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“Goods” is defined in s 2 of the ACL and includes items we may not expect, such as animals; trees and crops; ships, aircraft and other vehicles; gas and electricity; and computer software. This definition is broader than that found in the SOGAs. For example, while there are real issues about whether sales of computer software are caught under the definition of goods used by the SOGAs, this has been clarified by the definition used in the ACL. (This is one of the reasons the ACL is more commonly used than the SOGAs –it covers a wider range of transactions.) “Services” is also defined in s 2 and includes: (a) any rights (including rights in relation to, and interests in, real or personal property), benefits, privileges or facilities that are, or are to be, provided, granted or conferred in trade or commerce; and (b) without limiting paragraph (a), the rights, benefits, privileges or facilities that are, or are to be, provided, granted or conferred under: (i) a contract for or in relation to the performance of work (including work of a professional nature), whether with or without the supply of goods; or (ii) a contract for or in relation to the provision of, or the use or enjoyment of facilities for, amusement, entertainment, recreation or instruction; or (iii) a contract for or in relation to the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction; or
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(iv) a contract of insurance; or (v) a contract between a banker and a customer of the banker entered into in the course of the carrying on by the banker of the business of banking; or (vi) any contract for or in relation to the lending of money; but does not include rights or benefits being the supply of goods or the performance of work under a contract of service.
Look at how broad this definition is –and how it covers a range of financial transactions as well as commercial transactions.
Definition of “consumer” Anyone who sells butter containing stones or other things (to add to the weight) will be put into our pillory, then said butter will be placed on his head until entirely melted by the sun. Dogs may lick him and people offend him with whatever defamatory epithets they please without offence to God or King. Louis XI.
[22.60] The ACL is also narrower than the SOGAs as it only applies to the supply of goods or services to consumers. Consumer is defined at s 3 of the ACL, with s 3(1) providing a definition for consumers of goods, and s 3(3) a definition for consumers of services. We will focus on the definition of consumers of goods –note there is no significant difference between these definitions. Section 3(1) provides three alternative definitions of a consumer (only one of which needs to be satisfied):
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a)
a person who acquires goods of any kind where the price did not exceed the prescribed amount ($40,000); or
b)
a person who acquires goods of a kind ordinarily acquired for personal, domestic or household use or consumption (no limit on value); or
c)
the goods comprised a commercial road vehicle.
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Chapter 22 Supply of Goods and Services
Section 3(2) qualifies this definition by requiring that the goods must not have been acquired for the purpose of resupply, or to be used or transformed in a process of production or manufacture. Section 3(10) provides that we presume that everyone is a consumer, unless the contrary position is proved.
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The figure of $40,000 in s 3(1)(a) has not been changed since its introduction in 1974. The Australian Consumer Law Review (see [18.290]) conducted by Consumer Affairs Australia and New Zealand (CAANZ) proposed in its March 2017 report (Proposal 15) that this should be increased to $100,000. They argued that this figure broadly reflected the effect of inflation since the $40,000 limit was determined, and that increasing the threshold figure would prevent the protections afforded by the legislation from being eroded. At their meeting in August 2017, the Ministers for Consumer Affairs –responsible for approving any changes to the ACL –asked for more information about the impact of this proposal, to inform their future decision-making. While the increase has not been accepted at this time, check the legislation carefully for any changes, as this figure may well increase in the future. The test in s 3(1)(b) –in relation to goods of a kind ordinarily acquired for personal, domestic or household use or consumption –operates regardless of the value of the transaction. This test has been explained by the courts and, as the following case examples make clear, can operate broadly. It provides that a “consumer” is not limited to an individual, or an individual in a weaker position. It can, and often does, include a company, or a business –even one in a strong bargaining position. These cases discuss the definition in the TPA –but this is in the same terms as the ACL, and presumptions of statutory interpretation allow us to use this earlier case law when Parliament has re-enacted substantially the same provision. These cases discuss s 4B of the TPA –which is in substantially the same form as s 3 of the ACL.
Carpet Call Pty Ltd v Chan [1987] ATPR (Digest) 46-025 [22.70] Mr Chan, an experienced nightclub proprietor, obtained carpet for his new nightclub from Carpet Call. The total cost was almost $70,000 –more than the $40,000 threshold. The carpet which was supplied and laid was rated heavy duty domestic. Mr Chan wanted to claim that he was a consumer, so he could take advantage of the consumer protection warranties. The issue in this case then, was this businessman, acquiring carpet for his commercial premises, a consumer, because the carpet was of a kind ordinarily acquired for personal, domestic or household use or consumption. As Thomas J indicated: “a consumer” … may be satisfied only when the price is below a prescribed amount (not satisfied in this case) or in relation to goods that are of a kind “ordinarily acquired for personal, domestic or household use or consumption” … In my view “carpet” is a commodity, or goods, ordinarily acquired for domestic consumption, and it does not lose that description by reason of a commercial rating, or some quality which makes it last longer than other carpet normally supplied for use in a domestic setting.
Bunnings Group Limited v Laminex Group Ltd [2006] FCA 682 [22.80] The Bunnings Group purchased a quantity of reflective foil insulation coated with a decorative film of white polypropylene from the Laminex Group to install in a number of their warehouses. They paid more than the $40,000 threshold, and the question before the Court was whether or not the product was of a kind
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Business and the Law ordinarily acquired for personal, domestic or household use or consumption. The product, commonly known as sarking, was designed for commercial applications, and was bought and installed for commercial purposes. Laminex argued therefore that this was not a domestic product, and fell outside the definition –which meant Bunnings was not a consumer. However, the Court found that this product performed essentially the same function as other variations of sarking available for the domestic market, and other than price, would have been suitable for domestic applications. Young J found that Bunnings, when acquiring this sarking for installation in its warehouses, was a consumer. Even though they were a commercial party, buying a specialist commercial commodity, the nature or kind of the goods was essentially the same as goods ordinarily acquired for personal, domestic or household purposes. Consider the practical implications of this case. How many commercial purchases would be considered “consumer” purchases –regardless of price paid?
White v Malco [1999] NSWSC 1055 [22.90] This case of complex facts is an example of both a consumer of services (a contract for hire) and
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the operation of the presumption in what is now s 3(10). Usually, the person bringing the action (the plaintiff or applicant) has to prove every aspect of their case. However, s 3(10) means that if you argue you are a consumer, the court will accept this, unless the Respondent can prove that you are not.
The case raised multiple issues including workplace injuries, negligence, vicarious liability, contract, incorporation of terms and implied terms. The plaintiff, a subcontractor, was injured at work while driving a defective forklift hired by the defendant from Prevwreck Pty Limited. The plaintiff sued the defendant, who in turn issued a cross-claim against Prevwreck Pty Limited (there were nine cross-claims in this action). Malco argued that it was a consumer under the TPA as it had hired goods. As a result of that hiring, Malco had to pay compensation in negligence to the plaintiff, and it succeeded in recovering that amount from Prevwreck as damages for breach of the implied term in the contract for hire. There was no evidence of the hiring fee (important – because it would need to be under the threshold amount), but James J noted (at [568]): There would not appear to have been any evidence of the price or value of the forklift at the hearing. Certainly, in the final submissions of the parties I was not referred to any. However, subsection (3) of s 4B provides that where in any proceeding it is alleged that any person was a consumer it is to be presumed, unless the contrary is established, that the person was a consumer. Accordingly, in the absence of any evidence to the contrary, it is to be presumed that Malco was a consumer. Consequently the terms set out in s 71 are to be implied in the contract for the hire of the forklift from Prevwreck to Malco.
[22.100]
Summary –Which legislation to choose? Needs contract Only applies to consumers Covers goods Covers services Manufacturers and retailers legally responsible 964
Sale of Goods legislation
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Australian Consumer Law
Chapter 22 Supply of Goods and Services
IN CONTEXT
In Practice [22.110] If you are dealing with a consumer as defined by the ACL –this is the law which
should be used. Otherwise the SOGA of the particular State will be relevant. Always check however that you have a contract for the sale of goods. If you are not supplying to a consumer, and there is no contract for the sale of goods as that is defined in the legislation (eg a contract for a money price rather than barter), then only the common law will apply.
22.3 THE CONSUMER GUARANTEES [22.120] Having determined that the ACL is the relevant legislation, what are the guarantees which will apply? Division 1 of Pt 3-2 of the ACL covers consumer guarantees, and provides in subdiv A that the following guarantees exist in relation to the supply of goods: • s 51 – Title • s 52 –Undisturbed possession • s 53 –Undisclosed securities Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
• s 54 – Acceptable quality • s 55 –Fitness for any disclosed purpose • s 56 –Correspondence of goods by description • s 57 –Correspondence of goods by sample • s 58 –Repairs and spare parts • s 59 –Express warranties Subdivision B provides for the following guarantees in relation to the supply of services: • s 60 –Due care and skill • s 61(1) –Particular purpose • s 61(2) –Achieving a desired result • s 62 –Supply within a reasonable time These guarantees create statutory obligations which manufacturers and suppliers of goods and services must meet, in accordance with the relevant section. Unlike the sale of goods legislation (and earlier TPA provisions), they do not imply terms into contracts –and no contract is necessary for these guarantees to operate. What is necessary is that the elements of the relevant section are satisfied and then the guarantee will be in force.
Despite extensive dental work and oral surgery Mr Mahn is still apprehensive about eating and kissing the wife. Attempts to play the trombone have seen teeth disappear down the mouthpiece. NZ Herald (24 January 1994).
[22.130] These sections all follow a common form, and require that a common set of threshold elements are satisfied before the guarantee will apply. When we consider these sections, it is a two-step process: Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-25 03:10:03.
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(i)
Will the guarantee apply? To answer this, we consider if the threshold elements of the relevant section have been met; then
(ii)
If the guarantee applies, has it been breached?
As an example, consider s 56 of the ACL which provides for a guarantee that goods supplied by description will correspond with that description. (1) If: (a) a person supplies, in trade or commerce, goods by description to a consumer; and (b) the supply does not occur by way of sale by auction; there is a guarantee that the goods correspond with the description.
Before we consider whether or not the guarantee has been breached, that is whether or not the goods supplied correspond with their description, we need to consider the threshold elements: • person • supplies • trade or commerce • goods (or, depending on the section, services) • consumer Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
• not by auction. A man charged with stealing cars was advised by his lawyer that he could be tried by a jury of his peers or by a magistrate sitting alone. “What do you mean by peers?” asked the man. “Peers are your equals,” said the lawyer. “Men of your own class and kind.” “In that case, I’ll take the magistrate,” said the accused. “I don’t want to be tried by a bunch of car thieves.” Phillips E, The World’s Best Lawyer Jokes (Fontana Press, 1993).
Having satisfied these elements (and in this section, the extra element that supply occurred by description), we know that the guarantee applies and can consider its breach. If even one of these elements cannot be satisfied (eg there is no supply to a consumer), then this legislation does not apply. In these circumstances, we may look to other legislation such as the sale of goods legislation, or to the common law. [22.140] We have considered the meaning of “consumer” and “goods”. “Supplies” and “trade or commerce” are defined in s 2 of the ACL in standard terms, although note that the definition of “trade or commerce” was extended in the ACL to include “any business or professional activity (whether or not carried on for profit)”. This will clearly extend to the provision of professional services. “Person” carries a broad meaning and includes any natural or corporate person. The person subject to the obligation will usually be the retailer or the supplier of the goods – but it can also be the manufacturer. “Manufacturer” is defined in s 7(1) of the ACL and includes: (a) a person who grows, extracts, produces, processes or assembles goods; (b) a person who holds himself or herself out to the public as the manufacturer of goods;
…
(e) a person who imports goods into Australia if: (i) the person is not the manufacturer of the goods; and (ii) at the time of the importation, the manufacturer of the goods does not have a place of business in Australia. 966
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Chapter 22 Supply of Goods and Services
The following table sets out which of the supplier and manufacturer is bound by each of the guarantees. In those situations where the manufacturer is liable because of the operation of s 271, then s 274 provides that the supplier has a right of indemnity against the manufacturer –so that the manufacturer has ultimate responsibility for the provision of guarantees with respect to acceptable quality, correspondence with any description provided by the manufacturer and provision of facilities for repairs and spare parts. [22.150]
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Overview of responsibilities imposed by Consumer Guarantees Guarantee s 51 – title s 52 –undisturbed possession s 53 –undisclosed securities s 54 –acceptable quality s 55 –fitness for any disclosed purpose
Supplier
Manufacturer –s 271 (Primary liability and supplier indemnity only if purpose disclosed to manufacturer) –s 271
s 56 –correspondence of goods with description s 57 –correspondence of goods with sample s 58 –repairs and spare parts s 59 –express warranties s 60 –services rendered with due care and skill s 61 –services fit for a particular purpose s 62 –services supplied within a reasonable time
Both
–s 271
IN CONTEXT
Is an online auction an “auction”? [22.160] The purpose of the Consumer Guarantees is to protect consumers and to create a more even relationship between buyers and sellers. As auctions:
• usually occurred in physical locations where there was an opportunity to inspect the physical goods prior to purchase; • bidding consumers had the power to change the price in response to the quality and condition of the goods; and
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• final price was subject to market interest on the auction date, thus balancing power between buyers and sellers. The Consumer Guarantees have never applied to auctions. However, is an online auction the same as a physical auction? How easily can consumers inspect goods online? Without this knowledge, how can they calibrate the price they will pay? “Sale by auction” is defined in s 2 of the ACL to mean a sale conducted by an agent of the person, whether acting in person or by electronic means. Currently, some operators of online auction websites are exempt from the operation of the Consumer Guarantees –where they are acting as the seller’s agent, whereas others are caught –where their role is to set the rules of the virtual marketplace (and collect a fee for providing the marketplace) –not to act as an agent of the seller. As a consumer, how do you know which is which? The Australian Consumer Law Review has proposed (Proposal 14) that the “sale by auction” exemption be modernised to ensure that the consumer guarantees apply to all online auctions. This change is likely to be introduced after some further development –so check the legislation carefully for any amendments.
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22.4 GUARANTEES IN RELATION TO THE SUPPLY OF GOODS Guarantee as to title [22.170] Section 51 of the ACL provides a guarantee that the supplier has a right to dispose of the property in goods when that property is to pass to the consumer. In short, the guarantee is that the goods are the supplier’s to sell or dispose of. This is of course fundamental to any effective sale or disposition of goods, and similar protections have long been a part of the law, including s 17 of the Sale of Goods Act 1923 (NSW). The following case explains this concept, drawing on earlier sale of goods legislation.
Rowland v Divall [1923] All ER Rep 270 [22.180] Divall sold a car to Rowland who took possession, had the use of the car for some months and
then resold to a third party. At that point it was discovered that a previous purchaser had bought the car without knowing it to be stolen. That buyer in turn resold to Divall who had no knowledge of the previous defect in title. When the car was eventually traced to the third party, he was obliged to return it to the true owner. He then successfully sued Rowland for return of the purchase price. Rowland in turn sued Divall who sought to offset the claim because Rowland had used the car for several months. Atkin LJ commented (at 274): the buyer accepted the car on the representation of the seller that he had a right to sell it, and inasmuch as the seller had no such right he is not entitled to say that the buyer has enjoyed a benefit under the contract. In fact the buyer has not received any part of that which he contracted to receive –namely the property and right to possession –and that being so there has been a total failure of consideration.
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Chapter 22 Supply of Goods and Services
[22.190] In Rowland v Divall we see a good example of the legal principle –often described by the Latin maxim nemo dat quod non habet –that one cannot acquire a better title to goods than that possessed by the seller. So, because the original vendor of the car was a thief –who had possession of the car but no legal title to it –the thief, and anyone who bought from the thief, could not acquire a good title to the car. What rights does the purchaser have in this situation? Section 51 of the ACL, while it does not cure this defect in title, does give the purchaser a right of action against the seller –as there has been a breach of this guarantee. The practical problem, of course, is that the seller –who has dealt in a stolen car, or one subject to security for finance –is often not available to respond to litigation. The establishment of the Personal Property Securities Register, under the Personal Property Securities Act 2009 (Cth) gives added protection to purchasers and means that the same fact situation as in Rowland v Divall is unlikely to occur again (see Chapter 9).
Guarantee as to undisturbed possession
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[22.200] Section 52 of the ACL provides a guarantee that the consumer has the right to undisturbed possession of the goods –subject to any existing security rights which were disclosed at the time of purchase. The following case example, again drawing on older sale of goods legislation, explains this concept.
Healing (Sales) Pty Ltd v Inglis Electrix Pty Ltd [1968] HCA 60 [22.210] The appellant in the case had purchased goods worth £10,320.15 from the respondent on a con-
tract requiring payment within 60 days. Before the 60 days had expired and before the appellant had paid for the goods, the respondent entered the premises, seized and removed the goods. It was established that the buyer was not in breach of any of the terms of the contract at the time the goods were seized by the seller. The relevant issue for decision was, was there a breach of the warranty of quiet (undisturbed) possession? The High Court held that there was a breach of the implied warranty as the buyer was not allowed to enjoy quiet possession of the goods he had contracted to purchase. Per Barwick CJ and Menzies J at [4]: The first question for decision therefore is whether the seizure was in breach of the warranty that the buyer should have and enjoy quiet possession of the goods, it being common ground that the circumstances of the contract did not exclude the implication of this warranty … The unlawful seizure of goods sold but not paid for and still subject to the contract of sale is, in our opinion, a breach of this warranty in the contract. Such a seizure is a wrongful exertion by the seller of a claim to goods of which possession has been given and in respect of which the seller has warranted that the buyer shall enjoy quiet possession.
This case confirms that a seller must do more than merely transfer rights of ownership. The buyer is entitled to exercise those rights free from interference or limitation in any way.
Guarantee as to undisclosed securities [22.220] Section 53 of the ACL provides a guarantee that goods will be free from any security, charge or encumbrance not disclosed, or consented to by the consumer. Again, further protection is now afforded by the Personal Property Securities Register, and it will
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Business and the Law I find it rather easy to portray a businessman. Being bland, rather cruel and incompetent comes naturally to me. John Cleese.
always be prudent to conduct a search before a significant purchase. Sections 51, 52 and 53 provide valuable protection for purchasers if they buy goods with a defect in title, or subject to an undisclosed security –however a prior search is the best protection of all.
US research has indicated that glass is the most frequent intruder into beverage bottles followed by mice in the following conditions and numbers: dead 16, dead, fur oozing Coca-Cola 1, dead and putrid 2, dead and badly battered 1, decayed 2, decomposed and swollen 14, skeleton only 1, small 1, unspecified 19, 57 Bishop, “Trouble in a Bottle” (1964) 16 Baylor Law Review 337.
[22.240] “Merchantable quality” is a term which has been considered by the courts since at least the 1890s, and its meaning has developed considerably over this period. The TPA at s 66(2) offered a statutory definition as follows:
Guarantee as to acceptable quality [22.230] Section 54 of the ACL provides a guarantee that goods will be of acceptable quality. This is similar to the earlier implied condition under the TPA that goods would be of merchantable quality. There is considerable discussion as to whether “acceptable quality” carries the same meaning as this earlier term, or whether it describes a new standard which must be adhered to. The argument that it introduces a new requirement is based on the fact that Parliament deliberately chose a different word, and so wanted to convey a new meaning. The argument that it conveys the same meaning is based on principles of statutory interpretation. Section 15AC of the Acts Interpretation Act 1901 (Cth) provides that where Parliament has used the same idea but expressed it in different words in order to convey a clearer style, a new meaning is not necessarily intended. An examination of the definitions used in the TPA for “merchantable quality” and the ACL for “acceptable quality” suggests that although different words have been used, the same meaning is conveyed. This is important because it means we can use earlier cases from the TPA for guidance.
(2) Goods of any kind are of merchantable quality within the meaning of this Division if they are as fit for the purpose or purposes for which goods of that kind are commonly bought as it is reasonable to expect having regard to any description applied to them, the price (if relevant) and all the other relevant circumstances.
This definition was significant because it changed the existing common law definition of merchantable quality. At common law –and these definitions continue to be important because they govern our understanding of the sale of goods legislation –goods were of merchantable quality if, according to Dixon J in Australian Knitting Mills v Grant [1933] HCA 35, they are: …in such an actual state that a buyer fully acquainted with the facts and, therefore, knowing what hidden defects exist and not being limited to their apparent condition would buy them without abatement of the price obtainable for such goods if in reasonably sound order and condition and without special terms
Or in other words, if you knew then what you know now, would you still buy the goods at the same price? If you would, then they are of merchantable quality. This definition works well when goods have only one particular use –such as underwear –but difficulties arise when goods have a range of purposes. In Henry Kendall & Sons v William Lillico & Sons Ltd [1969] 2 AC 31, Reid LJ gave a short summary of the basic standard required (at 77): The test of whether goods are “not of merchantable quality” is an objective test: are the goods of “no use for any purpose for which goods which complied with the description under which these goods were sold would normally be used?”
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Chapter 22 Supply of Goods and Services
This had the result that goods would be regarded as of merchantable quality if fit for any of the purposes –feeding some animals but not others –for which they could be used. This is still the operative definition for the sale of goods legislation, but the TPA, in providing a statutory definition, referred to “purpose or purposes”. [22.250] The effect of this statutory definition was considered by the Queensland Supreme Court in Rasell v Cavalier Marketing (Aust) Pty Ltd [1991] 2 Qd R 323. This concerned a dispute about the supply of carpet to Mrs Rasell. The carpet was fine when first laid, but over time, because of a process called pile reversal, appeared to be watermarked, or puddled. This process affected the visual appeal of the carpet, but no other performance qualities. The carpet suppliers argued that this carpet was still of merchantable quality, as it was fit for some of the purposes for which carpet is normally supplied, but not all. This argument would have satisfied a claim under the sale of goods legislation, but it was rejected by the Supreme Court of Queensland as not meeting the TPA test. As the judge at first instance noted (quoted by the Court of Appeal at 344):
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In this case to say that the carpeting itself is still of good quality and will wear well is nothing to the point any more than such a plea would be if it were advanced by a flag manufacturer, for instance, engaged to provide Australian flags on the finest quality cloth which was known by it to have a propensity to allow for changes of colour when exposed to the weather.
The Court of Appeal made it clear that the phrase “fit for the purpose or purposes for which goods of that kind are commonly bought” means fit for all normal purposes for which goods of the kind are commonly bought. And as appearance is one of the purposes for which carpet is commonly bought, a carpet which is not of attractive appearance – regardless of its other qualities –will not be of merchantable quality. So this is quite different from the common law definition. [22.260] The definition of “acceptable quality” is in similar terms to the TPA definition of “merchantable quality”. Section 54(2) of the ACL provides that: (2) Goods are of acceptable quality if they are as: (a) fit for all the purposes for which goods of that kind are commonly supplied; and (b) acceptable in appearance and finish; and (c) free from defects; and (d) safe; and (e) durable; as a reasonable consumer fully acquainted with the state and condition of the goods (including any hidden defects of the goods), would regard as acceptable having regard to the matters in subsection (3).
Paragraph (a) picks up the idea of fitness for purpose found in the earlier TPA definition, and makes it even clearer that acceptable quality requires that goods are fit for all the purposes for which goods of that kind are commonly supplied. Section 54(2) lists the qualities which an acceptable good will have, but these are not absolute standards. Rather, the requirement is that of a reasonable consumer –so it is an objective test. The factors which are to be considered in objectively ascertaining acceptable quality are listed in s 54(3) as: (a) the nature of the goods; and (b) the price of the goods (if relevant); and
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[In] the present case it cannot possibly be said that the plaintiff received any portion of what he had agreed to buy. It is true that a motor car was delivered to him, but the person who sold it to him had no right to sell it, and therefore he did not get what he paid for –namely, a car to which he would have title; and under those circumstances the use of the car by the purchaser seems to me quite immaterial for the purpose of considering whether the condition had been converted into a warranty. In my opinion the plaintiff was entitled to recover the whole of the purchase money, and was not limited to his remedy in damages as the judge below held. Rowland v Divall [1923] 2 KB 500 at 504 per Bankes LJ.
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Business and the Law (c) any statements made about the goods on any packaging or label on the goods; and (d) any representation made about the goods by the supplier or manufacturer of the goods; and (e) any other relevant circumstances relating to the supply of the goods.
[22.270] Again these are not absolute standards but commonsense guides, and will operate flexibly, according to the nature of the goods and all relevant circumstances. Case law is important as a guide to understand how these factors will operate. Acceptable quality is an objective concept, and requires goods to be reasonably fit for all the purposes for which goods of that kind are commonly supplied. What is reasonably fit will differ according to the nature of goods and factors such as price will be relevant. So, the reasonable consumer does not expect a $5 pair of shoes to last as long as a $500 pair of shoes, but even a $5 pair of shoes should last longer than one wear. Goods need to be of acceptable quality at the time of supply, so if they are supplied with a latent defect, which only manifests itself at a later time (such as pile reversal in carpet), they will not be of acceptable quality. The reference to durable in the definition indicates that goods will not be of acceptable quality if they do not continue in good order for the length of time a reasonable consumer would expect.
It is quality rather than quantity that matters. Lucius Annaeus Seneca.
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IN CONTEXT
In Practice Quality is the best business plan. John Lasseter.
[22.280] “Acceptable quality” in s 54 of the ACL carries a similar meaning to “merchant-
able quality” in the TPA, but it carries a different meaning to merchantable quality under the common law. Accordingly, we can use TPA cases to understand the ACL, but not cases discussing merchantable quality in the context of the sale of goods legislation. “Merchantable quality” in the sale of goods legislation has a different meaning to both “merchantable quality” in the TPA and “acceptable quality” in the ACL.
The following case examples explore the meaning of “merchantable” in the TPA, but we can use them as a strong guide to the concept of “acceptable” quality in the ACL.
Medtel Pty Ltd v Courtney [2003] FCAFC 151 [22.290] Mr Courtney brought a representative action against the manufacturer Pacesetter, and the importer Medtel Pty Ltd of “Hazard Alert Pacemakers”. He claimed on behalf of members of the representative group that each of them had been fitted with a pacemaker which was not of merchantable (now, acceptable) quality nor fit for the purpose for which it was sold. The claims followed a hazard alert issued on 5 June 2000 by an Australian Government agency, the Therapeutic Goods Administration, concerning four models of pacemaker distributed by the appellant. The hazard alert warned that, because of the type of solder used in these pacemakers, there was an increased risk of early battery depletion resulting in a “no output condition”. This means 972
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Chapter 22 Supply of Goods and Services the pacemaker would stop working. Not all pacemakers would be affected –but it was impossible to test to decide which pacemakers were at risk of premature failure. Medtel had responded to this problem in their products by providing new pacemakers and paying for the operation to have the old pacemaker removed and the new pacemakers implanted. Mr Courtney’s pacemaker, when tested after removal, was found to be working normally, and unaffected by the solder issue. The importer claimed that as Mr Courtney’s pacemaker had not failed, and was not likely to fail, then the goods were merchantable despite the hazard warning. The issue for the court to decide was can a product which, at the time of trial, can be demonstrated to have performed, and to be continuing to perform, satisfactorily nonetheless be found to be “not of merchantable quality”? What was meant by this concept, under the TPA definition? Branson J indicated that while the common law authorities may be of some assistance for certain purposes, the statutory definition provided a different test. At [64] Her Honour noted:
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The requirement of merchantable quality … is a requirement defined by reference to what “it is reasonable to expect”; that is, in my view, with what it is objectively reasonable to expect at the time of supply to the consumer. The test … requires the making of a comparison. It calls for the fitness for purpose of the goods in question to be measured against what it was objectively reasonable to expect, in terms of fitness for purpose, in all the relevant circumstances. Those circumstances include the description applied to the goods by the manufacturer and the price received by the manufacturer for the goods. What it is objectively reasonable to expect in terms of fitness for purpose of goods of one description may be quite different from what it would be reasonable to expect of goods of another description. What it would be reasonable to expect in terms of fitness for purpose of an inexpensive product might be quite different from what it would be reasonable to expect of an expensive product of the same kind.
So bearing in mind the nature of the product in this case, a pacemaker – Mr Courtney’s pacemaker – which itself was functioning, but was part of a batch with a superadded risk of failure: Was Mr Courtney’s pacemaker objectively fit for purpose? Branson J discussed this in terms of a hypothetical example raised by counsel during argument as follows (at [71]): … The hypothetical situation concerned a grocer who buys a case of 100 cartons of yoghurt in which three cartons, which cannot be distinguished from the other ninety-seven, have had arsenic introduced into them. Mr Walker SC, who appeared with Mr Loveday and Mr Clark for the appellant, accepted that the case of 100 cartons of yoghurt was unmerchantable as a case because the grocer could not know which cartons had arsenic in them. However, in respect of a purchaser who bought and ate without ill-effect an individual carton of yoghurt, Mr Walker argued: The suggestion that it [ie the carton of yoghurt] was not merchantable because it belonged to a class in which the rate of arsenic contamination was 3 per cent … would be absurd. The test of merchantability in the above context involves consideration of whether the carton of yoghurt was as fit for human consumption at the time of its sale to the consumer as it is objectively reasonable to expect in all of the circumstances. It seems to me to be instructive to consider the application of that test in different hypothetical situations. These situations might include: (1) a sale to a purchaser who learned of the risk of poisoning before eating the yoghurt;
(2) a sale to a purchaser who only learned of the risk of poisoning well after eating the yoghurt; and
(3) a sale to a purchaser who learned of the risk of poisoning after eating the yoghurt but before any poison might be expected to have taken effect. A purchaser in the first class could reasonably be expected to return the carton of yoghurt or discard it. Surely it could not be said at trial, even if at that time all three poisoned cartons had been identified in the hands of other purchasers, that the carton of yoghurt was at the time of its sale as fit for human consumption as it is objectively reasonable to expect … A purchaser in the second class could reasonably be expected to feel relieved to have survived but angry that he or she had been placed at risk of poisoning. Again, in my view, it would be unrealistic to say of the carton of yoghurt that it was at the time of its sale as fit for human consumption as it was objectively
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Business and the Law reasonable to expect. A purchaser in the third class could reasonably be expected to feel the most keenly of the three that the yoghurt was not fit for human consumption at the time of purchase. The anxiety experienced by that purchaser, in my view, would flow directly from the carton of yoghurt not being, at the time of its sale, as fit for human consumption as it is objectively reasonable to expect. In short, I am not persuaded that it would be absurd to characterise a food product as not merchantable in the relevant sense where the product carries a slight but appreciable risk of contamination by a deadly poison … I reject the argument that the mere fact that it was known at the time of trial that Mr Courtney’s pacemaker had not failed prematurely meant that it could not be demonstrated that Mr Courtney’s pacemaker was not of merchantable quality … at the time of its supply to Mr Courtney.
[22.300] So merchantable quality, and acceptable quality, is a comparative concept and takes into account all aspects of the nature of the goods. A consumer in the position of Mr Courtney can rely on the available evidence of likely or potential failure and is not obliged to prove actual failure of the goods in order to succeed. The effect of the statutory definitions is to introduce notions of quality, and this means there is often a crossover between acceptable quality and the separate guarantee found in s 55 of the ACL “fitness for purpose”, as was seen in this case. The common law tests illustrated in Henry Kendall & Sons v William Lillico & Sons Ltd have been replaced with a wider test relating to reasonable expectations of the buyer.
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Exceptions When Ralph Nader tells me he wants my car to be cheap, ugly and slow, he’s imposing a way of life on me that I’m going to resist to the bitter end. Timothy Leary.
[22.310] A consumer cannot argue that goods are not of acceptable quality if any relevant defects or problems have been brought to their attention (ACL, s 54(4) and (5)). So if goods are sold as seconds or defects are pointed out at point of sale, then the goods will not fail to be of acceptable quality simply because of these defects. Similarly, according to s 54(7), if a consumer examines goods before their supply, there is no action for breach of this guarantee if the examination ought to reasonably have revealed that the goods were not of acceptable quality. Section 54(6) provides that goods do not fail to be of acceptable quality if they are damaged by abnormal use, or the consumer fails to take reasonable steps in relation to their use.
Laws v GWS Machinery (2007) 209 FLR 53; [2007] NSWSC 316 [22.320] Mr Laws was injured when a tractor tyre exploded as his father attempted to fit the tyre onto the
tractor. Tractor tyres are known to be potentially dangerous, but neither Mr Laws or his son were aware of this and they were also not warned by the retailer who sold them the tyre. The issue in the case was whether the tyre was of merchantable quality judging by whether an ordinary consumer would be aware of the risk of the tyre exploding. The court held that: An ordinary consumer (ie a person who is not a vendor of tyres, or involved in the tyre industry) would not generally be expected to know of the danger or risk of fitting a tyre when not trained so to do. Once the goods are capable of being used by a consumer, in this case by fitting the tyre themselves, and such use is reasonably likely, and can cause damage, those goods (in this case, the tyre) are defective (or have a defect) within the meaning of s 71(1)(a) of the Trade Practices Act. This defect was not specifically drawn to the attention of Laws Senior nor was it capable of being revealed on inspection … GWS, a corporation, which has imposed upon it an implied condition that the tyre sold is of merchantable quality, has not satisfied that condition.
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Chapter 22 Supply of Goods and Services
Ryan v Great Lakes Council [1999] FCA 177
Case Study
Facts
[22.330] In early 1997 there was an outbreak of Hepatitis A in NSW and 444 of these cases were
traced to the consumption of oysters grown in Wallis Lake. Oyster farms in Wallis Lake were contaminated by raw sewage from villages, caravan parks and small boats at the lake. The plaintiff had consumed some of the oysters and become ill. He sued in negligence and also under the merchantable quality provisions of the TPA. In relation to his claim that the oysters were unmerchantable because of their contamination, the defendant argued that the oysters were as fit as it was reasonable to expect. Issues The supplier argued that it was not possible to guarantee that each oyster was free from viruses or contamination without actually testing each oyster. The only known method of testing was to cut a slice out of each oyster and examine it under the microscope. This had been done to a representative sample with no contamination found. To test each oyster in this way would have destroyed the crop. Consequently, it argued that the oysters were as fit as could reasonably be expected, and thus merchantable within the meaning of the TPA definition. Decision
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The oysters were not merchantable. Although the supplier could not have tested each oyster, it could have warned consumers of the possible presence of viruses. In the absence of any warning, it was reasonable for the consumer to expect the oysters to be free from disease and fit for human consumption. Per Wilcox J (at 52,338–52,339): The issue in relation to [merchantable/acceptable quality] … is not whether it was possible for the grower to ensure the oysters were free of viruses, but whether a purchaser would act reasonably in expecting they were …. [Merchantable/acceptable quality] imposes an objective standard (“as it is reasonable to expect”), though that standard must be applied having regard to all relevant circumstances. In the present case those circumstances include the absence of any warning by the Barclay companies of the possibility of a virus in the oysters. Of course, this would not matter if it was well known to members of the public that viruses can survive even proper processing and depuration, but the evidence does not suggest it was.
This case eventually went on appeal to the High Court but only on the ground of liability in negligence (see also Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540). Implications This decision makes clear that the emphasis in the understanding of merchantable/acceptable quality under the TPA and the ACL is on the reasonable expectations of consumers –not what is reasonable to expect of the supplier or manufacturer. This can be contrasted with equivalent provisions under the SOGAs, which are based on the expectation of parties of equal bargaining power taking reasonable care for their own safety.
[22.340] It is also clear from the cases including Rasell that where there is more than one purpose, the goods must be reasonably fit for all of those purposes. This is completely different from the position under the sale of goods legislation where it is sufficient that the goods are fit for one of the purposes disclosed.
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IN CONTEXT
Extended warranties Give them quality. That’s the best kind of advertising. Milton Hersey.
[22.350] Manufacturers and retailers of goods such as phones, computers and cars com-
monly offer an extended warranty –a continuing period of protection, after any manufacturer’s warranty may have ended. Are these necessary? Do consumers need to purchase these, or do they simply duplicate the existing consumer guarantee that goods be of acceptable quality? Acceptable quality includes the requirement that goods be as durable as the reasonable consumer would expect, taking into account factors such as price and nature of the goods. So even if there is an express warranty that offers repair or replacement for say 12 months, but the reasonable consumer would expect the particular good to continue in good order without needing repairs for 3 years, then if the goods break down after 18 months they won’t be covered by an express warranty, but they will be covered by the guarantee that the goods be of acceptable quality. This is independent of any extended warranty.
In the Consumer Guarantees: A Guide for Business and Legal Practitioners (2010) prepared by the ACCC and State regulatory agencies, the following example is provided:
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A consumer buys a plasma television for $6,000. It stops working two years later. The supplier tells the consumer they have no rights to repairs or another remedy as the television was only under the manufacturer’s warranty for 12 months. The supplier says the consumer should have bought an extended warranty, which would have given five years’ cover. A reasonable consumer would expect more than two years’ use from a $6,000 television. Under the consumer guarantees, the consumer therefore has a statutory right to a remedy on the basis that the television is not of acceptable quality. The supplier must provide a remedy free of charge. This may also amount to misleading a consumer about their rights. It was very clear from evidence given to the Australian Consumer Law Review that consumers are often confused about extended warranties, and there is a risk that misrepresentations by sales staff may induce customers to purchase extended warranties they may not need. Accordingly, it is proposed (Proposal 3) that: • consumers be provided with details of their rights under the Consumer Guarantees and how these compare to their rights under an extended warranty they may decide to purchase; and • consumers will have a cooling-off period of at least 10 days during which they can change their mind about the purchase of the extended warranty. These changes have not yet been introduced –but when they are, it will be very important for suppliers to meet their new obligations to consumers.
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Chapter 22 Supply of Goods and Services
Guarantee as to fitness for purpose [22.360] Section 55 of the ACL provides a guarantee that goods are reasonably fit for any disclosed purpose, and for any purpose for which the supplier represents that they are reasonably fit. The guarantee requires that: • the purpose be disclosed
– either expressly or by implication;
– to any person in the supply chain;
– and if disclosed to the manufacturer (directly or indirectly) the manufacturer will be liable and the supplier will have a right of indemnity against the manufacturer (see s 274). • that the consumer relied on the skill or judgment of the person to whom the purpose was communicated
– and that it was reasonable to do so.
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This is very similar to the implied condition of fitness for purpose in both the TPA and the sale of goods legislation. The consumer guarantee of fitness for purpose is dependent on the consumer making known any particular purpose for which goods are required in order for the supplier to exercise skill or judgment in selecting appropriate goods. Section 55(2)(b) of the ACL makes it clear that if the purpose was communicated to the manufacturer –either directly or through the supplier –the manufacturer will also be directly liable for this guarantee. Essentially, this guarantee requires that when a consumer communicates what they want to do with a good, they should be able to rely on the advice given which leads to a particular purchase.
Communication of purpose [22.370] Communication of the consumer’s purpose is a key requirement of this section. The seller cannot begin to exercise skill and judgment in selection of goods until he has some idea of what the buyer wants the goods to do. The extent of disclosure required was discussed extensively in Ashington Piggeries v Christopher Hill. In relation to merchantable quality, Lord Diplock (at 504) held that:
To attract the condition to be implied [of fitness for purpose] the buyer must make known the purpose for which he requires the goods with sufficient particularity to enable a reasonable seller, engaged in the business of supplying goods of the kind ordered, to identify the characteristics which the goods need to possess to fit them for that purpose. If all that the buyer does make known to the seller is a range of purposes which do not all call for goods possessing identical characteristics … he does not give the seller sufficient information to enable him to make or to select goods possessing a characteristic which is needed to make them fit for any one of those purposes in particular. Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 at 506 per Lord Diplock.
To attract the condition … the buyer must make known the purpose … with sufficient particularity to enable a reasonable seller engaged in the business of supplying goods of the kind ordered to identify the characteristics which the goods need to possess to fit them for that purpose. If all that the buyer does make known to the seller is a range of purposes … and he does not identify the particular purpose or purposes within that range for which he in fact requires the goods he does not give the seller sufficient information … This … provides that the only condition to be implied as to the responsibility of the seller is that the goods should be reasonably fit for one of the purposes within the range.
Lord Diplock made it clear that responsibility for general suitability of goods rests with the seller. However, the buyer has the responsibility to make his particular purpose or
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purposes known to the seller with sufficient detail to allow the seller to choose suitable goods. The effect of this division of responsibilities was explained by Lord Wilberforce (at 490): Although the Act makes no reference to partial reliance, it was settled … that there may be some cases where the buyer relies on his own skill and judgment for some purposes and on the seller for others …
This is significant. The nexus between communication of purpose and reliance is clear, and Lord Wilberforce establishes that for this section to operate, the consumer does not have to rely totally on the skill and expertise of the supplier –partial reliance will be sufficient.
A judge is not supposed to know anything about the facts of life until they have been presented in evidence and explained to him at least three times. Lord Parker.
If the goods have an obvious purpose, and are to be used for this obvious purpose, then express communication is not required. The section makes this clear when it discusses “implied communication”, and it emerges clearly from cases such as Ryan v Great Lakes Council [1999] FCA 177, discussed at [22.330] in relation to acceptable quality. The obvious purpose of oysters is to be eaten, and this will not have to be expressly communicated to the supplier or the manufacturer, for this guarantee to be engaged.
Reasonableness of reliance
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[22.380] Generally speaking, reliance is established by communication of purpose. But what if the purpose is obvious, how can it be demonstrated that there was reliance, and that it was in fact reasonable for the consumer to rely on the skill and expertise of the supplier or manufacturer? The following case addresses these questions.
Ryan v Great Lakes Council [1999] FCA 177
Case Study
Facts
[22.390] There is often an overlap between the guarantees of acceptable quality and fitness for purpose. This case was discussed above in relation to acceptable quality, but a second issue raised in this case was whether or not the plaintiff had relied on the skill of the seller in selecting the oysters for sale to customers. Issues Although it was accepted that the oysters were unfit for their purpose – as they led to Mr Ryan and other contracting Hepatitis A –the supplier argued that the plaintiff had not relied on them in selection of the oysters, and that even if he had, this reliance was unreasonable in all the circumstances. Decision The court found that in the circumstances reliance could be implied or inferred. As Wilcox J noted (at 52,337): There is no evidence of reliance; but that does not mean the circumstances demonstrate a lack of reliance. A person will not normally seek an assurance that an item grown or manufactured for human consumption is fit for that purpose; in the absence of an obvious defect or special circumstance, fitness will be assumed.
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Chapter 22 Supply of Goods and Services
The acquirer will rely on the skill and judgment of the grower or manufacturer in ensuring the article is fit for human consumption. That was the situation in this case; if they had been asked, each of the Messrs Ryan would surely have said he assumed the oysters were fit for human consumption; they were purchased from a supplier associated with a reputable grower. The argument about unreasonableness has a little more force. Counsel for the Barclay companies say it was unreasonable for anyone to rely on the skill or judgment of the grower “since the expert evidence reveals that it was not possible to ensure that an oyster was free of viral contamination, even if viral testing had taken place before sale. Viral testing, of its nature, involves destruction of the oyster and could not have been carried out in relation to every oyster sold.” I accept it would not have been possible for Barclay Oysters to test the particular oysters sold to the applicant’s father and brother. I also accept it is impossible to ensure that a particular oyster is free from viral contamination, although it is possible to minimise the risk of the oyster being contaminated at the time of sale. However, as counsel for the applicant submits in reply, the question is not whether the grower could reasonably have discovered the defect; the issue is the reasonableness of the consumer’s reliance, not the reasonableness of the manufacturer’s behaviour … Neither of the Barclay companies gave any warning of the possibility that the oysters might contain a virus they could not detect. However, I think most people would assume there are procedures and tests that enable a grower to ensure its product is fit to eat. I believe it would come as a surprise to most members of the public, as it has come as a surprise to me, to learn this is not necessarily so. In the absence of a warning, each of the Messrs Ryan was entitled to rely on the skill and judgment of the grower.
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Implications Note Wilcox J’s statement in bold in the extract above. Unlike tort, which will assess the reasonableness of the manufacturer’s response to a known risk, s 55 of the ACL looks at the reasonableness of the consumer’s reliance. And like purpose, reliance in certain circumstances will be deemed to be obvious. So, if a business holds themselves out as being able to supply a good with an obvious purpose –such as oysters for consumption –express communication of purpose will not need to be shown; express reliance will not need to be shown; and it will be seen as reasonable –in the absence of any warnings –for a consumer to rely on the expertise of the manufacturer (in this case, the oyster farmer) or retailer. However, reliance cannot always be demonstrated. You will recall the following case from our discussion of “consumer” at [22.70].
Carpet Call Pty Ltd v Chan [1987] ATPR (Digest) 46-025 [22.400] Recall that Mr Chan had purchased some $70,000 of carpet for his nightclub. When problems developed with this carpet, he wanted to be able to take advantage of the equivalent of the consumer guarantees. The court found that he was a consumer, but in order to establish he had a claim under the fitness for purpose provision, he also had to establish that he had relied on the skill and expertise of Carpet Call, and that it was in fact reasonable for him to do so. The court found that there was insufficient evidence that Mr Chan had relied on Carpet Call when selecting the carpet to be laid in his nightclub, and that in fact, he knew more about night club wear and tear than the carpet company. Accordingly, he was not able to establish that the company owed him the equivalent of the present guarantee.
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Business and the Law There is no such thing as “soft sell” and “hard sell”. There is only “smart sell” and “stupid sell”. Charles Brower.
Reasonable fitness for purpose [22.410] Having established that the guarantee applies, what does it mean that the goods are reasonably fit for their purpose? Fitness includes both suitability for the disclosed purposes and general issues of quality. This is why there is often a crossover with ss 54 and 55 of the ACL. While often obvious –there was no question that contaminated oysters could be fit for their purpose of human consumption –there can be difficulties in establishing this concept. The following case shows the necessity of the buyer considering exactly what is required and then communicating those requirements to the seller.
Centurion Industries Ltd v Industrial Progress Corporation Pty Ltd [1998] WASC 117
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[22.420] In this case the defendant had contracted to purchase a new machine to replace a 10-year- old model. The contract specifications did not refer to overall production rates but did specify particular features, all of which were supplied. The new machine was a great disappointment to the defendants and was eventually removed by them. They felt it was uneconomic to run as it did not perform as well as their older machine. The sellers accepted that there was an implied term of the agreement that the new machine would be reasonably fit for the purpose of producing the purlins described in the contract. However, they denied that the purpose included productivity that was greater than, or at least equal to, that of the old machine. The court decided that there was no breach of any implied term of fitness for purpose. The buyers had specified what they wanted in some respects but had failed to specify any performance standards or output in comparison to the older machine. The issues were discussed by Templeman J: … the defendant could only succeed under this head if it was able to prove that it told the plaintiff’s representatives that it required the new machine to produce purlins one and a half times faster (or as fast, or at least as efficiently) as the old machine, so as to show that the defendant relied on the plaintiff’s skill or judgment to produce a machine which performed in that way … It is, I think, significant that the defendant made no attempt to compare in any quantitative way, the performance of the new machine with the Metroll machine The new machine is, in substance, a Metroll machine. Although that is irrelevant to the plaintiff’s contractual obligations, it is relevant when assessing performance … The Metroll machine has operated, apparently satisfactorily, for some 10 years. It must therefore be assumed to be reasonably fit for the purpose of producing purlins … While (the plaintiffs) knew, in general terms, that the defendant’s purpose in purchasing the new machine was to replace the old machine, no inference arises, in my view, as to the production rate of the new machine. In these circumstances, I am not persuaded that the defendant relied on the plaintiff’s skill or judgment in relation to productivity when specifying its requirements for the new machine.
This decision makes it clear that buyers must disclose their purposes with sufficient detail to enable sellers to make a proper selection of goods to fit those purposes.
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Chapter 22 Supply of Goods and Services
IN CONTEXT
Staff training [22.430] Consider the obligations which are imposed on suppliers and manufacturers in
relation to representations made about their products. Section 54(3) of the ACL includes as a relevant factor for whether or not the goods are of acceptable quality any statements or representations made about the goods. This includes on packaging –a critical issue for marketers – but also at point of sale. Section 55 often relies on the conversations which consumers have with retailers –or manufacturers. This should make it clear how critical it is under the ACL for all staff who deal with customers to be fully trained about the products they are selling.
Guarantee as to correspondence with description
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[22.440] Section 56 of the ACL provides a guarantee that goods will correspond with their description. This only applies where all the standard elements have been satisfied, and the goods have also been supplied by description. This guarantee was intended to give some measure of protection to a purchaser who was not in a position to inspect the goods prior to contract but needed to ensure that he or she received what he or she bargained for. This guarantee is just as important now, as in its original form in the sale of goods legislation, because of the rise of e-commerce and internet shopping. Much of the case law in earlier years was concerned with establishing what the description was for the purpose of compliance with these sections –did it encompass every word used to describe the goods including packaging, labelling and advertising or was it restricted in some way? The matter may now be said to be settled; see Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 per Diplock LJ (at 504):
A toy boomerang worth around 50¢ that returned and hit its 7-year-old thrower in the head has cost a UK toy company £4000 ($8,442), AFP reports. A court in Bangor, North Wales, said Ponders End Investments should have labelled the toy with a warning about the danger of being hit by a returning boomerang. Ponders End managing director Stephen Cole was stupefied by the ruling: “What on earth do they think boomerangs do, for goodness sake?” Australian Financial Review (2 October 1995).
The “description” by which unascertained goods are sold is, in my view, confined to those words in the contract which were intended by the parties to identify the kind of goods which were to be supplied. It is open to the parties to use a description as broad or narrow as they choose. But ultimately the test is whether the buyer could fairly and reasonably refuse to accept the physical goods proffered to him on the grounds that their failure to correspond with that part of what was said about them in the contract makes them goods of a different kind to those he had agreed to buy. The distinction between “description” of goods and their quality is made by Lord Dunedin in Manchester Liners v Rea Ltd [1922] 2 AC 74 at 80: “the tender of anything that does not tally with the specified description is not compliance with the contract. But where the article tendered does comply with this specific description and the objection on the buyer’s part is an objection to quality alone, then I think s 14(1) settles the standard.”
Importantly, the description identifies the subject of the purchase, not its qualities. So when we are talking about correspondence with description under s 56, we are considering the identity of the goods –not their quality. Matters of quality are dealt with by ss 54 and 55 (see [22.230], [22.360]). This is made clear in the Ashington Piggeries case, and well summarised by Salmond J in Taylor v Combined Buyers Ltd [1924] NZLR 627 at 642:
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Business and the Law Inspector Praline: What’s this one, “spring surprise?” Mr Milton: Ah –now that’s our specialty – covered with darkest creamy chocolate. When you pop it in your mouth steel bolts spring out and plunge straight through both cheeks. Praline: Well where’s the pleasure in that? If people place a nice chocky in their mouth, they don’t want their cheeks pierced. In any case this is an inadequate description of the sweetmeat. I shall have to ask you to accompany me to the station. Mr Milton: It’s a fair cop. Monty Python’s Flying Circus.
If I contract to buy “a cask of port wine”, and I receive beer, I am entitled to reject the goods because there has been a breach of the statutory condition of conformity with description. The difference between port wine and beer is not a difference of quality, degree or other unessential attribute, but is a difference of kind. If, however, I contract to buy “a cask of port wine in sound condition” and I receive a cask of port wine which, upon delivery and examination, is found to be in poor condition I am not entitled to reject the goods on the basis that the goods did not conform to the description under which it was sold. The port wine conforms to the description under which it was sold. The port wine conforms to the description, inasmuch as the difference between good port wine and bad port wine is merely a difference of quality, state or condition.
Consider, however, the situation where the description identifies the goods as requiring particular characteristics. This was the case in Elder Smith Goldsborough Mort v McBride [1976] 2 NSWLR 631 where the purchaser of what the court held was described as a “breeding bull” was able to recover damages for non-correspondence with description when the bull was found to be sterile. It should be clear from this discussion that consumers should take care to specify carefully and with some precision exactly what it is that they want. Contracts should be drafted carefully and orders should be precise to be able to take advantage of this guarantee of correspondence with description.
Guarantee as to correspondence with sample or demonstration model
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[22.450] Section 57 of the ACL provides a guarantee that, if sold by reference to a sample or demonstration model, the goods will correspond with that sample or model. There is a further guarantee that the consumer will have a reasonable opportunity to compare the goods with the sample. A third guarantee provides that the goods will be free of any defect, defined as a defect that would not be apparent on reasonable examination and which would not cause the goods not to be of acceptable quality. We have discussed this concept before and it is defined in s 54(2). In practice, there is often considerable overlap between this guarantee and the preceding guarantee, and the legislation links these concepts. Section 57(3) provides that where goods are sold by both sample and description, both guarantees apply. This section was similarly concerned to provide comfort to purchasers who could not inspect the goods prior to purchase.
Guarantee as to repairs and spare parts [22.460] Section 58 of the ACL imposes an obligation on the manufacturer to ensure spare parts and facilities for repair of goods are available for a reasonable time, after the supply of the goods. There is no definition of what a reasonable period is –this will be a matter for the courts to determine objectively by considering the expectations of a reasonable member of the community. Section 58(2) allows manufacturers to exclude their liability by giving consumers written notice at the time of purchase that facilities for repairs or spare parts would not be available or would only be available for a limited time. 982
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Chapter 22 Supply of Goods and Services
Any business accepting goods for repair should be familiar with the provisions of s 103 which permit the Minister to prescribe a notice which is required to be given to consumers. Regulation 91 of the Competition and Consumer Law Regulations 2010 (Cth), for example, requires repairers who supply refurbished goods as an alternative to repair, or use refurbished parts in the repair of a consumer’s goods to provide the following notice: Goods presented for repair may be replaced by refurbished goods of the same type rather than being repaired. Refurbished parts may be used to repair the goods.
Guarantee as to express warranties [22.470] Section 59 of the ACL imposes an obligation on both suppliers and manufacturers to comply with any express warranties which have been given. “Express warranty” is defined broadly in s 2 and includes: an undertaking, assertion or representation: (a) that relates to: (i) the quality, state, condition, performance or characteristics of the goods; or (ii) the provision of services that are or may at any time be required for the goods; or (iii) the supply of parts that are or may at any time be required for the goods; or
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(iv) the future availability of identical goods, or of goods constituting or forming part of a set of which the goods, in relation to which the undertaking, assertion or representation is given or made, form part; and
Otago service manager Kevin Campbell said the tyres were not considered dangerous provided instructions were followed. He conceded difficulties arose because some instructions were written in Japanese. Otago Daily Times (New Zealand) (16 August 1996).
(b) that is given or made in connection with the supply of the goods, or in connection with the promotion by any means of the supply or use of the goods; and (c) the natural tendency of which is to induce persons to acquire the goods.
So express warranties concern representations as to the quality, characteristics or the performance of the goods –what they will do, and for how long they will do it. The ACL also provides for another type of warranty known as a warranty against defects. In s 102(3) this is defined as: a representation …at or about the time of supply … that a person will… (a) repair or replace the goods … (b) provide again or rectify the services … (c) wholly or partly recompense the consumer; if the goods or services or part of them are defective …
If an express warranty is also a warranty against defects, then the warranty must be given in the form prescribed by the regulations. Regulation 90 of the Competition and Consumer Law Regulations 2010 (Cth) provides that a warranty against defects must be in a document that is easily read and understood and clearly states the obligations of the consumer and the person giving the warranty. It must indicate that the warranty is in addition to the rights and remedies under the ACL and must include the following text: Our goods come with guarantees that cannot be excluded under the Australian Consumer Law. You are entitled to a replacement or refund for a major failure and compensation for any other reasonably foreseeable loss or damage. You are also entitled to have the goods repaired
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Business and the Law or replaced if the goods fail to be of acceptable quality and the failure does not amount to a major failure.
Simply promising performance qualities –for example, this mattress will last for 10 years –will be an express warranty, and binding according to s 59. (It will also be relevant for s 54.) Promising that you will replace any mattress which does not last for 10 years will also be a warranty against defects, and must be in the prescribed form. Any warranties or promises of repair, replacement or refund must be in addition to, not instead of, the remedies prescribed under the ACL. Section 59 addresses the issue with privity of contract. Prior to this provision, warranties given by retailers were enforceable as part of the contract of sale, but warranties or guarantees provided by a manufacturer were not enforceable.
22.5 GUARANTEES IN RELATION TO THE SUPPLY OF SERVICES If you don’t have time to do it right you must have time to do it over. Unknown.
[22.480] Subdivision B contains a suite of provisions providing guarantees in relation to the provision of services. This is an important distinction between the ACL and the sale of goods legislation –which only applies to goods. Services is defined broadly in s 2 and will include rights, benefits, privileges or facilities provided under: (i) a contract for or in relation to the performance of work (including work of a professional nature), whether with or without the supply of goods; or
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(ii) a contract for or in relation to the provision of, or the use or enjoyment of facilities for, amusement, entertainment, recreation or instruction; or (iii) a contract for or in relation to the conferring of rights, benefits or privileges for which remuneration is payable in the form of a royalty, tribute, levy or similar exaction; or (iv) a contract of insurance; or (v) a contract between a banker and a customer of the banker entered into in the course of the carrying on by the banker of the business of banking; or (vi) any contract for or in relation to the lending of money;
Work done under a contract of service is excluded. This definition is broad enough to include most professional work (except that done by an employee for an employer) and work done by tradespeople, whether or not in connection with the supply of goods. The supply of “materials” has been held to be broader than merely goods. In Gharibian v Propix Pty Ltd (t/as Jamberoo Recreational Park) [2007] ATPR 42-171, the NSW Court of Appeal found that the provision of a toboggan ride on the side of a mountain constituted the provision of “materials” and breached the equivalent guarantee where those materials were unsafe. In that case, a woman was injured when she was unable to stop the toboggan in the rain.
Guarantee as to due care and skill [22.490] Section 60 of the ACL imposes an obligation on a service provider to provide those services with due care and skill. 984
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Chapter 22 Supply of Goods and Services
The real significance of this section is in relation to s 64 (see [22.520]), which provides that the consumer guarantees may not be excluded. Those providing services –for example, removalists and drycleaners –routinely try to limit their liability by using exclusion clauses. While these will be successful to exclude any contractual liability and, if drafted broadly enough, any liability arising out of negligence –this separate statutory guarantee, which will give a similar protection to the law of negligence, may not be excluded. Procedurally, this will often be easier to establish than a claim in negligence –as no duty of care is required –and so this broadens the protections available to consumers. For example, in Warnock v ANZ Banking Group Ltd [1989] ATPR 40-928, a bank was held to have breached the equivalent of this guarantee through the failure of a manager to advise a customer correctly in relation to the preconditions attaching to an insurance policy taken out by the customer through the bank in relation to a loan.
Guarantee as to fitness for purpose
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[22.500] Section 61 of the ACL imposes an obligation on a supplier that, where a particular purpose or desired result has been communicated, the services rendered will be reasonably fit for that purpose and that they will be of a standard that could reasonably be expected to achieve that desired result. Like the very similar s 55 in relation to goods, the section only applies if the consumer relied on the service provider and that it was reasonable for them to do. In essence, this section provides for services the same protection that s 55 provides in relation to goods.
Guarantee as to time of supply [22.510] Section 62 of the ACL imposes an obligation on suppliers that services will be provided within a reasonable time. Reasonable is not defined in the legislation.
22.6 EXCLUDING THE CONSUMER GUARANTEES [22.520] The consumer guarantees may not be excluded (ACL, s 64) and indeed an attempt to exclude the operation of the guarantees would also breach the prohibition against engaging in conduct which is misleading or deceptive (s 18) and the related prohibitions (one civil and the other criminal) against false or misleading representations as to rights (s 29(1)(m) and s 151(1)(m)). This provision has an important impact on the law of exclusion clauses. An example of the application of s 64 is Dillon v Baltic Shipping Company (1989) 21 NSWLR 617. In this case, the contract sought to exclude liability in relation to the provision of the service of the carriage of personal luggage on the cruise ship –an attempt to exclude the equivalent of the guarantee in relation to provision of services with due care and skill (s 60). The court found this duty was non-excludable, and so the exclusion clause was void. Businesses need to think carefully about signs such as “No Refunds” or “This guarantee replaces any other warranty or guarantee”. Both would be void under s 64, and may also be in breach of s 18. Refunds, in whole or in part, may be available for example under s 54 or s 55, and the operation of these sections cannot be excluded. For example, in Miller v Fionas Clothes Horse of Centrepoint Pty Ltd [1989] ATPR 50-515 at 40-963, the defendant
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In commercial contracts negotiated between businessmen capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can most economically be borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible to one meaning only. Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 per Lord Diplock.
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Business and the Law A bad workman blames his tools. Chinese Proverb.
had incorrect product content labelling, incorrect or no product care labelling, and signs in stores indicating that no refunds would be given. These were all breaches of the relevant provisions of the consumer law. Signs such as “Please choose carefully. We do not refund if you change your mind” do not breach the ACL because there is no general right in contract law to return goods. Section 64A qualifies the general rule that the consumer guarantees cannot be excluded or modified. This section allows suppliers –subject to an overriding test of fairness and reasonableness –to limit their liability in relation to the supply of goods or services other than goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption to the cost of replacement or repair of goods or the cost of having the services supplied again.
ACCC v Fitbit (Australia) Pty Ltd (ACCC media Release 97/18 1 June 2018) [22.530] Fitbit supplies both goods –the wearable fitness tracker –and services –subscriptions available to consumers via its website. Both the supply of Fitbits and any associated services are governed by the Consumer Guarantees. Fitbit, via statements on its website and in product packaging, sought to limit its liability under the ACL by:
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• Limiting the time for repair or replacement of defective products to one year from the date of purchase; • Providing that replacement products are only protected by warranty for the remainder of the original warranty, or 30 days, whichever is longer; • Requiring consumers to pay the cost of returning defective products; • Excluding liability for any loss or damages from a breach of any express or implied warranty; and • Automatically renewing membership fees for subscription services. The ACCC formed the view that these attempts by Fitbit to limit its liability to consumers under the ACL could mislead consumers as to their statutory rights because: • The ACL does not limit remedies for defective goods to a specific time; • The ACL does not limit remedies for replacement goods that are defective to a specific time; • the ACL does not require consumers to pay any significant costs of returning goods where a product is returned pursuant to a right to return under the ACL; • guarantees under the ACL cannot be excluded by contract; and • automatically renewing fees may mislead consumers about the actual price. Fitbit (Australia) Pty Ltd is the Australian subsidiary of an American parent Fitbit Inc and goods and services are supplied directly from the Fitbit website and through third-party retailers. Fitbits are sold worldwide, and even the website directed towards Australian consumers is available to an international audience. To deal with the issue of different regulatory regimes in different countries, the web-site had included phrases such as “to the extent permitted by law” and “except where prohibited by applicable law”. The ACCC however took the view that this was not enough to make it clear to Australian consumers that they were protected by the ACL and that their rights were not limited in the manner suggested by the text of the Fitbit statements. 986
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Chapter 22 Supply of Goods and Services As well as taking the matter to a court for its decision and the imposition of a civil pecuniary penalty or a fine, the ACCC has the ability, under s 87B to seek an enforceable undertaking. This is an administrative action [see 18.460] which: • requires the company to admit that its behaviour is in breach of the ACL; • requires the company to change its behaviour in specified ways to protect consumers; • may involve certain redress towards affected consumers; • generally involves a requirement that the company address its culture and implement a compliance program; • is a quicker and more cost-effective solution to address a problem than litigation; and • is court enforceable if breached. In this instance, Fitbit acknowledged that its conduct may have contravened s 18 and s 29(1)(m) of the ACL, and the matter was dealt with by way of enforceable undertaking. You can find a copy of the actual undertaking here: https://www.accc.gov.au/system/files/public-registers/undertaking/EO%20-%20Undertaking%20s87B%20-%20Fitbit%20%28Australia%29%20 Pty%20Limited%20-%20Signed%20by%20Chairman%2031%20May%202018.pdf
IN CONTEXT
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Companies Operating Internationally [22.540] The Fitbit case raises the issue for companies which sell internationally of how
to make sure that they comply with the different regulatory regimes in different countries. Can you just have one general set of terms on your website, which apply to everyone? Is it enough to indicate to purchasers that their rights may be subject to local laws? The ACCC has made it very clear that for Australian compliance, broad general statements such as “to the extent permitted by law” are not sufficient. If rights are being specifically limited –for example, a time limit imposed –Australian consumers must know clearly that this does not apply to them. In any website directed towards Australian consumers, or any product information or packaging on products sold in Australia, the ACL must be specifically referred to and statements about rights and warranties must be specifically Australianised. Generic statements about unnamed protections which may or may not be available under unnamed laws may still mislead Australian consumers.
22.7 MANUFACTURER TO INDEMNIFY RETAILER [22.550] Section 274 of the ACL provides that in cases where a consumer has an action against the retailer under s 54, s 55 or s 56, the retailer has a right to be indemnified by the manufacturer. However, s 276A provides that in the case of goods other than goods of a kind ordinarily acquired for personal, domestic or household use or consumption,
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Business and the Law
the liability of a manufacturer to a retailer is limited to a liability to pay to the seller an amount equal to the lowest amount of: (a)
the cost of replacing the goods;
(b)
the cost of obtaining equivalent goods; or
(c)
the cost of having the goods repaired.
This limitation does not apply in relation to particular goods if the retailer establishes that it is not fair or reasonable for the liability of the manufacturer in respect of those goods to be limited (s 276A(2)). Retailers and manufacturers can also reach an agreement as to what costs each will cover in respect of goods which do not meet the relevant consumer guarantees.
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22.8 REMEDIES FOR BREACH OF THE CONSUMER GUARANTEES These are difficult days for automobile manufacturers; they’re thinking up ways (to make their products safer and new names to make them sound more dangerous. Thomas La Mance.
[22.560] While the sale of goods legislation and the earlier TPA provided remedies based in contract, the consumer guarantees provide remedies based on the legislation. These remedies are found in Pt 5-4 of the ACL and broadly provide that consumers may seek a refund, replacement or repair of goods or reprovision of the service which was the subject of the guarantee. The exact remedies depend on the nature of the breach –whether it is major or a minor failure –and the actual guarantee which has been breached. Broadly speaking, if the breach is a major failure, the consumer is entitled to choose which of the statutory remedies is appropriate (eg refund rather than replacement), but if the failure is minor, then the supplier may choose the remedy (eg repair rather than refund.) The actual consumer need not bring the action. Section 266 provides that if a person receives goods as a gift, they will have the same rights and remedies as the consumer. Section 260 provides that a breach of a guarantee will be a major failure if the goods would not have been acquired by a reasonable consumer fully acquainted with the extent of the failure, or the goods depart in a significant respect from their description, or from a sample or demonstration model. Unsafe goods also constitute a major failure. If the goods are substantially unfit for the purpose for which goods of that kind are commonly supplied or unfit for a disclosed purpose, and this unfitness cannot be remedied within a reasonable time, this will also constitute a major failure. The following tables, reproduced from the Australian Government publication –The Australian Consumer Law –A Guide to Provisions (2010) –give a detailed breakdown of the remedy provisions. Following the Australian Consumer Law Review, these may be supplemented by two new rights: • the right for the consumer to obtain a refund or replacement where goods fail within a short, specified time of purchase (Proposal 1); and • multiple non-major failures will be treated as a major failure (Proposal 2). This will mean that rather than having to accept that a faulty product is constantly repaired by the supplier, the consumer will be able to require a refund or a replacement. These proposals require more development before their implementation.
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Chapter 22 Supply of Goods and Services
[22.570] Consumer rights concerning guarantees for the supply of goods
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Right of action Section 259(1)
A consumer has a right to take action if a supplier of goods fails to comply with a guarantee that applies under Chapter 3, Part 3-2, Division 1, Subdivision A of the ACL. Right to require that If a failure to comply with a guarantee is not a major failure a failure to honour a and is capable of being remedied by the supplier, the conguarantee be remedied sumer may require the supplier to remedy the failure within a Section 259(2) reasonable time. What is a “reasonable time” will vary depending on the nature of the goods and nature of the failure. If a supplier fails to remedy a failure within a reasonable time Consequences for a supplier of failing to remedy a a consumer may have the failure remedied elsewhere and failure to honour a guaran- recover all reasonable costs incurred from the supplier, or tee Section 259(2) reject the goods. The costs that will be recoverable under the section if goods are remedied elsewhere would likely include any amount paid to the alternative repairer, and any costs of transporting the goods to and from that repairer, such as postage and handling costs. If a failure to comply with a guarantee is major or the failure is Rights of a consumer if not capable of being remedied, the consumer may reject the a failure to comply with goods or seek compensation from the supplier for the reduca guarantee is major or tion in the value of the goods below the price paid or payable is not capable of remedy for the goods. Section 259(3) Consumer’s right to The consumer may also recover damages for any loss incurred recover damages that was reasonably foreseeable as a result of the failure. Section 259(4-6) This will include the costs of inspection and transportation in respect of seeking to have the failure remedied. Original packaging The right of consumers to seek remedies from suppliers is Section 259(7) not affected by whether or not the goods are in their original packaging. When is a failure to honA failure to honour a guarantee is a “major failure” if the goods our a guarantee a “major would not have been acquired by a reasonable consumer fully failure”? Section 260 acquainted with the extent of the failure, or the goods depart, in significant respect, from their description, or from a sample or demonstration model. A failure to honour a guarantee is also a major failure if the goods are substantially unfit for the purpose that goods of the same kind are commonly supplied for and they cannot be remedied within a reasonable time, or they are unfit for a disclosed purpose and cannot be remedied within a reasonable time. A major failure also occurs if goods are unsafe.
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Ways in which a supplier may remedy a failure Section 261
A supplier may remedy a failure to comply with a guarantee by: • if a failure relates to title, curing the defect in the title. • if a failure does not relate to title, repair the goods, replace the goods or provide the consumer with a refund.
When consumer are not entitled to reject goods Section 262
Whilst there is no restriction placed on a consumer requesting a particular remedy, the method of remedying a failure will be at the option of the supplier. A consumer may reject goods in certain circumstances. That right may be lost in certain circumstances. These include: • If the rejection period for the goods has ended –the rejection period is defined as a reasonable period given the type of goods, the use to which the consumer is likely to put them, the length of time it is reasonable for them to be used and the amount of use to which it is reasonable for them to be put before the failure becomes apparent. What is reasonable will vary on a case-by-case basis.
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• If the goods have been lost, destroyed or disposed of by the consumer –in these circumstances it is impossible for the consumer to reject the goods and return them to the supplier. • the goods were damaged after being supplied to the consumer –suppliers cannot be required to accept goods that have been damaged by consumers; accordingly, the right to reject goods is lost if damage occurs after they are supplied. • the goods have been attached to other property and they cannot be detached without damaging them –in these circumstances a consumer will not be able to reject the goods but will need to seek another remedy, such as a repair. Consequences of rejecting If a consumer rejects goods the consumer must return the goods Section 263(1) goods to the supplier. Exceptions to this rule apply if the goods have already been returned to, or retrieved by, the supplier. Any goods returned become the property of the supplier when the consumer tells the supplier of their intention to reject the goods. Supplier to pay for costs If the goods cannot be returned without significant cost to the of returning goods in consumer, because of the nature of the failure or due to their certain circumstances size or height, or because the goods are attached to other Section 263(3) property (such as land or a building), then the supplier must collect the goods at their own expense. Refund or replacement If goods are rejected the consumer will have the right to goods Section 263(4) choose between a refund or replacement and the supplier will have an obligation to comply with the consumer’s request. 990
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Chapter 22 Supply of Goods and Services
Replaced goods Section 264 Termination of contracts for the supply of services that are connected with rejected goods Section 265
Rights of gift recipients Section 266
If goods are replaced, the replacement goods are subject to the guarantees set out in Chapter 3, Part 3-2, Division 1 of the ACL. Certain goods are often supplied in conjunction with associated services. A common example is mobile telephones and associated network services. When goods are supplied to a consumer under a contract and that contract also provides for services to be provided to the consumer, the consumer will often have no use for the associated services if the goods are rejected and returned to the supplier. If a consumer rejects the goods and the supplier is required to provide a refund in respect of a supply of goods, then the consumer may also choose to terminate the contract for the supply of any services that are connected with rejected goods. A consumer will not be required to make any further payments to the supplier of the services after the time that the contract is taken to have been terminated. A person who is provided with goods as a gift from a consumer has the same rights and remedies as would be available to the consumer under Chapter 5, Part 5-4, Division 1, Subdivision A of the ACL.
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Australian Government, The Australian Consumer Law: A Guide to Provisions (2010) p 51. [22.580] Consumer rights concerning guarantees for services Right of action Section 267(1)
Right to require that a failure to honour a guarantee be remedied Section 267(2)
Consequences for a supplier of failing to remedy a failure to honour a guarantee Section 267(3) Rights of a consumer if a failure to comply with a guarantee is major or is not capable of remedy Section 267(3)
A consumer has a right to take action if a supplier of services fails to comply with a guarantee that applies under Chapter 3, Part 3-2, Division 1, Subdivision B of the ACL. If a failure to comply with a remedy is not a major failure and is capable of being remedied by the supplier, the consumer may require the supplier to remedy the failure within a reasonable time. What is a “reasonable time” will vary depending on the nature of the services and the nature of the failure. If a supplier fails to remedy a failure within a reasonable time, a consumer will be able to have the failure remedied elsewhere and recover all reasonable costs incurred from the supplier, or terminate the contract for the supply of the services. If a failure to comply with a guarantee is major or the failure is not capable of being remedied, the consumer may terminate the contract for the supply of the services or seek compensation from the supplier for the reduction in the value of the services below the price paid or payable for the services.
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Consumer’s right to recover damages Section 267(4)
Termination of contracts for the supply of services Section 269
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Termination of contracts for the supply of goods that are connected with terminated services Section 270
The consumer may also recover damages for any loss or damage incurred that was reasonably foreseeable as a result of the failure. The consumer does not have a right to claim damages from the supplier of services if a failure occurs because of an act, default or omission, or a representation made by a person other than the supplier, or an agent or employee of the supplier. A supplier is also not liable for a failure if it is caused by something that is independent of human control. A termination of a contract for the supply of services takes effect from the time when a consumer tells a supplier that they are terminating the contract. When a consumer terminates a contract for the supply of services the supplier must refund any money paid for the services. If a consumer terminates a contract for the supply of services and goods are inextricably linked to the services, the consumer may also choose to reject the goods at the same time as terminating the contract for the services. The consumer must return the goods to the supplier and the supplier must provide the consumer with a refund.
[22.590] Actions for damages against manufacturers of goods
Respective positions of supplier and manufacturers Section 274
Rights of action against manufacturers Section 271(1)
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Consumers purchase goods directly from suppliers and have only indirect dealings with manufacturers. Accordingly, the primary source of remedies under the statutory consumer guarantees would be suppliers. Consumers will be able to seek repairs, refunds or replacement goods from suppliers. Suppliers will be able to recoup any costs of providing those remedies from the manufacturers of goods. In certain circumstances, consumers will not be able to obtain a remedy from the supplier of goods. Examples of such circumstances include those whereby a supplier has become insolvent, is not longer in business or refuses to provide a remedy. To allow for circumstances whereby consumers need to seek a remedy directly from a manufacturer, a consumer may recover damages from a manufacturer if goods are not of acceptable quality.
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Chapter 22 Supply of Goods and Services
Consumer’s right to claim damages Sections 271(2), (3) and (5)
Damages that may be recovered by action against a manufacturer of goods Section 272(1)
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Manufacturer’s requirement to make spare parts and repairs reasonably available Section 271 Original packaging Section 271(7) Time limit for actions against manufacturers Section 273
A person may also recover damages from a manufacturer if goods do not match a description that is applied by, or on behalf of, the manufacturer. The right to recover damages is subject to exceptions if the cause of the failure to comply with a guarantee is independent of the supplier (ie it is caused by someone else or by causes independent of human control). If a consumer requires a manufacturer to repair or replace goods under an express warranty, they cannot seek damages from the manufacturer in respect of a failure to honour a guarantee. A consumer may recover the price paid for the goods and any loss that is reasonably foreseeable as a result of the failure. This will include any costs incurred by the consumer to transport the goods back to the manufacturer and any cost inspecting the goods to ascertain whether they are faulty. One remedy that is available only from a manufacturer relates to the guarantee to make spare parts and repairs reasonably available. A consumer may seek damages from a manufacturer in respect of a failure by a manufacturer to make spare parts and repairs reasonably available. A consumer may commence an action against a manufacturer for damages irrespective of whether the goods are in their original packaging. A consumer may commence an action against a manufacturer for a period of three years after they became aware that a guarantee has not been complied with.
Australian Government, The Australian Consumer Law: A Guide to Provisions (2010) pp 53-54.
22.9 CROSSOVER WITH SALE OF GOODS LEGISLATION [22.600] As we have seen, the consumer guarantees developed from the sale of goods legislation, and the ACL sits alongside the sale of goods legislation. There is considerable overlap between the ACL and the sale of goods legislation. If a consumer –which is broadly understood –is acquiring goods or services, the ACL consumer guarantees will most commonly be used. The sale of goods legislation still continues to be important for non-consumer sales. [22.610] Each State and Territory has a version of a SOGA based on the original Sale of Goods Act 1893 (UK). • Sale of Goods Act 1923 (NSW); • Goods Act 1958 (Vic); • Sale of Goods Act 1896 (Qld); • Sale of Goods Act 1896 (Tas);
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• Sale of Goods Act 1895 (WA); • Sale of Goods Act 1895 (SA); • Sale of Goods Act 1972 (NT); and • Sale of Goods Act 1954 (ACT). Instead of the statutory guarantees approach of the ACL, the SOGAs imply terms into contracts for the sale of goods. These implied terms are in substantially similar terms to the Consumer Guarantees in the ACL. The SOGAs also regulate matters such as the duties of buyer and seller, transfer of risk and passing of property in the goods and the rights of the parties in the event of a breach of the contract. Dangie Jim (to city jeweller): But you guaranteed this watch to last a lifetime. Jeweller. Certainly, certainly. But you looked pretty crook the day you bought it. Bill Bowyang’s Magazine (July 1927).
The SOGAs expressly provide that a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth, or may be implied from the conduct of the parties (see eg Sale of Goods Act 1923 (NSW), s 8). In some Australian States, there are also formal requirements of evidence in writing for any contract exceeding $20 (Sale of Goods Act 1896 (Tas), s 9; Sale of Goods Act 1895 (WA), s 4). These formal requirements are originally derived from the Statute of Frauds 1677 (Imp) and have been repealed in most States. [22.620] The following table shows the correspondence between provisions in the ACL and the SOGAs.
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Transaction
Sales of goods only Provision of services
Term implied into contract by SOGAs Correspondence with description: s 18 Fitness for purpose: s 19(1) Merchantable quality: s 19(2) Compliance with sample: s 20 Not applicable
Can the terms be modified or excluded? Yes –s 57
Not applicable
Yes –s 57 Yes –s 57 Yes –s 57
ACL –buyer is a consumer Correspondence with description: s 56 Fitness for purpose: s 55 Acceptable quality: s 54 Correspondence with sample: s 57 Description: s 60 Fitness for purpose: s 61
Can the terms be modified or excluded? Only in accordance with s 64A Only in accordance with s 64A Only in accordance with s 64A Only in accordance with s 64A Only in accordance with s 64A Only in accordance with s 64A
The seller’s obligations under the implied terms [22.630] Under the sale of goods legislation, terms are implied into all contracts imposing duties on the seller in relation to: • title; • correspondence with description; and • correspondence with sample. 994
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Chapter 22 Supply of Goods and Services
When the seller is acting in the course of a business, then additional terms are implied in relation to: • merchantable quality; and • reasonable fitness for purpose. Nothing in the SOGAs prevents the buyer and the seller from agreeing on express terms that impose alternative or additional obligations in respect of quality and condition. The implied terms simply provide a minimum level of protection. The fundamental obligation under a contract of sale is for the seller to transfer property in the goods to the buyer in return for the buyer’s payment. The SOGAs provide for a number of remedies that accommodate this reality.
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Buyer’s remedies [22.640] A seller’s breach of contract whether by non-delivery, delayed delivery or for breach of any of the implied terms outlined above confers a right to damages on the aggrieved purchaser. Normal principles for awarding damages apply. In practice, the most common area for dispute is the buyer’s right to reject defective goods. Although damages are available for breach of both warranties (minor terms) and conditions (major terms), the right of repudiation –the right to reject the goods –is available only for breach of condition. The implied terms of merchantability and fitness are expressed as conditions giving rise to the right to reject. The right of repudiation is lost in certain circumstances where the buyer has waived the breach of condition or elected to treat it as a breach of warranty (in other words, where the buyer has elected to be satisfied with an action for damages) and where the buyer has accepted the goods. Goods are deemed to be accepted by the buyer when the buyer intimates to the seller that they have been accepted; or when the buyer of delivered goods does an act inconsistent with the seller’s ownership, such as reselling them; or when the buyer retains the goods for a reasonable period without intimating to the seller that they have been rejected. Where goods have not previously been examined, the buyer is granted by the SOGAs a reasonable opportunity to examine them to ascertain whether they comply with the contract before they are deemed to be accepted.
Once the words of description are ascertained, the test is clear and strict. No doubt there may be microscopic deviations which businessmen and therefore lawyers will ignore … but apart from this consideration the right view is that the conditions of the contract must be strictly performed. If a condition is not performed the buyer has a right to reject. Acros Ltd E A Ronaasen & Son [1993] AC 470 at 480.
Seller’s remedies [22.650] The seller’s remedies may be exercised against the goods (real actions) or the defaulting buyer (personal actions). The seller’s personal remedies include an action for damages for non-acceptance and action for the price. The seller’s real remedies include: • Lien. Under the SOGAs, an unpaid seller has a right of lien, a possessory security interest under which the goods can be retained until the price is paid. • Stoppage in transitu. If the goods have left the seller’s possession, the right to a lien cannot be exercised. However, under the legislation an unpaid seller has a right of stoppage in transitu, a right to stop the transportation of the goods to the buyer by retaking possession or by serving a notice on the carrier if the buyer becomes insolvent. On
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exercising this right, the seller then has a lien over them and may retain them until payment. • Right of resale. An unpaid seller has the right to resell the goods. This right arises if the goods are of a perishable nature, if the right is given by the contract or, in cases of a right of lien or stoppage in transitu, the price is not paid within a reasonable time of notice of intention to resell being given.
22.10 STRICT LIABILITY OF MANUFACTURERS AND IMPORTERS FOR DEFECTIVE GOODS [22.660] The consumer guarantees primarily relate to the quality of goods. The ACL, in Pt 3-5, also imposes responsibility on manufacturers in relation to the safety of goods. Manufacturers have a strict liability to compensate injured individuals for damage caused by their defective or unsafe goods. These product liability provisions overlap to some extent with the law of contracts, but in a much more significant way with the law of negligence. Accordingly, they are sometimes referred to as statutory negligence, but this is a misdescription. These laws are much broader than the laws of contract, as the right of recovery is not restricted to parties to a contract. They operate differently to the tort of negligence. Instead of considering the existence of a duty of care, the question is whether a type of loss covered by the legislation exists, and if so, was it caused by a defective good. Unlike tort, under Pt 3-5 liability is strict. This is important for manufacturers to consider. If a defective good caused a loss of a required kind, it does not matter whether or not the manufacturer responded appropriately to any risk –they will be required to accept liability.
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Send lawyers, guns and money, the shit has hit the fan. Warren Zevon.
Recall the discussion at [22.20] about the reasons for the extension of protection for injured parties. This was addressed by the Australian Law Reform Commission in 1989, with its report on Product liability (Report No 51). This recommended that legislation be enacted to confer a right to compensation on a person who suffers loss or damage caused “by the way the goods acted”. The product liability legislation that was eventually enacted as Pt VA of the TPA rejected this extraordinarily controversial recommendation and instead adopted a scheme based on the European Community Product Liability Directive of 1985. Under Pt VA, which came into operation on 9 July 1992, a regime of strict liability was imposed on manufacturers and importers of defective goods under which manufacturers may be held liable without the plaintiff having to prove fault. [22.670] These provisions have been included in the ACL and will be found in Pt 3-5. Four types of loss are covered (at ss 138, 139, 140 and 141) and responsibility for compensating for these losses is imposed if the following threshold elements have been satisfied: • manufacturer • supplies • goods • to an individual • in trade or commerce 996
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Chapter 22 Supply of Goods and Services
• goods have a safety defect • defect causes specified loss Note that these provisions do not apply to consumers –but to individuals. An individual is a natural person, so there is no recovery for corporate loss. Corporations suffering loss due to defective goods need to rely on the law of torts and contracts (if appropriate). We have previously considered the meaning of goods, supplies and trade or commerce – all of these terms carry the meanings prescribed in s 2.
Manufacturer [22.680] We indicated earlier that “manufacturer” is defined in s 7 and carries an expanded meaning. As well as the actual manufacturer, the definition includes: (a) a person who grows, extracts, produces, processes or assembles goods; (b) a person who holds himself or herself out to the public as the manufacturer of goods; (c) a person who causes or permits the name of the person, a name by which the person carries on business or a brand or mark of the person to be applied to goods supplied by the person; (d) a person (the first person) who causes or permits another person, in connection with:
We have learned to live in a world of mistakes and defective products as if they were necessary to life. It is time to adopt a new philosophy in America. W Edwards Deming.
(i) the supply or possible supply of goods by that other person; or (ii) the promotion by that other person by any means of the supply or use of goods; Copyright © 2018. Thomson Reuters (Professional) Australia Pty Limited. All rights reserved.
to hold out the first person to the public as the manufacturer of the goods;
(e) a person who imports goods into Australia if: (i) the person is not the manufacturer of the goods; and (ii) at the time of the importation, the manufacturer of the goods does not have a place of business in Australia.
So farmers, home branders and importers are all manufacturers for the purposes of the ACL. It may seem surprising that the definition is so broad, but this is an example of the consumer protection procedural aspects of this legislation. If goods are defective, someone in the jurisdiction must accept responsibility –either the actual manufacturer or the person selling the goods as their own (a home brander) or the importer. This broad definition means that importers should take care to ensure they have appropriate indemnity provisions in their contracts with their suppliers.
ACCC v Glendale Chemical Products Ltd [1998] FCA 180 [22.690] The breadth of this definition was considered in the Glendale case. Mr Barnes purchased a container of caustic soda to clear a blocked drain in his shower recess. Glendale argued that it should not be treated as a manufacturer because it had purchased the product in bulk –caustic soda –from another firm and had merely repackaged it in smaller containers. There was a statement on the packaging that the material was “packaged” by Glendale, although there was no statement indicating that Glendale was not the manufacturer or advising who in fact had manufactured the product. It was held that Glendale was a “manufacturer”. It was sufficient that the corporation was named on the products. Emmett J noted:
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Business and the Law A corporation which is not the manufacturer is deemed to be the manufacturer for the purposes of [the ACL] even if it is clearly not. One can understand the policy reasons for the Parliament imposing such an obligation. That is to say if a corporation is prepared to lend its name to a product by having its name or its logo affixed to the product, an individual injured by defect in that product need look no further than that corporation. The effect may well be to impose onerous obligations on any corporation which supplies a product with its name or logo applied to the product. Be that as it may, that appears to me to be the clear meaning and intent of the provision. Accordingly, I conclude that the Product is deemed to have been manufactured by Glendale.
[22.700] In Medtel Pty Limited v Courtney [2003] FCAFC 151 discussed at [22.290], the court applied the same principle: Although the pacemakers were manufactured in Sylmar, California, the appellant caused or permitted a name by which it carried on business, namely “Telectronics” to be applied to the goods (the pacemakers) supplied by it. The consequence was that subs 74A(3) deemed the appellant to have manufactured the goods. In any event, the appellant did not dispute that the terms of subs 74A(4) of the Act were satisfied, so that it was also deemed by that provision to have manufactured the goods.
Defective goods
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The best brewer sometimes makes bad beer. German Proverb.
[22.710] We commonly refer to Pt 3-5 as a defective goods regime; however, the term itself is somewhat of a misnomer. The ACL does provide remedies for goods with a safety defect, but it defines this term, at s 9, as goods “which are not as safe as persons generally are entitled to expect”. So the existence of a defect is to be determined by an objective test –but one which reflects community standards, rather than one which focuses on the objective lack of safety of a good. Not all unsafe goods will be defective goods. A very sharp knife may be unsafe, but it will not be defective within the meaning of s 9, as the community expects sharp knives to cut a range of materials –including misplaced fingers. Cigarettes may cause extensive lung damage –but they are not defective goods as the community generally expects that this is entirely what they will do. A chair which collapses when a guest takes a seat will be a defective good, as this is not what the community expects. However, what if the chair has been in the family for 30 years? Time of supply is a relevant consideration. Section 9(2) provides that the following matters, among others, are to be considered when determining whether or not a good is unsafe: (a) the manner in which, and the purposes for which, they have been marketed; and (b) their packaging; and (c) the use of any mark in relation to them; and (d) any instructions for, or warnings with respect to, doing, or refraining from doing, anything with or in relation to them; and (e) what might reasonably be expected to be done with or in relation to them; and (f)
the time when they were supplied by their manufacturer.
Section 9(3) provides that a good will not have a safety defect simply because safer goods are subsequently brought onto the market. 998
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Chapter 22 Supply of Goods and Services
Glendale Chemical Products Pty Ltd v ACCC [1998] FCA 1571
Case Study
Facts
[22.720] Glendale distributed a product known as “Glendale Caustic Soda”. Mr Barnes purchased this product to unblock a drain in his shower recess. At the time of purchase a friend of Mr Barnes advised him to pour hot water down the drain before pouring the product down the drain. He did as advised and suffered injuries when a column of hot water erupted from the drain. The label on the product advised the user to dissolve the product in water before pouring it down the drain. The label did not contain a warning about the danger of putting caustic soda into hot water. Issue The primary issue for the court was whether the product had a “defect” and, in particular, whether an inadequate warning was a defect under Pt VA (now ACL, Pt 3-5). Decision
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In the Federal Court at first instance, ACCC v Glendale Chemical Products Pty Ltd [1998] FCA 180, Emmett J held that: There is, of course, no suggestion that, as caustic soda, the Product as used by Mr Barnes was defective. However, s 75AC deals with a different question. Goods will not be safe even if, having regard to the goods, they operate as intended. Section 75AC(2) makes it clear that the section applies even if there is no inherent defect in the goods in question. Thus, it is clear that a substance which is, for example, marketed as being suitable for a particular purpose without warnings as to the particular way in which that purpose should be achieved may have a defect because use in some ways would not be safe.
The Court noted that the purposes for which the caustic soda was marketed included cleaning, or removing grease from, household drains and drain pipes; therefore, Glendale marketed it for the purpose for which it was used by Mr Barnes: While there may be no prior evidence of an incident such as this, it is quite foreseeable that caustic soda may have been poured down a drain which had hot water in it. I consider that the possibility of reaction with hot water was one which was sufficiently well known for a conclusion to be drawn that it was not safe for caustic soda to be marketed in a package for the purposes of use such as that described without a warning against using it in hot water in a confined space.
It was argued during the appeal that if Mr Barnes had worn safety glasses, as the safety instructions suggested, his injury would have been prevented. However, the Full Court took the view (per Wilcox, Tamberlin and Sackville JJ) that: the instruction about safety glasses was inadequate to bring home to an ordinary reader the risk of being injured in the way in which Mr Barnes was injured. The instruction said “Always wear rubber gloves and safety glasses when handling caustic soda”. We think the conjunction of rubber gloves and safety glasses, especially when limited by the words “when handling”, would cause the average reader to understand that the relevant risk was that of dry caustic soda coming into contact with the handler’s skin; the words would not alert a reader to the extreme inadvisability of allowing any part of the body to be in the vicinity of hot water to which caustic soda had been added. The lack of such a warning was a “defect” in the product, within the meaning of s 75AC of the Act.
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Implications The Glendale case also emphasises the necessity for manufacturers and importers to be aware of the wording of warnings included in packaging and also to consider the context in which the warning is given as that may affect the interpretation of an ordinary consumer. Note that the provisions of the TPA and Pt 3-5 of the ACL are in identical terms.
Liability for loss Some circumstantial evidence is very strong, as when you find a trout in the milk. Henry David Thoreau.
[22.730] Unlike the tort of negligence, where the negligent party is responsible to compensate the injured party for a broad range of losses caused by their negligence, the extent of the liability of manufacturers is limited by ss 138, 139, 140 and 141 of the ACL. These specify the categories of people who may recover compensation from the manufacturer in respect of loss caused by defective goods and the types of loss recoverable. Four categories of claimants are recognised:
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• Persons who suffer personal injury are entitled to compensation (in the case of death, the deceased’s estate is compensated in accordance with State or Territory law (s 138)). • Persons who suffer loss due to the personal injury or death of another person are entitled to compensation. This does not include loss of a business or professional nature (s 139). • Persons who suffer loss in respect of damage caused to goods of a kind ordinarily acquired for personal, domestic or household use –and which are actually used or intended to be used in this way –are entitled to compensation (s 140). • Persons who suffer loss (caused by the defective goods) in respect of destruction of or damage to land, buildings or fixtures, of a kind ordinarily acquired for private use, are entitled to compensation (s 141). Although these provisions apply to individuals rather than consumers, the provisions relating to recoverable loss in effect restrict the protection of Pt 3-5 to consumers rather than commercial interests. The plaintiff bears the burden of proving that the product was defective, that he or she suffered loss or damage, and that the defect in the product caused the loss or damage.
Defences [22.740] Four defences to liability are provided by s 142 of the ACL: • that the defect did not exist at the time of supply; • that the defect existed only because of the manufacturer’s compliance with a mandatory standard (in such a case the Commonwealth becomes liable for loss arising from the defect (s 148)); • that the state of scientific or technical knowledge at the time the goods were supplied by their actual manufacturer was not such as to enable the defect to be discovered; 1000
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Chapter 22 Supply of Goods and Services
• in the case of defects in components in finished goods, that the defect was attributable to the design of the finished goods, or the markings accompanying the finished goods or the warnings or instructions given by the manufacturer of the finished goods. The manufacturer’s liability to compensate under Pt 3-5 may be reduced to nil by the contributory acts or omissions of the plaintiff (Competition and Consumer Act 2010 (Cth), s 137A(1)).
General [22.750] Liability under Pt 3-5 is joint and several (ACL, s 144). Thus, if two defendants are liable for the same loss (eg the manufacturer of the defective component and the manufacturer who incorporates it in a finished product), the plaintiff can recover from either and the question of indemnity and contribution as between the two manufacturers is not the plaintiff’s responsibility.
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If a plaintiff does not know the identity of the actual manufacturer, a notice may be served on the supplier requiring it to identify the manufacturer and, if that information is not forthcoming after 30 days, deeming the supplier to be the manufacturer for the purposes of Pt 3-5 (s 147).
Cahn’s axiom. When all else fails, read the instructions. Paul Dickson, in Playboy (April 1978).
Claims under Pt 3-5 are subject to a three-year limitation period which runs from the time a person became aware (or ought reasonably to have become aware) of the alleged loss, the defect, and the identity of the person who manufactured the goods –the subject of the action –and, in any event, the Pt 3-5 action must be commenced within 10 years of the supply of the defective goods (s 143). Representative actions may be taken by the ACCC. The Commission may commence an action on behalf of one or more persons who have suffered similar forms of loss from the use of the same or a similar product, provided that it has first obtained the written consent of each person on behalf of whom the application is being made (s 149). , discussed at [22.690], is an example of a representative action.
Exclusionary provisions void [22.760] Part 3-5 renders void any term that purports to exclude, restrict or modify or has the effect of excluding, restricting or modifying the application of the provisions of Pt 3-5, the exercise of any rights conferred by the provisions of Pt 3-5 or any liability arising under the provisions of Pt 3-5 (s 150).
22.11 PRODUCT SAFETY AND INFORMATION [22.770] So far our discussion has focused on remedies and responsibilities for product quality and product safety which apply after the point of purchase. The ACL also contains provisions which operate prospectively, and seek to ensure that all goods are safe prior to the time of purchase. These provisions are principally located in Pts 3-3 and 3-4 of the ACL. Parts 3-3 and 3-4 are largely based on the former Pt V, Div 1A of the TPA, which was introduced in 1986.
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Part 3-3 of the ACL provides for: • the proclamation of compulsory product safety standards (s 104); • banning the supply of unsafe consumer goods (s 106); • ordering compulsory recall of unsafe goods (s 122). Voluntary recalls are also permitted (s 128); • publishing warning notices in respect of goods under investigation as possibly dangerous (s 129); and • notification by suppliers of any safety problems with their goods (s 131).
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Part 3-4 deals with the provision of information standards (s 135). [22.780] Whereas the aim of other laws in relation to defective goods is remedial (to compensate the victim), the aim of Pts 3-3 and 3-4 of the ACL is preventative (to reduce, if not prevent, the possibility of harm to the community). These provisions directly involve the government to a greater extent than is usual, in the interests of consumer protection. They do not simply impose general standards of conduct (the approach of the consumer guarantees) but provide powers to directly intervene in the distribution of goods ultimately to the extent of imposing permanent bans (s 114) and requiring the recall of specified goods (s 122). These provisions are only triggered if goods may cause injury to a person, or a reasonably foreseeable use may cause injury to a person. Part 3-3 also applies to services. Examples given by the Australian Government in their publication Australian Consumer Law –A Guide to Provisions (2010) of services which may be unsafe include the assembly or installation of a product –such as installing looped blind cords within easy reach of small children and infants, or the assembly of a bicycle. This case, involving legal requirements for the content and labelling of meat products such as frankfurters, affords a rare opportunity to explore simultaneously both parts of Bismarck’s aphorism that “No man should see how laws or sausages are made”. Community Nutrition Inst v Block 749 F 2d 50 at 51 (DC Cir 1984) per Scalia J.
A complete list of product safety and information standards and banning orders is provided on the ACCC website at http://www.recalls.gov.au. In formulating product and information standards, standards approved by the Standards Association of Australia (Standards Australia) –an independent, non-profit association –are influential. Products currently subject to mandatory standards under the ACL include: balloon-blowing kits, beanbags, bicycle helmets, bunks, child restraints for motor vehicles and children’s nightwear. It is prudent for business and importers to check these standards before beginning the manufacture or importation of any product.
Safety standards [22.790] Part 3-3, Div 1 of the ACL confers significant powers on Commonwealth Ministers with respect to product safety. Sections 104 and 105 permit the making of standards, and these may relate to design, construction or testing of products or require certain warnings to be in place. Division 2 provides for the banning of supply of particular goods. Two types of bans are possible: interim and permanent. Section 109 provides that either a Commonwealth or a State or Territory Minister may make an interim ban if it appears that particular goods will, or it is reasonably foreseeable that they may, cause injury to any person. Interim bans last 60 days, but may be extended a further 30 days if necessary. Section 114 provides for the making of permanent bans – these may only be made by the relevant Commonwealth Minister. They remain in force
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Chapter 22 Supply of Goods and Services Many consumer goods are today sold in sealed containers which defy inspection … [The consumer] is therefore driven to rely on the advice of traders and the accuracy of advertisements extolling the product he seeks. He relies more and more heavily on the manufacturer (on the brand name promoted by extensive advertising) and yet, the sale is not normally made through him, but through some retail firm. The manufacturer can make what extravagant claims he likes for his product but he will be under no contractual liability to the purchaser for these promises unless he can be brought within the Carlill v Carbolic Smoke Ball principle. NSW Law Reform Commission, Working Paper on Sale of Goods (1975).
unless revoked by the Commonwealth Minister. Goods currently subject to a permanent ban include gas masks with asbestos breathing devices, fire footbags and combustible candle holders.
Product recall [22.800] Part 3-3, Div 3 of the ACL provides procedures for the recall of unsafe goods. These recalls may be either voluntary or mandatory. Section 122 provides that either the responsible Commonwealth or State or Territory Minister may order a recall of goods, if it appears: • that the goods may cause injury; or • a reasonably foreseeable use may cause injury; or • the goods do not comply with a prescribed consumer product safety standard; or • an interim or permanent ban exists in relation to the goods; and no supplier has taken satisfactory action. Section 123 provides that the recall order may require the supplier to do one or more of the following: • recall the goods; • publicise the nature of the defect; and/or
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• repair or replace the goods or refund the price. Voluntary recalls are provided for in s 128. This gives suppliers the opportunity to manage any safety issues themselves, without the necessity of government intervention. However, s 132 provides that they must notify the relevant Commonwealth Minister in writing within two days of any death, serious injury or illness arising in connection with the relevant consumer goods.
When should a business move towards a voluntary recall? ACCC v Thermomix [2018] FCA 556 [22.810] From 7 July 2014, Thermomix in Australia Pty Ltd (Thermomix) was aware that users of their
product could be injured by the lid of its product lifting and hot food escaping –burning the user. How did they respond to this known risk? They continued to supply the product as usual and did not inform consumers of the risk for almost three months. A voluntary recall notice was then published, which facilitated the replacement of the sealing ring and revised operating instructions. During this period of three months, Thermomix was aware of at least 14 injuries from the use of its product. However, it did not inform the relevant Minister within two days, as required by s 132. Consumers who approached Thermomix seeking refunds or replacements of their goods (consider whether a product which may cause severe burns is of acceptable quality) were told either that they were not available or, in one case, that they were only available if the consumer signed a non-disclosure agreement.
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1003
Business and the Law The ACCC began proceedings against Thermomix, which were settled by consent orders. Thermomix was found: • to have made false or misleading representations to consumers through its silence (for three months) about a safety issue affecting its product; • to have made false or misleading representations to consumer about their rights under the consumer guarantees; • to have not complied with their s 132 obligations on 14 occasions. They were ordered to pay penalties in excess of $4 million for these breaches. Clearly, companies should act quickly as soon as they are aware of any safety issues with their products.
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Safety Warning Notices
It has to be remembered that this representation (concerning an electric saw] is not made to all and sundry, to the dwarfs, to the giants, to the blind, to the deaf –it is made by reference to the reasonable conditions which must exist in relation to the operation of any machine of this kind. Obviously it is a dangerous machine … [W]hen you approach a safety razor you have to take note that it is sharp and you have to adjust it accordingly. When it comes to machines like this which are likely to lop off limbs, anybody knows that great care must be taken. Ransley v Black & Decker (t/as Asia Pty Ltd) (1997) 3 TPR 138 per Smithers J.
[22.820] Part 3-3, Div 4 of the ACL provides for the responsible Commonwealth, State or Territory Minister to publish safety warning notices in relation to potentially unsafe goods. Section 129 sets out the grounds for the making of such a notice. These notices do not ban or restrict the supply of goods –they warn the community of possible danger and seek to prevent any injury. They may be used in situations where further investigation is required to determine the nature of any risk posed by a particular goods, and while the Minister is still considering the appropriateness of imposing a ban. For example, a safety warning was issued in relation to a brand of children’s car seat which was being sold online, but which appeared to breach Australia’s mandatory safety standards.
Product information [22.830] Part 3-4 of the ACL provides that the responsible Commonwealth Minister may prescribe information standards. These do not go to the safety of goods, but rather information which consumers need –such as care instructions for clothing or ingredients of cosmetics. In Hamlyn v Mark Foy’s Pty Ltd [1982] ATPR 40-316 a retailer was fined because a dress that was damaged by ironing did not conform with the standard. The dress contained acetate and in accordance with the standard should have been labelled with the words “warm iron”. It was not.
Remedies and offences [22.840] There are both civil remedies and criminal penalties for breach of the product safety and product information provisions. Part 4-3 of the ACL provides that it may be a criminal offence to breach these provisions. Civil remedies include injunctions, damages, compensation orders, non-punitive orders and adverse publicity orders. Civil pecuniary penalties apply up to a maximum of $1.1 million for a corporation and $220,000 for an individual. As well, disqualification orders and public warning notices are available and non-party redress may be ordered. Penalties for criminal offences carry maximum fines of $1.1 million for a corporation or $220,000 for an individual.
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Chapter 22 Supply of Goods and Services
IN CONTEXT
Safety of goods before, or after, they enter the market? [22.850] Australia’s existing product safety laws focus on “post-market” controls. That is
providing mechanisms (such as recalls and banning notices) to address safety problems of goods which are already in circulation. Should we move instead to more “pre-market” controls? Ensuring goods are safe before they enter the market? This is the role of the safety and information standards, but is more needed? This question was considered by the Productivity Commission in 2006 –which decided that a general safety provision was unnecessary at that time. Eleven years later, the Australian Consumer Law Review has come to a different conclusion. They argue that the increasing trend of retailers to directly source fast-moving consumer goods from overseas provides challenges which are best addressed by imposing on the importer or retailer a general obligation to ensure the safety of a product before it enters the market. Penalties would apply for breach of this provision.
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We have seen a number of recalls of frozen food in recent time. If this new obligation is introduced, then, subject to any defences which may apply, the importer or retailer of the unsafe frozen goods would be liable for additional penalties, even though they complied with all the recall provisions. This has obvious advantages –more protections for consumer safety and increased consumer trust in the quality of products. It also has disadvantages –it imposes a very high burden on importers and retailers to check quality and safety along the whole supply chain, even when they do not have access to the whole supply chain. These additional costs of testing and compliance would be passed on as higher prices to consumers. Balancing these competing demands is what makes legislation in this area often difficult. A proposal to introduce a general safety provision on importers and retailers to require them to ensure the safety of a product before it enters the market (Proposal 6) is under active consideration. This will be an interesting debate to watch and has major impacts for consumers and business alike.
QUESTIONS 1.
“The retreat from the principle of personal responsibility for products purchased – caveat emptor –has gone too far and imposes unreasonable and burdensome obligations on sellers and manufacturers”.
Explain, with reasons, why you agree or disagree with this statement.
2.
“Liability for defects in goods should be borne by the manufacturer rather than the retailer because of modern methods of packaging, labelling, distribution and promotion”: Zaravinos v Dairy Farmers [1985] FCA 77 at [17] per Lockhart J.
Discuss this proposition.
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Business and the Law
3.
The Australian Consumer Law introduced “consumer guarantees” in place of the “implied terms” of the former Trade Practices Act 1974 (Cth). Why was this different approach to protecting consumers introduced?
4.
Michelle, an automotive electrician, bought an air-conditioning unit manufactured by Chilly Air Pty Ltd from Cool Runnings Pty Ltd. It was for her home and she intended to install it herself. She went to Fix It Pty Ltd, a shop specialising in electrical supplies, to purchase the copper wiring necessary to connect the air conditioner to the house’s electrical circuit. She explained what she wanted the copper wire for and asked the salesperson whether the wiring on the shelf would be suitable. The salesperson replied: “All I know is that it is electrical wiring for houses. I’m not an expert.” Michelle bought the wire for $100 and used it for installing the air conditioner. Unfortunately, the wire Michelle had bought was not suitable for house wiring, and when the power was connected, it overheated, causing a fire which damaged the house. Two weeks later, after the house had been repaired and the air conditioner connected to the power with proper wiring, the air conditioner exploded because of a fault in it which had not been discovered by quality control processes at the factory. Michelle’s hand was burnt and her computer she used for work purposes was damaged beyond repair. Advise Michelle of any rights and remedies she may have against Cool Runnings Pty Ltd, Chilly Air Pty Ltd and Fix It Pty Ltd.
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WEB REFERENCES Australian Competition and Consumer Commission: http://www.accc.gov.au Australian Government Scamwatch: http://www.scamwatch.gov.au Competition and Consumer Law Education Programs: https://www.accc.gov.au/about-us/ tools-resources/cca-education-programs?source=cca Product Safety Australia: http://www.productsafety.gov.au The Australian Consumer Law: http://www.consumerlaw.gov.au The Australian Consumer Law Review: http://consumerlaw.gov.au/consultations-and- reviews/review-of-the-australian-consumer-law/final-report/
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Part 5 BUSINESS AND COMPETITIVE TRADING
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23
23
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Competition Law Andrew Terry THE BUSINESS CONTEXT Competition is an essential feature of a free enterprise economy. It has been described as the “great regulative force which establishes control over economic activities” (S H Slichter, Modern Economic Society (Henry Holt, 1931)). It strengthens the efficiency of private enterprise. It is based on the “paradox that it requires government intervention to make free markets work well” (Professor Allan Fels, former ACCC Chairman). The strong competition laws enshrined in the Competition and Consumer Act 2010 (Cth) (CCA) to ensure a healthy market economy –and the administration and enforcement of these laws –are of fundamental importance. All business activities in Australia are subject to the CCA. The ACCC is an aggressive enforcer of the regulatory scheme and private actions supplement public enforcement. In addition to a range of other orders, heavy financial penalties are imposed by the court for contravention (up to the greater of: $10 million; three times the value of the benefit reasonably attributable to the contravention; or 10% of the corporation’s annual turnover). Individual employees are personally vulnerable as well as the companies on whose behalf they acted. The Act is, in the words of previous ACCC chairmen, a “quite remarkable piece of legislation which has revolutionised the way in which business has been pursued in Australia” (Professor Bob Baxt) and “arguably the most important law affecting Australian business” (Professor Allan Fels). Business ignores the CCA at its peril.
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Business and the Law
PART 1 –COMPETITION AND REGULATION .......................................................................................................... 1011 23.1 COMPETITION, EFFICIENCY AND THE PUBLIC INTEREST ..................................................................... 1011 23.2 THE REGULATORY FRAMEWORK .................................................................................................................... 1013 [23.40]
Competition and Consumer Act 2010 (Cth) ................................................................................................ 1013
[23.70]
Economic not moral basis for trade practices law .............................................................................. 1014
[23.80]
The nature of the prohibited conduct ................................................................................................... 1015
[23.90]
Application and exemptions ................................................................................................................... 1016
[23.100]
Extra-territorial effect ............................................................................................................................... 1017
[23.110]
The development of Australia’s antitrust laws .................................................................................... 1017
[23.130]
The Hilmer Report and the National Competition Policy reforms .................................................. 1018
[23.170]
The Harper Report and the Competition Policy Review reforms ........................................................ 1020
[23.190]
Industry codes of practice ........................................................................................................................ 1023
23.3 “COMPETITION” IN A “MARKET” ..................................................................................................................... 1024 [23.220]
The market .................................................................................................................................................. 1024
[23.310] Competition ............................................................................................................................................... 1031 [23.350]
Substantial lessening of competition .................................................................................................... 1033
23.4 AUTHORISING ANTICOMPETITIVE ACTIVITY ............................................................................................ 1038 [23.440] Authorisation ............................................................................................................................................. 1039 [23.450] Notification ................................................................................................................................................. 1040 [23.460]
Class exemption ........................................................................................................................................ 1040
[23.470]
Public Benefit ............................................................................................................................................. 1041
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23.5 THE ACCESS TO ESSENTIAL FACILITIES REGIME ...................................................................................... 1044 [23.520]
The access regime ..................................................................................................................................... 1044
[23.540]
The rationale for the access regime ....................................................................................................... 1044
[23.550]
The extent of the access regime .............................................................................................................. 1046
[23.570]
The operation of the access regime ....................................................................................................... 1047
23.6 ADMINISTRATION AND ENFORCEMENT ..................................................................................................... 1048 [23.610] Administration ........................................................................................................................................... 1048 [23.660] Enforcement ............................................................................................................................................... 1049 [23.690] Remedies ..................................................................................................................................................... 1051 [23.740]
Primary and secondary liability: Liability of directors, officers and employees ........................... 1055
PART 2 –RESTRICTIVE TRADE PRACTICES ............................................................................................................ 1056 23.7 CARTEL CONDUCT ............................................................................................................................................... 1056 [23.770]
The cartel provisions ................................................................................................................................ 1057
[23.800]
Contract, arrangement or understanding ............................................................................................ 1059
[23.900]
Price fixing .................................................................................................................................................. 1065
[23.980]
Bid rigging .................................................................................................................................................. 1070
[23.990]
Controlling output .................................................................................................................................... 1071
[23.1000]
Sharing markets ........................................................................................................................................ 1071
23.8 ANTI-COMPETITIVE CONTRACTS, ARRANGEMENTS AND UNDERSTANDINGS THAT SUBSTANTIALLY LESSEN COMPETITION ..................................................................................................... 1072 [23.1020]
Anti-competitive contracts, arrangements and competition ............................................................ 1073
[23.1040]
Concerted practices .................................................................................................................................. 1074
1010
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Chapter 23 Competition Law
23.8 A COLLECTIVE BARGAINING ........................................................................................................................... 1076 [23.1050]
Collective bargaining and boycotts ....................................................................................................... 1076
[23.1080]
Small business collective bargaining .................................................................................................... 1079
[23.1100]
Class exemption for small business ...................................................................................................... 1081
23.9 SECONDARY BOYCOTTS ..................................................................................................................................... 1082 23.10 EXCLUSIVE DEALING .......................................................................................................................................... 1084 [23.1160]
The nature of exclusive dealing .............................................................................................................. 1084
[23.1170]
Practices constituting exclusive dealing ............................................................................................... 1085
[23.1250]
Product exclusivity .................................................................................................................................... 1087
[23.1320]
Customer and territorial exclusivity ...................................................................................................... 1091
[23.1330]
Supplier imposed restrictions ................................................................................................................. 1091
[23.1360]
Third-line forcing ...................................................................................................................................... 1092
23.11 RESALE PRICE MAINTENANCE ........................................................................................................................ 1096 [23.1420]
RPM and competition ............................................................................................................................... 1096
[23.1430]
Resale price maintenance ........................................................................................................................ 1097
[23.1460]
Conduct constituting RPM ...................................................................................................................... 1100
[23.1560]
Recommended prices ............................................................................................................................... 1104
[23.1580]
The “loss-leader” exception ..................................................................................................................... 1105
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23.12 MISUSE OF MARKET POWER ............................................................................................................................ 1106 [23.1610]
Competition by its very nature is “deliberate and ruthless” ............................................................ 1106
[23.1630]
From a “purpose” to an “effects” test ...................................................................................................... 1108
[23.1650]
Section 46 .................................................................................................................................................... 1112
[23.1660]
Substantial degree of power ................................................................................................................... 1113
[23.1700]
Purpose, effect, or likely effect of substantially lessening competition .......................................... 1117
[23.1760]
Types of conduct that may contravene s 46 .......................................................................................... 1119
[23.1770]
Pre Harper Amendment s 46 cases ....................................................................................................... 1121
[23.1830]
Types of conduct not likely to contravene s 46 ..................................................................................... 1125
23.13 MERGERS AND ACQUISITIONS ....................................................................................................................... 1127 [23.1860]
The competition threshold ...................................................................................................................... 1128
[23.1890]
Mergers “substantially lessening competition” .................................................................................. 1130
[23.1950]
Acquisitions outside Australia ................................................................................................................ 1133
[23.1960]
Authorising and clearing mergers ......................................................................................................... 1134
PART 1 COMPETITION AND REGULATION 23.1 COMPETITION, EFFICIENCY AND THE PUBLIC INTEREST [23.10] In One Nation: Statement by the Prime Minister (AGPS, 1992) Paul Keating, then Prime Minister, stated that “the engine which drives efficiency is free and open competition”. The wider benefits were spelt out in Independent Committee of Inquiry into Competition Policy in Australia, National Competition Policy (AGPS, 1993) (Hilmer Report), p xv:
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1011
Competition brings out the best in products and worst in people. David Sarnoff.
Business and the Law
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Competition is also a positive force that assists economic growth and job creation. It has triggered initiative and discovery in fields ranging from the invention of the telephone to the opening of new retail stores and small manufacturing operations. In fact, it is these developments in smaller firms, prompted by the belief of these firms in their ability to compete, that are the main source of both new job and value-added exports. The benefits of fostering more competitive markets are being increasingly recognised by governments around Australia, and indeed around the world. Within Australia, all levels of government have made important reforms to enhance competition. Trade barriers have been lowered to increase international competition, and restrictions on competition within Australia have been relaxed in sectors as diverse as telecommunications, aviation, egg marketing and conveyancing. Consumers are already obtaining substantial benefits through these reforms, and businesses which rely on these inputs are better placed to compete successfully in international markets. Reforms of these kinds also foster innovation and make the economy more flexible, improving its capacity to respond to external shocks and changing market opportunities. If Australia is to prosper as a nation … Australian organisations … must become more efficient, more innovative and more flexible … there has been a growing recognition … of the role that competition plays in meeting these challenges. Competition provides the spur for businesses to improve their performance, develop new products and respond to changing circumstances. Competition offers the promise of lower prices and improved choice for consumers and greater efficiency, higher economic growth and increased employment opportunities for the economy as a whole. Independent Committee of Inquiry into Competition Policy in Australia, National Competition Policy (AGPS, 1993) (Hilmer Report).
Australia’s commitment to a competitive marketplace is not simply a matter of political rhetoric. Australia subscribes to a policy of competition because it delivers economic efficiencies that ultimately benefit consumers. The philosophy of the Competition and Consumer Act 2010 (Cth) (CCA), the instrument that is primarily responsible for ensuring a competitive marketplace, is enshrined in s 2: The object of this Act is to enhance the welfare of Australians through the promotion of competition and fair trading and provision for consumer protection.
Despite Australia’s commitment to competition, it has never been suggested that economic efficiency is a goal that should be pursued to the exclusion of other legitimate social goals. The challenge to Australia, and indeed for any nation that subscribes to the philosophy of free and open competition, is to devise a formula which delivers economic efficiency and growth but nevertheless accommodates other social goals valued by that society. The CCA provides this mechanism, primarily through the authorisation procedure under which the benefits of competition may be subordinated in appropriate cases to the demands of other redeeming public benefits.
1012
IN CONTEXT
What is competition policy? [23.20] Competition policy is not about the pursuit of competition per se. Rather it seeks to facilitate effective competition to promote efficiency and economic growth while recognising and protecting the public interest. Competition policy is more than just law. It includes both policies which are specifically directed at promoting competition and policies which have an indirect impact on competition. Its impact may be on either market structure – such as influencing the incentives for competitive conduct, or directly on market conduct. This embraces a wide range of policy instruments concerning trade, intellectual property, foreign investment, tax, small business, the legal system, public and private ownership, licensing, contracting out, bidding for monopoly franchises and so on, as well as both the restrictive trade practices and consumer protection
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Chapter 23 Competition Law
provisions of the [CCA]. Some of these policies have an obvious direct effect on competition whilst others affect the general economic environment and ultimately the general climate of competition in the country. A Fels, Competition Policy and Laws (8 September 1996)
[23.30] The CCA prohibits a range of anti-competitive conduct. However, as the Hilmer Report notes, the relevant field of policy interest is much wider:
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In its broadest sense, competition policy encourages all policy dealing with the extent and nature of competition in the economy. It permeates a large body of legislation and government actions that influence permissible competitive behaviour by firms, the capacity of firms to contest particular economic activities and differences in the regulatory regimes faced by firms competing in the one market. Taxes, tariffs, trade policies and other aspects of government policy form part of the overall matrix of Australia’s competition policy.
The main focus of the 1993 Hilmer Report was on making the existing competition laws operate more effectively. The 2015 Harper Report –Competition Policy Review: Final Report – broadened the focus to include a consideration of Australia’s wider competitive landscape and made significant competition policy recommendations with the aim of introducing competition to particular areas of the economy including taxis and ride sharing, retailing trading hours, pharmacies, roads, liquor and gambling, planning and zoning, and electricity and gas. While the Government generally accepted certain industry-specific recommendations their implementation is complicated by constitutional considerations and the role of the States in these areas and they are not addressed in this chapter.
23.2 THE REGULATORY FRAMEWORK Competition and Consumer Act 2010 (Cth) [23.40] The CCA’s object of “enhancing the welfare of Australians through the promotion of competition” (s 2) is based on the premise that “society’s resources are best allocated in a competitive market where rivalry between firms ensures maximum efficiency in the use of resources” (Tru Tone Ltd v Festival Records Retail Marketing Ltd [1988] 2 NZLR 352 at 358 per Richardson J). This role is entrusted to Pt IV, “Restrictive trade practices”, which prohibits a number of anti-competitive practices that hinder or prevent the market for the relevant goods or services from operating freely. The following practices are prohibited: • cartel conduct (Div 1); • contracts, arrangements or understandings that restrict dealings or affect competition between competitors, secondary boycotts and other agreements which substantially lessen competition (ss 45-45E); • misuse of market power, where a firm with substantial market power engages in conduct that has the purpose or effect of substantially lessening competition (s 46);
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1013
Competition is the best consumer protection. Ron Bannerman.
Business and the Law
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The factors affecting the development of trade practices law are economic, political, legal and social. There is tension at times between principles of competition and principles of equity, and between the interests of big business, small business and the organised consumer movement. Even in applying settled principles, there is usually tension inside an industry. These tensions are part of free enterprise. Ron Bannerman, former ACCC Chair.
• exclusive dealing arrangements which substantially lessen competition (s 47); • resale price maintenance (RPM), in which individual suppliers seek to force distributors to charge fixed prices for their goods or services (ss 48, 96-100); and • mergers which substantially lessen competition (s 50). [23.50] In addition to the restrictive trade practices of general application, the CCA also deals with some specific competition issues. • Pt IIIA –the access to essential services regime –establishes a legal regime to facilitate third-party access to nationally significant “essential facilities” such as gas and water pipelines, electricity transmission wires, railway tracks, airport systems and telecommunication networks. • Pt X –international cargo shipping –provides limited exemptions from Pt IV for international liner cargo shipping conferences (an unincorporated association of two or more ocean carriers carrying on two or more businesses each of which includes the provision of liner cargo shipping services). • Pts XIB and XIC –telecommunications –provide for the Australian Competition and Consumer Commission (ACCC) to regulate the specific competition provisions applicable to the telecommunication industry (Pt XIB) and administer its industry-specific access regime (Pt XIC). Irrespective of the status of the relationships that exist between the various parties in the chain of distribution from producer through intermediaries to consumer, the CCA operates to ensure that the competitive process is not harmed by bilateral or unilateral conduct within the distribution chain. In the case of exclusive dealing the arrangements may be bilateral and consensual for example a retailer’s agreement to buy exclusively from a particular supplier in return for a discounted price. In the case of misuse of market power the conduct is unilateral and non-consensual. The focus of Pt IV is competition and the integrity of the competitive process and all conduct, whether bilateral or unilateral, consensual or non-consensual, must be tested by reference to it. [23.60] The restrictive trade practices were first enacted in the Trade Practices Act 1974 (Cth) (TPA) which provided the first effective and comprehensive body of law aimed at protecting and promoting competition. Its enactment marked the beginning of a new era in regulation of the marketplace. Effective 1 January 2011, the TPA was renamed the Competition and Consumer Act 2010 (Cth). The restrictive trade practices provisions did not change but Sch 2 to the new CCA prescribed Australia’s first national consumer law, the Australian Consumer Law, discussed in Chapter 18.
Economic not moral basis for trade practices law [23.70] The objectives of Pt IV of the Act are, in the words of Deane J in the High Court, “economic and not moral”: Queensland Wire Industries v Broken Hill Proprietary Co Ltd [1989] HCA 6. The Act plays an important role in “ensuring that the maximum benefits are obtained through an efficient allocation of our natural resources” and aims at “promoting efficiency through competition thus ensuring goods are provided to the 1014
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Chapter 23 Competition Law
consumer at the cheapest possible price”: Attorney-General’s second reading speech, Trade Practices Revision Act 1986 (Cth). Restrictive trade practices law clearly raises particular problems. It is legislation on a different scale from the “black-letter law” with which lawyers are more familiar. The notions are those of markets, market power, competitors and competition. The legislation blends economic and legal concepts in a manner without precedent in Australian legislation. The aim is to create a distinctive economic law blending legal and economic analysis –a difficult task. Although the courts reinforce the economic objects of the legislation, it is nevertheless true that economists lament their under-utilisation in Pt IV proceedings (see K Yeung, “The Court Room Economist in Antitrust Legislation: An Underutilised Resource?” (1992) 20 Australian Business Law Review 461).
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The restrictive trade practices provisions are undeniably complex. Any legislation that attempts to enshrine economic concepts in black-letter laws cannot be otherwise. The ACCC has suggested that consideration should be given to replacing some of the more complex restrictive trade practices provisions of the Act with simple precepts (eg that any behaviour which substantially lessens competition in a substantial market should be prohibited unless authorised). A former chairman, Professor Allan Fels, has suggested in “The future of competition and prices policy” (Paper presented at Monash University, 7 May 1992) that: The adoption of simple precepts would have the great advantage of focusing clearly the attention of business, the courts and the Commission on the essence of trade practices law – the maintenance and fostering of competition … Simplification of the Act would give a much clearer focus to the economic motives of the law and its significance in the micro-economic reform process.
The reform of the s 46 abuse of market power provision as a result of the Harper Report recommendations is an example of this philosophy being embraced (see [23.1630]).
The nature of the prohibited conduct [23.80] Although the CCA is directed at a range of anti-competitive conduct, different rules are appropriate for different types of conduct. The Hilmer Report noted that the approach of Pt IV is that “the anti-competitive impact of some kinds of conduct may be so unambiguous that they should be prohibited outright without having to demonstrate their impact in each particular case” whereas “other forms of behaviour, such as certain cooperative arrangements between firms, are more ambiguous in their impact on competition” (p 28). Those practices prohibited outright are known as per se offences. Their effect on competition is considered to be so detrimental that they are prohibited without reference to an analysis of their market impact. The per se practices include collusive price fixing (Div 1) and RPM (s 48). Because there is no need to prove the anti-competitive purpose or effect of such practices there is the virtue of certainty and savings in enforcement costs. The other practices prohibited by Pt IV are prohibited only if a “substantial lessening of competition” in a market is established, a determination that is not without difficulty. All the prohibited practices can be authorised that is granted immunity on public benefit grounds.
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1015
Defamation laws in Australia prevent … competitors being nasty to each other. The trade practices legislation prevents them being nice. J Gilmour, Australian Business Monthly (December 1993).
Business and the Law
Application and exemptions [23.90] Since the introduction of the national competition policy reforms in 1995, the CCA now extends to virtually all sections of the Australian economy. The limited reach of the Act (which originally applied only to the business activities of corporations, to the business activities of sole traders and partnerships that cross State boundaries or take place within a Territory, and to the commercial activities of the Commonwealth) was extended as the result of State and Territory application laws to all businesses and professions, unincorporated as well as incorporated, and to State and Territory government trading activities of government business entities (ss 2A, 2B). There are a limited number of exemptions provided by s 51: • conduct that is specifically authorised or approved by a Commonwealth, State or Territory law
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Hey, if you can’t take people’s money and screw ‘em, then you’ve got no business being in the business. W Brown (Mayor of San Francisco), The Bulletin (31 December 1996).
• conduct that arises from: – matters relating to remuneration, hours of working or working conditions of employees; – restrictive provisions in contracts of service (employment contracts) restricting non- corporate employees in relation to the work which the employees may engage in either during or after the termination of the employment contract; – restrictive provisions in contracts for the provision of services (independent contractor contracts) restricting the contracts of non-corporate independent contractors in relation to the work which they may engage in either during or after the termination of the contract; – provisions requiring a person to comply with standards of dimension, design or quality of performance laid down by the Standards Association of Australia; – arrangements between non-corporate partners in relation to the terms of the partnership, the conduct of the partnership business, or competition between the partnership and a partner either during the partnership or on that person ceasing to be a partner; – provisions in a contract for the sale of a business which are solely for the protection of the purchaser in respect of the goodwill of the business; – arrangements relating exclusively to the export of goods from Australia or the supply of services outside Australia provided certain notification requirements are met; and – consumer boycotts. Immunity through the authorisation process is available for all Pt IV conduct and the notification process is available for exclusive dealing, RPM and collective bargaining (see 23.4). A further source of immunity was introduced as a result of the Harper Report: the ACCC now has the power to issue class exemptions for particular kinds of conduct so as to create “safe harbours” for business and thereby reduce compliance and administrations costs associated with individual authorisations (see [23.460]).
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Chapter 23 Competition Law
Extra-territorial effect [23.100] The CCA can apply to conduct engaged in outside Australia. If the firm engaging in anti-competitive conduct is incorporated in or carries on business in Australia (s 5) and the conduct relates to a market in Australia (s 4E) Part IV applies (s 5). In Air New Zealand v ACCC [2017] HCA 21 the High Court expanded the circumstances in which conduct that takes place outside Australia may be caught by the CCA. The requirement of “a market in Australia” was not limited by where the act (in this case price fixing) took place but was determined by the geographical area in which the airlines competed, which included Australia as it was a significant source of demand, for air cargo services. The Harper Report recommended that s 5 which applies the competition law to certain conduct engaged in outside Australia should be amended to remove the requirement that the contravening firm has a connection with Australia in the nature of residence, incorporation or business presence and that the competition law should apply to overseas conduct insofar as the conduct relates to trade or commerce within Australia or between Australia and places outside Australia. This recommendation was not accepted by the Government and the cartel provisions were in fact amended to confine the application of the cartel conduct provisions to conduct affecting competition in Australian markets.
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The development of Australia’s antitrust laws [23.110] The US term antitrust law is sometimes used to describe what is usually referred to in Europe as competition law and in Australia as trade practices law –although with the title of the legislation changing from the TPA to the Competition and Consumer Act the term “competition law” is becoming more common in Australia today. The use of the term “anti-trust” derives from the United States where the device of the “trust” (a fiduciary relationship under which a trustee holds property for and on behalf of a beneficiary) was used extensively a century ago by groups of competing corporations uniting to eliminate competition. The legislative attempts to control these combinations were known as the antitrust laws although they had wider effect. Australia’s federal statute book is littered with a number of earlier, and largely unsuccessful, attempts to regulate competition prior to the enactment by the Whitlam Labor Government of the TPA. The Constitution does not expressly confer power on the Federal Parliament to regulate restrictive trade practices and the history of Australian trade practices law is largely a history of constitutional interpretation. The early interpretations of the High Court jealously preserved State rights and it was not until the introduction in 1974 of the TPA that the Commonwealth’s legislative authority in this area was confirmed. Within five years of Federation, the Australian Industries Preservation Act 1906 (Cth) was enacted following concern about monopolistic practices in general and the International Harvester Corporation’s threat of dumping to capture the Australian agricultural implement market in particular. The effectiveness of the 1906 Act was nevertheless emasculated by constitutional limitations and judicial conservatism. In Huddart Parker & Co Pty Ltd v Moorehead [1909] HCA 36 (High Court) and Adelaide Steamship Co Ltd v The King [1912] HCA 58 (High Court); Attorney-General v The Adelaide Steamship Co Ltd (1913) 18 CLR 30 (Privy Council) (High Court) (the Coal vend case), it was held that the “corporations
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1017
Contemporary economists are very much like shamans or witchdoctors. They have a little ritualistic dance and incantation and no one understands what they are talking about. If a doctor did this sort of thing he would be up on a serious malpractice charge, I suspect. B Hayden, Business Review Weekly (13 August 1993).
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Business and the Law
The overall rationale for the content of the list is obvious enough: these were the areas perceived by the founding fathers in the 1890s to be the areas of national concern, the areas in which uniformity of regulation was thought to be desirable. Conversely, the States were to retain power over local matters. In theory, such a scheme seems a thoroughly sensible arrangement for an incipient nation intent on uniting to the extent of its commonality of interest but equally intent on remaining separate to the extent of its diversity. Michael Coper, Encounters with the Australian Constitution (CCH, 1988) p 164.
power” did not extend to controlling the trading activities of corporations and that the “interstate trade and commerce power” did not extend to purely intrastate activities. The Coal Vend case further weakened the legislation by a lenient interpretation which, in that case, allowed reasonableness based on distressed economic conditions to be pleaded as a defence to collusive price fixing. The legislation never recovered from these blows and ceased to be used. Pressure for new and effective legislation mounted in the 1960s resulting in the Trade Practices Act 1965 (Cth). This Act was also unsuccessful. Not only did the legislation fail to provide an overall effective antitrust policy, it failed on constitutional grounds. In Strickland v Rocla Concrete Pipes Ltd [1971] HCA 40 the High Court held that the Federal Parliament had failed to use correctly the available sources of federal power and that the Act had no clear constitutional basis. However, the High Court indicated that the Huddart Parker case had been wrongly decided and acknowledged that the corporations power provided a sufficient constitutional base for laws governing the trading activities of corporations. The Restrictive Trade Practices Act 1971 (Cth), which replaced the 1965 Act, was essentially a re-enactment of the legislation constitutionally based on the corporations power of s 51(xx). The acknowledged policy weaknesses of that legislation led to its repeal and replacement in 1974 by the Trade Practices Act 1974 (Cth) –which was also based on the corporations power and which survived the predictable constitutional challenges. [23.120] The reasons for the enactment of the TPA were clearly spelt out by Senator Lionel Murphy, the then Attorney-General, in his second reading speech introducing the legislation: Restrictive trade practices have long been rife in Australia. Most of them are undesirable and have served the interests of the parties engaged in them, irrespective of whether those interests coincide with the interests of Australians generally. These practices cause prices to be maintained at artificially high levels. They enable particular enterprises or groups of enterprises to attain positions of economic dominance which are then susceptible to abuse; they interfere with the interplay of competitive forces which are the foundation of any market economy; they allow discriminatory action against small businesses, exploitation of consumers and feather-bedding of industries.
The Hilmer Report and the National Competition Policy reforms [23.130] In 1991 the Commonwealth, State and Territory governments agreed to examine a national approach to competition policy within the Council of Australian Governments (COAG) framework. A National Competition Policy Review Committee (the Hilmer Committee) was established and its report, National competition policy, identified a number of issues that prevented the TPA from enshrining a truly national competition policy. Of particular concern was the fact that a significant section of the Australian economy was beyond the scope of the Act –the business activities of State and Territory governments and non-corporate persons which were beyond the constitutional powers of the Commonwealth, and key industry sectors which were exempted from compliance by Commonwealth, State and Territory laws. The Hilmer Report concluded that a national competition policy required reform in a number of areas.
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Chapter 23 Competition Law
The Hilmer Report canvassed the possible options for putting its recommendations into effect: • the Commonwealth could act unilaterally, relying on an expanded use of its existing constitutional powers; • the Commonwealth could legislate unilaterally but with a reference of powers from the States; • the States could enact legislation which applies Commonwealth legislation in their jurisdictions; or • the States could enact their own legislation embodying the competitive conduct rules.
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The Report recommended that Commonwealth legislation which would require a referral of powers from the States would be necessary to ensure universal coverage. This, in practical terms, was the greatest challenge extended by the Hilmer Report, which acknowledged that implementation of the Report would require a level of cooperation between the Commonwealth, States and Territories “which has only rarely been achieved in the past” (p xxxix). The Committee warned that a failure to achieve the required degree of cooperation “will forgo urgently needed benefits for the Australian economy and community” (p xxxix). [23.140] The third option was adopted. In April 1995, the COAG ratified the National Competition Policy. The key ingredients of this policy are the Competition Principles Agreement and the Conduct Code Agreement, which comprise a package of measures intended to give effect to the key recommendations of the Hilmer Report. Under these Agreements, the Competition Policy Reform Act 1995 (Cth) was enacted, which provided for a number of initiatives referred to elsewhere in this chapter including: • the establishment of the ACCC and the National Competition Council (see [23.610]); • the introduction of an access regime for essential facilities (see 23.5); • removal of “shield of the Crown” immunity for government business enterprises and extension of the Act to all businesses and professions in Australia; and • amendments to the competitive conduct rules governing restrictive trade practices. In addition, the Act lays down principles of competitive neutrality and structural reform of public monopolies with which participating jurisdictions must comply to qualify for the financial assistance grants from the Commonwealth. Under the Conduct Code Agreement, participating jurisdictions (the States and Territories) have enacted legislation that applies the Competition Code to all persons within its legislative competence. The Competition Code is a schedule to the CCA added by the Competition Policy Reform Act 1995 (Cth), which restates Pt IV in terms of “persons” rather than “corporations”. Each jurisdiction has enacted the Competition Code, which has the effect that unincorporated entities, sole traders, partnerships and government business enterprises are now subject to the competitive conduct rules of Pt IV that have governed corporations since the enactment of the original Trade Practices Act 1974 (Cth).
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1019
The task of transferring the product from the manufacturer to the consumer can be achieved in a number of ways … The manufacturer will be keen to exercise some sort of control over the distribution channel for a variety of reasons: firstly, to make sure that the product is aimed at the right sort of people; secondly, to maintain the quality of his product; thirdly, to obtain maximum profit. Such control might, however, be inimical to the free interplay of competitive forces. Robin Edwards, Issues in Marketing Law (New South Wales University Press, 1982).
Business and the Law
IN CONTEXT
Application of the Competition and Consumer Act to Government [23.150] As a result of the National Competition Policy reforms Commonwealth, State and
Territory governments are subject to the CCA if carrying on a business (ss 2A, 2B). A government entity not carrying on business is entitled to “crown immunity” and until recently it was the law that non-government parties contracting them were protected by a doctrine of “derivative crown immunity”. This law changed with the decision of the High Court in ACCC v Baxter Healthcare Pty Ltd [2007] HCA 38. Baxter had offered State and Territory purchasing authorities long-term exclusive contracts for “bundled products”. (It had market power in sterile fluids which it “bundled” with dialysis products.) The Federal Court held that this conduct contravened ss 46 and 47 but that Baxter was entitled to derivative crown immunity as State and Territory authorities were not carrying on a business within the meaning of s 2B. The Crown (the State and Territory purchasing authorities) was therefore entitled to crown immunity and Baxter was protected by derivative crown immunity. The High Court by majority overruled the Federal Court holding that it would be “remarkable” if a business dealing with government in the course of its own business enjoyed an immunity not available to government when government itself was carrying on business.
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Nobody talks more of free enterprise and competition and of the best man winning than the man who inherited his father’s store or farm. C Wright Mills.
[23.160] Under the Competition Principles Agreement 1995 the principles that all governments must follow in relation to competition policy are set out. These principles relate to prices oversight of government business enterprises, structural reform of public monopolies, review of anti-competitive legislation and regulations and the elimination of any competitive advantage or disadvantage experienced by government businesses when they compete with the private sector through implementing “competitive neutrality”. The role of the National Competition Council in overseeing the agreed principles is also set out.
The Harper Report and the Competition Policy Review reforms [23.170] In December 2013 the then Prime minister announced a “root and branch” review of competition policy –the first significant review since the Hilmer Report two decades earlier. The Review was chaired by Professor Ian Harper and the report –the Competition Policy Review: Final Report –was published in March 2015. The Report states in the Executive Summary that: Reinvigorating Australia’s competition landscape is a central element of a new round of microeconomic reform. To this end, the Panel examines whether Australia’s existing competition policy, laws and institutions remain “fit for purpose”, especially in light of the persistent forces for change that will shape the Australian economy now and into the future. The rise of Asia and other emerging economies provides significant opportunities for Australian businesses and consumers but also poses some challenges. A heightened capacity for agility and innovation will be needed to match changing tastes and preferences in emerging economies with our capacity to deliver commodities, goods, services and capital. We 1020
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Chapter 23 Competition Law
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need policies, laws and institutions that enable us to take full advantage of the opportunities offered. Our ageing population will give rise to a wider array of needs and preferences among older Australians and their families. Extending choice and contestability in government provision of human services will help people to meet their individual health and aged care needs. New technologies are “digitally disrupting” the way many markets operate, the way business is done and the way consumers engage with markets. The challenge for policymakers and regulators is to capture the benefits of digital disruption by ensuring that competition policy, laws and institutions do not unduly obstruct its impact yet still preserve expected safeguards for consumers.
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Business and the Law
In relation to the competition laws contained in the CCA the Harper Review concluded that while the concepts, prohibitions and structure of the Act are sound, a number of provisions are unnecessarily complex and reform would improve the flexibility and effectiveness of the law, increase certainty and reduce costs for business. The reforms introduced as a result of the Harper Report have been legislated in the two Acts which commenced on 6 November 2017 –the Competition and Consumer Amendment (Competition Policy Reform) Act 2017 (Cth) and the Competition and Consumer Amendment (Misuse of Market Power) Act 2017 (Cth).
IN CONTEXT
Government response to the Competition Policy Review [23.180] Competition is one of the surest ways to lift long-term productivity growth. Competition energises enterprise and encourages business to pursue efficiencies, rewarding the innovative and dynamic businesses that provide the best services at the lowest cost, and benefiting households by giving them more choice and better value products and services.
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The 2015 Intergenerational Report showed that productivity growth is the most important driver of Australian incomes and living standards. That is why the Australian Government (the Government) is laying the groundwork for a more competitive and flexible economy by reforming Australia’s competition framework. These reforms will make markets work better for the benefit of all Australians, reduce barriers to entry for new businesses and encourage businesses to innovate and provide greater choice to consumers. Previous National Competition Policy (NCP) reforms delivered in response to the Hilmer Review resulted in substantial economic benefits for Australia. Efficiency improvements in the key infrastructure industries targeted by the reforms boosted Australia’s gross domestic product (GDP) by 2.5 per cent. The reforms delivered by the NCP are a strong example of how all governments can work together and utilise competition to increase economic growth. The Competition Policy Review (the Harper Review) was commissioned by the Government as a key election commitment and is an important limb of the Government’s forward economic policy agenda, which also includes the Tax White Paper, the Federation White Paper and the response to the Financial System Inquiry. The Harper Review provides a comprehensive, independent assessment of Australia’s competition framework. It makes 56 recommendations to revitalise competition policy at both the state and Commonwealth level, reshape competition institutions, and modernise and simplify Australia’s competition laws with a view to strengthening competition and incentives to innovate, empowering consumers, and promoting better use of and investment in infrastructure. The Government will implement the majority of the Review’s recommendations. Many of the recommendations of the Harper Review are in areas of state and territory responsibility and the Government is engaging with the states and territories to advance an ambitious reform agenda. All governments recognise the benefits that were delivered by the NCP and are 1022
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Chapter 23 Competition Law
already working together to develop a new national framework between the Commonwealth, states and territories that will identify and facilitate innovative ways to deliver services and promote economic growth. The Government supports 39 of the Harper Review’s recommendations in full or in principle and a further 5 recommendations in part. The Government also notes or remains open to 12 recommendations in areas where implementation will be considered following further review and consultation, including with the states and territories. Overview, Australian Government Response to the Competition Policy Review (2015)
Industry codes of practice
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[23.190] In recent years, governments have taken a number of deregulatory initiatives that reflect a concern that government regulation be cost-effective, efficient and free from unnecessary restrictions. This deregulatory climate, together with the nation’s well- established trade association infrastructure, suggests considerable scope for industry codes of practice to play a larger role in the total regulatory “mix”. In an address on self- regulation on 4 April 2000 then Chairman of the ACCC, Professor Allan Fels, noted the advantages of industry codes: Developed voluntarily on the initiative of an industry, codes can provide a flexible, cost- effective approach to problem areas. Market failure problems can be addressed on an industry-wide basis, and so enhance the competitive process. Also, by addressing recurring or structural problems, codes can establish a form of industry quality control. They offer the flexibility and sensitivity to market circumstances necessary for product innovation, diversification and development.
The Trade Practices Act has been likened to a contraceptive: once it is being used, it is difficult to determine what would have happened in its absence. The Australian (14 October 1975).
There are, of course, limits to the viability of self-regulation through industry codes. In an address in August 1998, ACCC Commissioner Shogren noted that: External regulation is partly a complement to self-regulation and partly a safety net alternative to it. The regulator has to make sure that the external regulation does complement self-regulation and that the safety net does work. It must be remembered that the safety net is not there to save any particular player from fatal injury; it is there to protect the process of competition itself. There are going to be issues which self-regulation will fail to deal with satisfactorily. Self- regulatory bodies comprising a mix of industry representatives may struggle to reach a consensus due to the conflicting incentives of participants in the regulatory process. This can be particularly damaging where one participant holds a large degree of market power and/or controls a large proportion of network infrastructure. To be sure, the technical expertise of industry players will give them a comparative advantage in regulating some matters –especially in the design of industry codes of conduct. In many other areas, however, it is clear that external regulation may well be required. Hence, an immediate conclusion is that there should be some optimal mix of regulation, where the industry itself regulates on some issues, but the regulation of other issues is left to the external regulator …
[23.200] Provision now exists under the Pt IVB of the CCA for both voluntary and mandatory codes to be prescribed under the Act. The Franchising Code of Conduct discussed in Chapter 15 was the first mandatory code prescribed under s 51AD. Today there are six Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-25 03:10:20.
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Business and the Law
mandatory codes and one voluntary code –the Food and Grocery Code of Conduct, a voluntary code which is nevertheless binding on those retailers and wholesalers who elect to be bound by it. The Code requires certain standards of conduct that cover the life cycle of the relationship between retailers or wholesalers and suppliers. It: • sets out minimum obligations for retailers and wholesalers relating to the making of grocery supply agreements; • requires retailers and wholesalers to act lawfully and in good faith; • prohibits retailers from threatening suppliers with business disruption or termination without reasonable grounds; • establishes minimum standards of conduct by a retailer when dealing with suppliers, such as payment, de-listing, standards and specifications for fresh produce and the allocation of shelf space; and • requires retailers and wholesalers to provide annual training to employees whose role includes direct involvement in buying grocery products, and their managers, on the requirements of the Code.
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23.3 “COMPETITION” IN A “MARKET” The existence of price differentials between different products … does not by itself place the products in different markets. The test of whether or not there are different markets is based on what happens (or would happen) on either the demand or the supply side in response to a change in relative price. TPC v Australia Meat Holdings Pty Ltd [1988] ATPR 40-876 at 49,480 per Wilcox J.
[23.210] In Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd [1982] FCA 178, Smithers J explained that: To apply the concept of substantially lessening competition in a market, it is necessary to assess the nature and extent of the market, the probable nature and extent of competition which would exist therein but for the conduct in question, the way the market operates and the nature and extent of the contemplated lessening.
This approach, which was approved by the Full Federal Court in Outboard Marine Australia Pty Ltd v Hecar Investments (No 6) Pty Ltd [1982] FCA 265, involves several steps: • definition of an appropriate market or markets; • determination of the probable nature and extent of competition that will exist in the market but for the conduct in question; • ascertainment of the likely effect of the conduct on competition in the market; and • assessment of whether the conduct may substantially lessen competition.
The market The concept of the “market” [23.220] The concept of the market for goods or services is central to Pt IV of the CCA. In the words of the High Court in ACCC v Flight Centre [2016] HCA 49 at [69] identifying a market and defining its dimensions is a “focusing process” requiring selection of “what emerges as the clearest picture of the relevant competitive process in the light of commercial reality and the purposes of the law”. The market is the starting point for the evaluation of competition and pervades trade practices law. Competitive effects of conduct are not determined in a vacuum nor in relation to the totality of commercial activity –they are 1024
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Chapter 23 Competition Law
measured in relation to the particular market or markets in which the purpose or effect of that conduct is felt. The majority of the Pt IV prohibitions are triggered by a substantial lessening of competition threshold. Market definition is obviously crucial to this determination. Other provisions –such as the prohibition of abuse of market power –incorporate a substantial market power threshold. Even those practices such as price fixing that are prohibited irrespective of their competitive effect require that the conspirators are in competition with each other, which in turn requires a consideration of whether they operate in the same market. The market is therefore the basic starting point in any valuation of competitive effect. The precise definition of the particular market is difficult. Deane J commented in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6; (1989) 167 CLR 177 at 196:
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The economy is not divided into an identifiable number of discrete markets into one or other of which all trading activities can be neatly fitted. One overall market may overlap other markets and contain more narrowly defined markets which may, in their turn, overlap, the one with one or more others. The outer limits (including geographic confines) of a particular market are likely to be blurred; their definition will commonly involve assessment of the relative weight to be given to competing considerations in relation to questions such as the extent of product substitutability and the significance of competition between traders at different stages of distribution.
[23.230] The basic battlelines are nevertheless easily drawn. The plaintiff clearly wants the market to be narrowly drawn –the narrower the market, the more likely it is that the activity will have a substantial impact on competition within that narrow market. The defendant clearly wants the market to be widely drawn –the larger the market, the less likely it is that the activity will have a substantial impact on competition within that wider market. In Queensland Wire Industries, Mason CJ and Wilson J warned that: [T]oo narrow a description of the market will create the appearance of more market power than in fact exists; too broad a description will create the appearance of less market power than there is.
And, as Hill J commented in Helicruise Air Services Pty Ltd v Rotorway Australia Pty Ltd [1996] FCA 308 (in relation to a s 46 case where the threshold issue to be determined was whether a commercial helicopter charter company had substantial power in a market): Of course, if one defines the market narrowly enough there will always be market power in some person. Conversely, if the market is defined widely enough there may never be market power in some person.
The implications of the market definition are immense. The difficulties in determining the appropriate market are very real. The decision is often controversial. [23.240] Although the Australian legislation, unlike its New Zealand counterpart (Commerce Act 1986 (NZ), s 3(1A)), does not expressly define a market to mean one that maybe distinguished “as a matter of fact and commercial common sense”, the determination of the appropriate market in Australia, as well as New Zealand, is a practical commercial enquiry rather than one which pays undue respect to pure economic theory, law, or dictionary definitions. The early experience in Australia was not particularly happy. In one of the first competition cases to come before the courts, a case involving
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And while the law of competition may be sometimes hard for the individual, it is best for the race, because it ensures the survival of the fittest in every department. Andrew Carnegie.
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the termination of a Gold Coast dealer’s franchise to sell Datsun cars (Top Performance Motors Pty Ltd v Ira Berk (Queensland) Pty Ltd [1975] ATPR 40-004), Joske J held that the relevant market was that for the sale of Datsun cars on the Gold Coast. It was widely acknowledged that, in other than exceptional cases, to restrict the relevant market to branded products was inappropriate and unworkable. Section 4E was added to the Act in 1977 to get around this decision. Section 4E does not define “market” but provides that it “includes a market for … goods or services that are substitutable for or otherwise competitive with” the goods or services under consideration. In the case of mergers that are prohibited if they substantially lessen competition, s 50(6) provides that “market” means “a substantial market for goods and services in Australia, or a State or a Territory or a region of Australia”.
Identifying the market
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[23.250] The Trade Practices Tribunal in Re Queensland Co-operative Milling Association Ltd [1976] ATPR 40-012 at 17,247 regarded the concept of market to be “basically a simple idea”: a market is “the area of close competition between firms, or putting it a little differently, the field of rivalry between them”. The Tribunal stated, in a passage approved by the High Court in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6: Within the bounds of a market there is 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 amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. Let us suppose that the price of one supplier goes up. Then on the demand side, buyers may switch their patronage from this firm’s product to another, or from this geographic source of supply to another. As well, on the supply side, sellers can adjust their production plans, substituting one product for another. Whether such substitution is feasible or likely depends ultimately on customer attitudes, technology, distance and cost and price incentives. It is the possibilities of such substitution which set the limits upon a firm’s ability to “give less and charge more”. Accordingly, in determining the outer boundaries of the market we ask a quite simple but fundamental question: If the firm were “to give less and charge more” would there be, to put the matter colloquially, much of a reaction? And if so, from whom? In the language of economics the question is this: From which products and which activities could we expect a relatively high demand or supply response to price change, that is, a relatively high cross-elasticity of demand or cross-elasticity of supply?
[23.260] A market is therefore a multi-dimensional concept involving four dimensions: • product; Competition has been shown to be useful up to a certain point and no further, but cooperation, which is the thing we must strive for today, begins where competition leaves off. Franklin D Roosevelt.
• geography; • function; and • time. Each dimension must be assessed in determining the market in a particular case.
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• The product dimension refers to the types of goods or services in the particular market. The product market consists of the goods or services supplied by the parties, together with competing goods or services that could reasonably be used by most customers as substitutes for them.
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Chapter 23 Competition Law
• The geographic dimension refers to the area the market covers. The geographic market can be described as the geographic area or areas in which sellers of the particular product operate and to which purchasers can practicably turn for such goods or services. The geographic market is a function of a variety of factors, including the pattern of demand and the value of commodity in relation to the cost of transporting it or, in the case of services, the degree of inconvenience involved in obtaining them from another source. • The functional dimension refers to the relevant stage in the production and marketing chain at which competition is affected. • The time dimension refers to the period in relation to which the determination of the market is made. The size and scope of a market may change over time. The determination is not restricted to an analysis of factors influencing market definition that are frozen at a particular point in time and “substitution possibilities” in the longer term can be considered. The National Competition Council gives the following examples in The National Access Regime: A Draft Guide to Part IIIA of the Trade Practices Act (September 1996): • The relevant product dimension: this refers to the types of goods and services in the particular market. For example, is there a market for gas, or is there a market for energy of which gas is one of several competing products?
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• The relevant geographic dimension: this refers to the area the market covers. For example, is there an energy market in Queensland, or is there really only an energy market in Australia? • The relevant functional dimension: this refers to the relevant stage in the production and marketing chain. For example, is the market a market for electricity generation, or for electricity transmission, or for electricity distribution or for selling electricity? • The relevant temporal dimension: this refers to whether the size or scope of the market is likely to change through time. For example, through the introduction of new technology?
IN CONTEXT
Substitutable for or otherwise competitive with Identifying products that may be close substitutes
While competition cannot be created by statutory enactment, it can in large measure be revived by changing the laws and forbidding the practices that killed it, and by enacting laws that will give it heart and occasion again. We can arrest and prevent monopoly. Woodrow Wilson (1912).
[23.270] The ACCC seeks to identify close substitutes of the relevant product by considering the following types of information:
• the function or end use of the product; • physical and technical characteristics of the product; • costs of switching purchases between the product and potential substitutes; • views and past behaviour of buyers regarding the likelihood of substitution between products; • evidence of buyers switching to other products in response to price increases in the recent past;
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• evidence of producers redeploying their production capacity in response to price increases in the recent past; • costs of switching production and distribution systems from another product line to a product that is closely substitutable with the relevant product; • views, business records and past behaviour of suppliers of the relevant products regarding the impact of price and marketing decisions by suppliers of potential substitute products on their own pricing and marketing decisions; • relative price levels and price movements of the product compared to potential substitutes. Identifying geographic regions that may be close substitutes Number one, cash is king … number two, communicate … number three, buy or bury the competition. Jack Welch, Former Chairman and CEO of General Electric.
The ACCC seeks to identify close substitutes of the relevant geographic region by considering the following types of information: • the portability of the relevant product as determined by its perishability, weight, etc; • transportation costs to move the relevant product between regions (particularly the transportation costs as a proportion of total value of the product); • the costs to customers of obtaining supply from alternative regions; • any limitations on the ability of customers to access alternative sources of supply in alternative regions; • the costs of extending or switching production and distribution systems to supply the customers in alternative regions;
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• any regulatory or other practical constraints on suppliers selling to alternative regions; • records relating to trade flows and the actual movement of customers and/or suppliers between geographic regions, especially related to changes in relative prices across regions in the recent past; • views and business records of buyers and suppliers regarding the likelihood of switching between geographic sources of supply; • the relative price levels and price movements of different geographic sources of supply. ACCC, Merger Guidelines (2008).
IN CONTEXT
Market definition [23.280] One of the most helpful statements of the principles relevant to market definition
is that of the Trade Practices Tribunal in Re Tooth & Co Ltd; Re: Tooheys Ltd [1979] ATPR 40-113 at 18,196-18,197: First, and most generally, we seek to identify the area or areas of close competition of relevance for the applications.
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Chapter 23 Competition Law
Second, such competition may proceed not just through the substitution of one product for another in use (substitution in demand) but also through the substitution of one source of supply for another in production or distribution (substitution in supply). The market should comprehend the maximum range of business activities and the widest geographic area within which, if given a sufficient economic incentive, buyers can switch to a substantial extent from one source of supply to another and sellers can switch to a substantial extent from one production plan to another. In an economist’s language, both cross-elasticity of demand and cross-elasticity of supply are relevant. Third, there is the matter of time perspective. It is plain that the longer the period allowed for likely customer and supplier adjustments to economic incentives, the wider the market delineated. In our judgment, given the policy objectives of the legislation, it serves no useful purpose to focus attention upon a short-run, transitory situation. We consider we should be basically concerned with substitution possibilities in the longer run. This does not mean we seek to prophesy the shape of the future –to speculate upon how community tastes, or institutions, or technology might change. Rather, we ask of the evidence what is likely to happen to patterns of consumption and production were existing suppliers to raise price or, more generally, offer a poorer deal. For the market is the field of actual or potential rivalry between firms. Fourth, all competition or substitution does not cease at the outer boundaries of the market; the economy as a whole is a network of substitution possibilities in consumption and production; competition is a matter of degree. Rather, at the extremities of the market, there is such a break in substitution possibilities that firms within its boundaries would collectively possess substantial market power, were they to raise prices or offer a poorer deal without their market being substantially undermined by the incursions of rivals. Fifth, within the bounds of the market, substitution possibilities may be more or less intense, and more or less immediate: the field of substitution is not necessarily homogeneous but may contain within it sub-markets wherein competition is especially close or especially immediate. There may be, too, certain key sub-markets such that their competitive relationships have a wider effect upon the functioning of the market as a whole. In these matters we have found that the identification of relevant sub-markets may be rather helpful in clarifying how competition works. Finally, as is commonly recognised, the market is a multi-dimensional concept – with dimensions of product, functional level, space, and time.
Greed … is good. Greed is right. Greed clarifies, cuts through and captures the essence of the evolutionary spirit … Greed –mark my words –will save … the USA. Gordon Gekko.
Examples of Market Definition [23.290] Case Mark Lyons v Bursill [1987] FCA 282
Market alleged by applicant Salomon ski boots in Australia; Salomon ski boots in Sydney; Salomon ski boots sold by retailers in Sydney
Market alleged by respondent The ski gear market or the retail market for sports gear
Market as found by the court The Australian ski boot market
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Case
Market alleged by applicant Beef cattle turned off for immediate slaughter (the fat cattle market) in Queensland
Market alleged by respondent The market for beef cattle in North Queensland
Biscuits in Australia (but seeking to exclude certain types of biscuits at some point in the trail) The market for supply of airline services for wholesale tours between Australia and the Maldive Islands
Biscuits, snack foods, confectionery and bread
Dowling v Dalgety Australia Ltd [1992] FCA 35
The provision of livestock auctioning services
The provision of livestock selling services
General Newspapers Pty Ltd v Australian and Overseas Telecommunications Corp Ltd [1993] FCA 5
The Australian directory market
The Australian advertising market
TPC v Australia Meat Holdings Pty Ltd [1988] FCA 338
TPC v Arnott’s Ltd [1990] FCA 15
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Taprobane Tours WA v Singapore Airlines Ltd [1990] FCA 404
Packaged island holiday tours originating from Australia
QIW Retailers v Davids Holdings Pty Ltd [1993] FCA 204
Market as found by the court The fat cattle market (excluding store cattle but including cattle purchased for feed lots) in North Queensland Biscuits in Australia
The applicant’s market definition was accepted at trail. The respondent’s market definition was accepted on appeal. The market definition was determinative of the case. The applicant won at trail. The respondent won on appeal The market for livestock selling services with its various components which include the provision of livestock auction services The Australian directory market, being a market in which publishes books to be retained by users for a relatively lengthy period such as a year or more The applicant’s market definition was accepted at trail and on appeal
The market for the The market for supsupply by indeply and distribution pendent retailers of products to conin Queensland or sumers in Australia in Queensland and or in the eastern northern New South States of Australia Wales Source: W Pengilley, “Misuse of Market Power: Present Difficulties –Future Problems” (1994) 2 Trade Practices Law Journal, 30-32.
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Chapter 23 Competition Law
Boral Besser Masonry Ltd v ACCC [2003] HCA 5 [23.300] The ACCC claimed that Boral had taken advantage of its market power by, inter alia, selling con-
crete blocks at less than the avoidable cost of production for the purpose of eliminating or damaging a competitor in contravention of s 46 of the TPA. A key issue in a s 46 case is the threshold issue –did the corporation have a substantial degree of power in a market? In this determination the first issue to be determined is: What is the market within which a substantial degree of power is assessed? In Boral the key issue was whether concrete masonry products manufactured by Boral competed with, and were substitutable for, other walling products. In the Full Federal Court, Finkelstein J clearly explained the determination that had to be made (ACCC v Boral Ltd [2000] FCA 30 at [306]): In a market where walling products include masonry blocks and bricks, clay bricks, tilt-up panels, precast concrete, plasterboard, timber, glass, aluminium, steel products and fibro-cement sheeting Boral could not have significant market power … Or did the evidence in fact establish the existence of a narrower market, such as the one for which the Commission contended, namely a market for concrete masonry products? [In which Boral did have significant market power.]
The trial judge had found that Boral’s more expansive definition of the market was appropriate –that Boral’s concrete masonry products were simply part of a larger market for walling products (ACCC v Boral Ltd [1999] FCA 1318 at [130] per Heerey J):
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A wall is a wall whether it is made of concrete blocks or tilt-up or concrete bricks or clay bricks. The only need of the builder is to have a wall which will perform as a wall, and for the lowest possible cost.
On appeal the Full Federal Court held that the narrower definition of the market was the appropriate definition – there was a distinct market for the sale of concrete products. Finkelstein J noted that product specifications in building projects must take account of cost, structural requirements, aesthetic considerations and performance characteristics which will usually dictate the product to be used –in only approximately 10% of projects will there be a choice of building material. There was little evidence of any significant substitution between alternative building materials (ACCC v Boral Ltd [2001] FCA 30 at [311]): Each walling product has its own characteristics that make it more or less capable of satisfying a particular requirement … All in all, one thing that comes across quite clearly from the evidence is that a wall is not just a wall.
In this case the geographic dimension of the market –Melbourne –was not in dispute, it being accepted that Melbourne participants in the market would not be influenced to any significant extent by what happened outside Melbourne. On the ultimate appeal the High Court approved the Full Federal Court’s narrower market definition.
Competition [23.310] It is hardly surprising that the concept of “substantially lessening competition” is not without difficulty. Although the relatively obvious term “lessening” is defined to include “preventing or hindering” (CCA, s 4G), the more difficult concepts of “substantial/substantially” and “competition” are not defined. The definition section, s 4, nevertheless clarifies that competition includes competition from goods and services that are capable of being imported in addition to those that are actually imported. A credible threat of import competition is therefore relevant to competition analysis. An assessment of whether conduct substantially lessens competition in a market involves an assessment
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of the state of competition within the particular market, and the likely effect of the conduct in question on competition in that market.
IN CONTEXT
Competition as ongoing rivalry [23.320] Competition is a state of ongoing rivalry between firms –rivalry in terms of price,
service, technology, quality and consistency. In a fully competitive market each market participant is mutually constrained in its pricing, output and related commercial decisions by the activity of other market participants (or potential market participants). In other words, where competition exists, the market power of each market participant is limited. ACCC, Merger Guidelines (2008)
Competition within a market
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[23.330] The first decision to consider the issue of competition at any length was that of the Trade Practices Tribunal in Re QCMA [1976] ATPR 40-012 at 17,246 which adopted a structural approach: One of those fogs of ambiguity so dear to the laws of England. A P Herbert.
Competition expresses itself as rivalrous market behaviour. In the course of these proceedings, two rather different emphases were placed upon the most useful form such rivalry can take. On the one hand it was put to us that price competition is the most valuable and desirable form of competition. On the other hand it was said that if there is rivalry in other dimensions of business conduct –in service, in technology, in quality and consistency of product –an absence of price competition need not be of great concern. In our view effective competition requires both that prices should be flexible, reflecting the forces of demand and supply, and that there should be independent rivalry in all dimensions of the price-product-service packages offered to consumers and customers. Competition is a process rather than a situation. Nevertheless, whether firms compete is very much a matter of the structure of the markets in which they operate. The elements of market structure which we would stress as needing to be scanned in any case are these: 1. the number and size distribution of independent sellers, especially the degree of market concentration; 2. the height of barriers to entry, that is the ease with which new firms may enter and secure a viable market; 3. the extent to which the products of the industry are characterised by extreme product differentiation and sales promotion; 4. the character of “vertical relationships with customers” and with suppliers and the extent of vertical integration; and 5. the nature of any formal, stable and fundamental arrangements between firms which restrict their ability to function as independent entities. Of all these elements of market structure, no doubt the most important is (2), the condition of entry. For it is the ease with which firms may enter which establishes the possibilities of 1032
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Chapter 23 Competition Law market concentration over time; and it is the threat of the entry of a new firm or a new plant into a market which operates as the ultimate regulator of competitive conduct.
IN CONTEXT
Height of barriers to entry [23.340] In identifying the height of any barriers to entry the ACCC considers, among
Justice … limps along, but it gets there all the same. Gabriel Garcia Marquez.
other things, information relating to:
• the ability of producers that are not current competitors to switch production to competing products or services; • the market conditions that may effect the ability of existing firms to expand; • the size and extent of any investment, particularly sunk investment, that producers would need to make to either enter the relevant market/s or to expand production significantly in these market/s; • the extent of brand loyalty in the relevant market/s; • the existence and nature of any long-term supply contracts in the relevant market/s;
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• any relevant “switching costs” (such as product compatibility issues, product bundling, contract termination charges) that may prevent buyers in the relevant market/s from changing suppliers or sellers in the relevant market/s from changing buyers, in the short to medium term; • evidence of any growth or decline in the relevant market/s. ACCC, Merger Guidelines (2008).
Substantial lessening of competition [23.350] The requirement that the lessening of competition is “substantial” has been the subject of much judicial debate. In Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd [1982] FCA 178, Smithers J regarded the word as one “the meaning of which in the circumstances in which it is applied must to some extent be of uncertain incidence and a matter of judgment. There is no precise scale by which to measure what is substantial”. In Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd [1982] FCA 206, Lockhart J commented at that: the word “substantial” is imprecise and ambiguous. Its meaning must be taken from its context. It can mean considerable or big … It can also mean not merely nominal, ephemeral or minimal. Sometimes it is used in a relative sense, and at other times to indicate an absolute size or quantity.
There is most support for the word importing a greater rather than lesser degree of power; that is, substantial in the sense of considerable or large (see Dowling v Dalgety Australia Ltd [1992] FCA 35). An effect is considered to be substantial if it is important or weighty in relation to the size of the particular market. In the words of French J in Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 38, to work out whether
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competition is being substantially lessened “there must be a purpose, effect or likely effect of the impugned conduct on competition which is substantial in the sense of meaningful or relevant to the competitive process”.
IN CONTEXT
Substantial lessening of competition [23.360] The concept of substantial lessening of competition, like market definition, is not
something that can be categorically defined. The Commission is left with some flexibility in this matter because it takes on a different meaning depending on the situation that it is in and depending on the existing market arrangements. For example, in a market with three companies, company A with 60%, B with 25% and C with 15% shares in a market, a joint agreement between companies A and B may result in a substantial lessening of competition; however, an agreement between competitors B and C may be procompetitive. A Fels, ACCC Digest 12-1350 (August 1997)
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[23.370] In relation to mergers, s 50(3) of the CCA expressly provides that without limiting the matters that may be taken into account in determining whether the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a market, the following matters must be taken into account: I have yet to see any problem, however complicated, which, when you looked at it in the right way, did not become still more complicated. Paul Anderson.
(a)
the actual and potential level of import competition in the market;
(b)
the height of barriers to entry to the market;
(c)
the level of concentration in the market;
(d)
the degree of countervailing power in the market;
(e)
the likelihood that the acquisition would result in the acquirer being able to significantly and sustainably increase prices or profit margins;
(f)
the extent to which substitutes are available in the market or are likely to be available in the market;
(g)
the dynamic characteristics of the market, including growth, innovation and product differentiations;
(h)
the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor; and
(i)
the nature and extent of vertical integration in the market.
These factors are of general application to other provisions requiring an assessment of competition. The factors include not only “structural” factors but also “dynamic” factors relating to market conduct.
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Chapter 23 Competition Law
TPC v Ansett Transport Industries (Operations) Pty Ltd [1978] FCA 21 [23.380] In this case Northrop J, in determining that Ansett’s takeover of Avis did not lead to Ansett dom-
inating the Australian rental car market in contravention of s 50 (as it was then drafted), acknowledged that Avis was by far the largest car rental operator, the market leader and, on crude figures, the most profitable. The most compelling factor related to market conduct –there was keen and effective price competition within the market.
Focus on competition not competitors [23.390] As stated in Boral Besser Masonry Ltd v ACCC [2003] HCA 5 at [87]: The purpose of the Act is to promote competition, not to protect the private interests of particular persons or corporations. Competition damages competitors. If the damage is sufficiently serious, competition may eliminate a competitor.
IN CONTEXT
Competition is for consumers not competitors [23.400] Since becoming Chairman of the Australian Competition and Consumer
I find commercials fascinating. They are so exquisitely vulgar and so delightfully tasteless that they must be irresistible to everyone save the few who aren’t enchanted by discussions of nasal passages and digestive tracts. Alfred Hitchcock.
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Commission (ACCC), perhaps the greatest misunderstanding I’ve come across about the ACCC and the Trade Practices Act 1974 (Cth) (the Act) is the belief that both are there to protect business from competitors. Not surprisingly, this view is more prevalent among small businesses, especially those hit hard by the arrival, or expansion, of a bigger competitor into their market which threatens their survival. A classic example of this was our decision earlier this year not to halt the “shopper docket discounts” which offer Woolworths’ and Coles’ customers cheaper petrol at Woolies or Coles branded petrol stations. The ACCC took no action against the schemes because we found shopper docket discounts offer substantial benefits to consumers and promote competition. This has given rise to some concern that shopper dockets will accelerate the decline in independent service stations and further entrench both the major oil company sites and the major supermarket chains. Regardless of whether or not this is true, those who argue for intervention on such ground misunderstand the meaning of the Act and the role of the ACCC. The role of the ACCC and the Trade Practices Act is fundamentally to enhance the interests of Australian consumers by promoting fair, vigorous and lawful competition whether it be between big, medium and/or small businesses. It is not now, and never has been, the mandate of the ACCC to preserve competitors or protect any sectors of the economy from competition.
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Business and the Law
Vigorous competition is not market failure, and it is inconceivable to me that any government, or the ACCC, would ever intervene to prevent such conduct. The fundamental purpose of competition policy is to provide benefits to consumers, that is to say the community at large. Vigorous competition provides consumers with: • choice; • the information to make that choice rationally; • convenience; and • higher quality and lower prices for goods and services. … Any protection afforded to certain competitors as a necessary mechanism for preserving and promoting competition for the benefit of consumers is entirely consistent with competition policy. However, where the protection is merely to protect a vested interest group from the normal disciplines of competition, this is clearly not consistent with competition policy or the best interests of consumers.
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The Majority Report, Senate Economics References Committee, The Effectiveness of the Trade Practices Act 1974 in Protecting Small Business (March 2004) put it this way (p xi at [E.3]): No civilization … would ever have been possible without a framework of stability, to provide the wherein for the flux of change. Foremost among the stabilizing factors … are the legal systems that regulate our life in the world and our daily affairs with each other. Hannah Arendt.
An issue which has been raised during many of these inquiries is the question of whether the Act should seek to protect competition or competitors. The Committee considers that the Act can best protect competition by maintaining a range of competitors, who should rise and fall in accordance with the results of competitive rather than anti-competitive conduct. This means that the Act should protect businesses (large or small) against anti-competitive conduct, and it should not be amended to protect competitors against competitive conduct. … The ultimate aim of competition policy is to benefit consumers by encouraging competitive behaviour that is vigorous, but above all lawful. The Act specifically states that any small business that is subjected to unconscionable business behaviour, or conduct that is inherently anti-competitive and disadvantages consumers, is entitled to protection under our competition laws. Unconscionable conduct should not be confused with hard bargaining, but occurs when one party, usually a bigger business, uses its superior negotiating power in a harsh or oppressive fashion in the course of a commercial transaction. … Small business is a crucial and important part of our economy. It contributes almost one- third of our gross domestic product and employs over half of the workforce. For the most part, small business is an integral part of vigorous competition and the interests of small business are at one with those of consumers. But the principles of competition policy enshrined in the Trade Practices Act make clear that its primary purpose is a vigorous competitive economy that enhances the welfare of all Australians. The difficult task for governments and competition policy regulators is to strike the balance –to distinguish between rigorous, lawful competitive behaviour that is likely to lead to
1036
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Chapter 23 Competition Law
significant benefits for consumers, and unlawful inherently anti-competitive behaviour that is likely to disadvantage consumers. Business, too, can be a beneficiary of competition policy. Competition – and this includes intense and, at times, incessant price competition –benefits those businesses that are able and motivated to take advantage of the powerful forces driving their particular markets. Businesses that are able and motivated to take advantage of the competitive environment through innovation, improved efficiencies, keen pricing, quality service standards and other forms of vigorous competition, will thrive. And for the most part, small business is able to respond to the competitive environment more quickly and with more flexibility than many of its larger competitors. The corollary, of course, is that businesses that are unable or unwilling to respond to the, often daunting, challenge of competition, will languish and may ultimately fail. But this is the essence of an open market economy. It is this process that has been operating in free enterprise economics in one form or another for the past few hundred years. It is just the intensity and speed of change that is different. G Samuel (Chairman of ACCC), “Competition is for Consumers, Not Competitors” (2004) 12 Trade Practices Law Journal 152 at 152-154.
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IN CONTEXT
Qualitative assessment of competitive effect [23.410] A helpful conclusion to this section is the discussion of Wilcox J in Eastern
Express Pty Ltd v General Newspapers Pty Ltd [1991] FCA 321, which points out that the assessment of competitive effect is a qualitative not a quantitative process (at [116]): In Trade practices law, vol 1, p 42, Donald and Heydon say that “the assessment of substantial effects on competition can never be simply a quantitative assessment. It must involve qualitative judgments about the impact of conduct on the market in general”. I agree with that observation. I add that, in making those judgments, courts should have regard to commercial realities and normal commercial practice. It is not difficult to think of examples of contracts which involve a substantial and long-term commitment but which would generally be considered acceptable; even desirable in promoting a competitive economy. Let me take an imaginary case. Assume that a building company, X, habitually purchases bricks from brickyard A, ordering bricks as required at current prices. It uses about 500,000 bricks each year. Promoters of a proposed brickyard, B, approach X with a proposal for a contract whereby B will supply, and X will purchase, not less than 500,000 bricks per year for five years, at prices which are specified but lower than those presently paid by the company to A. B sees such a contract as advantageous because it provides a market base justifying the incurring of establishment costs. The attraction to X is an assured supply of bricks at a known, cheaper price. The contract is made. In theory, X remains free to purchase bricks from A, or anyone else. But, in practice, it is unlikely to do so. If the contract
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There is no place for dogma in economics. There are too many technical complexities and the behavioural reaction of human beings is too unpredictable for that. Those who pretend that the policy solutions are simple and straightforward are indulging in a huge confidence trick. F Argy, Business Review Weekly (19 November 1993).
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Business and the Law
is honoured, its likely needs will be fully met by B. Conversely, B has committed to X 500,000 bricks per year, out of its total production capacity. It is no longer free to sell those bricks elsewhere. To the extent of their obligations, the contract has lessened the ability of both parties to compete in the open market. In a direct sense, the effect of the agreement is to lessen competition in the brick market. This is a market in which X participates. So the relevant competition is “competition” within the meaning of s 45(2) of the Act. Having regard to the volume of bricks involved and the duration of the agreement, it could hardly be said that the effect was insignificant. Yet I venture to think that a court would decline to hold that the agreement was one which substantially lessened competition; but, rather, that it would be impressed with the argument that the agreement was instrumental in bringing into the market a new participant … The qualitative judgment of the court, weighing its pro-competitive aspects against its anti-competitive aspects, would probably be that the agreement was not unreasonably restrictive in character and, on the whole, conducive to competition rather than the contrary.
23.4 AUTHORISING ANTICOMPETITIVE ACTIVITY
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[23.420] In ACCCount: A report of the Australian Competition and Consumer Commission’s and Australian Energy Regulator’s activities (2014) at [1.20] the ACCC states that: In circumstances where competitive markets do not work to deliver the most efficient outcomes it may be in the public interest to allow certain restrictions on competition. This is particularly the case where there are features in a market that may lead to market failure, or where left to itself does not achieve the most optimal outcomes. In many ways, the authorisation and notification provisions of the Act allow the ACCC to consider the benefits from allowing conduct that addresses a market failure but which nonetheless restricts competition.
The Hilmer Report emphasised (p 6) that:
It certainly is not the purpose of our competitive system that it should produce a competition which destroys stability in an industry and reduces to poverty all those within it. Its purpose is rather to maintain that degree of competition which induces progress and protects the consumer. If our regulatory laws be at fault they should be revised. H C Hoover (1930).
Competition policy is not about the pursuit of competition for its own sake. Rather, it seeks to facilitate effective competition in the interests of economic efficiency while accommodating situations where competition does not achieve economic efficiency or conflicts with other social objectives.
[23.430] The authorisation and notification processes under Part VII provide the mechanism that accommodates the sanctioning of anti-competitive arrangements on public benefit grounds. The 2017 Amendments added a further type of immunity –through the ACCC providing “safe harbours” by way of class exemptions (see [23.460]). These processes allow the sometimes competing priorities of competition and other social goals to be appropriately balanced. In Re 7-11 Stores Pty Ltd [1994] ATPR 41-357, the Trade Practices Tribunal explained, at 42,677, the role of the authorisation in these terms:
1038
The object of the restrictive practices provisions of the Act is the promotion of competition. Nevertheless, the very existence of authorisation points to the recognition that there may be exceptional circumstances in which business conduct associated with a lessening of competition may have value on society. We cannot rely upon the functioning of competitive markets to deliver everything “of value to the community generally”. In the present matter, the question is what are the special characteristics of the publishers’ product or of the newsagents’ activity that would justify a non-competitive organisation as yielding public benefit.
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Chapter 23 Competition Law
The Dawson Committee in its report (Review of the competition provisions of the Trade Practices Act (2003) (Dawson Report)) reaffirmed the important role of authorisations: The authorisation by the ACCC of conduct that offers public benefits sufficient to outweigh any detriment to competition is a significant feature of the Australian system of competition regulation. Importantly, it offers a means of dealing with situations in which the application of the competition provisions may not facilitate the most economically efficient outcome.
Without great, powerful organisations, Americans cannot hope to compete successfully with the world. Henry Frick.
Since the national competition policy reforms, the view is that the authorisation process should be the primary basis for permitting exemptions, as opposed to legislative exemption for particular sectors or conduct.
Authorisation [23.440] The CCA in Part VII makes provision for an administrative procedure – authorisation –under which the ACCC can authorise certain future conduct which may otherwise be in breach of the Act, on public benefit grounds. Since the 2017 Amendments, authorisation is available for all of the restrictive trade practices including abuse of market power and cartel conduct. Section 90(7) now contains a single authorisation test for all conduct. The new test provides that the ACCC must not grant an authorisation unless it is satisfied in all the circumstances either:
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• that the conduct would not have the effect, or would not be likely to have the effect, of substantially lessening competition or • that the conduct would result, or be likely to result, in a benefit to the public which would outweigh the detriment to the public that would result, or be likely to result, from the conduct. The first limb is not applicable to per se conduct prohibited irrespective of its effect on competition (s 90(8)) –and cartel conduct, secondary boycotts and RPM can be authorised only under the second limb if a net public benefit can be demonstrated. For other conduct either limb can be satisfied. The CCA permits the ACCC to impose specific conditions on an authorisation granted (s 88(3)). The ACCC must publish a draft decision and provide the opportunity for a conference of interested parties before it can make its final decision on whether to grant authorisation (s 90A). Non-merger applications for authorisation must be determined within six months. Interim authorisations may be granted and, in certain circumstances, authorisations granted may be revoked (eg if granted on false or misleading evidence or if there is a material change in circumstances). The applicant or “any other person interested” may apply to the Australian Competition Tribunal for a review of the ACCC’s decision (Pt IX). Examples of contracts, arrangements or understandings that the ACCC is commonly asked to authorise (and noted in ACCC, Guidelines for Authorisation of Conduct (Non- merger) (August 2018)) include: • non-prescribed voluntary industry codes of conduct –for example where provisions of a code impose standards of behaviour on signatories that may reduce competition, require training from specific providers and exclude membership for code breaches; Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-25 03:10:20.
1039
Business and the Law Price is the “central nervous system of the economy”. United States v Socony-Vacuum Oil Co, 310 US 150 (1940) at 226.
• collective bargaining arrangements –where two or more competitors come together to negotiate terms and conditions (which can include price) with a supplier; • agreements to impose industry levies –for example an agreement among industry participants to impose a levy on the sale of particular goods/services, the proceeds of which may then be used to fund relevant research and development or a product stewardship scheme for the proper disposal of environmentally harmful products; • alliances between competitors –for example a supply agreement whereby one party agrees to cease supply of a good/service and to instead purchase that good/service from the other party; and • co-ordination of a logistics chain –for example buyers (eg producers) and sellers (eg terminal operators) cooperate by entering into vertical agreements such as long- term contracts, to provide a level of commitment that provides sufficient certainty to undertake long term, specific investment.
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Notification [23.450] In the case of exclusive dealing, RPM and collective bargaining an administrative procedure – notification –is available. The protection from legal action provided for by the notification of exclusive dealing commences from notification until revoked by the ACCC on the ground that it substantially lessens competition and has no redeeming public benefit (s 93(3)). In the case of per se RPM conduct the notification takes effect 14 days after lodgment until revoked by the ACCC on the ground that any public benefit will not outweigh public detriment (s 93(3A)). Prior to removing protection the ACCC is obliged to “seek such relevant information as it considers reasonable and appropriate” (s 93C3A). While the notification is in force, the business is able to engage in the exclusive dealing conduct as described in the notification without the risk of breaching the Act. Protection ceases 30 days after the ACCC’s decision to remove it. The ACCC’s decision can be reviewed by the Australian Competition Tribunal.
Class exemption While competition cannot be created by statutory enactment, it can in large measure be revived by changing the laws and forbidding the practices that killed it, and by enacting laws that will give it heart and occasion again. We can arrest and prevent monopoly. Woodrow Wilson (1912).
[23.460] As a result of the 2017 Amendments the ACCC now has the power to issue a “class exemption” for business practices that are unlikely to generate competition concerns, or are likely to generate a net public benefit. The Explanatory Memorandum explains that such exemptions “would remove the need to make individual applications by creating ‘safe harbours’ for business and thereby reduce compliance and administration costs and increase certainty”. Under s 95AA the ACCC can create class exemptions where conduct would not have the likely effect of substantially lessening competition or would result in a public benefit to outweigh the detriment that would be likely to result from the duct. In August 2018 the ACCC sought industry views of a potential “class exemption” that would provide eligible small business, agribusinesses and franchisees with legal protection to collectively bargain with customers or suppliers without having to apply to the ACCC.
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Chapter 23 Competition Law
Public benefit [23.470] The CCA does not define what constitutes a public benefit. In Re QCMA [1976] ATPR 40-012 at 17,242, the Trade Practices Tribunal suggested that the term “public benefit” should be given the widest possible reading to include “anything of value to the community generally, any contribution to the aims pursued by society including as one of its principle elements … the achievement of the economic goals of efficiency and progress”. [23.480] In its Authorisation Guidelines 2013, the ACCC lists a number of public benefits recognised in previous Commission and Tribunal cases:
Nothing is illegal if a hundred businessmen decide to do it, and that’s true anywhere in the world. Andrew Young.
• fostering business efficiency, especially when this results in improved international competitiveness; industry rationalisation resulting in more efficient allocation of resources and in lower or contained unit production costs; • expansion of employment or prevention of unemployment in efficient industries or employment growth in particular regions; • promotion of industry cost savings resulting in contained or lower prices at all levels in the supply chain; • promotion of competition in industry; • promotion of equitable dealings in the market;
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• growth in export markets; • development of import replacements; • economic development, for example of natural resources through encouraging exploration, research and capital investment; • assistance to efficient small business, for example guidance on costing and pricing or marketing initiatives which promote competitiveness; • industrial harmony; • improvement in the quality and safety of goods and services and expansion of consumer choice; and • supply of better information to consumers and business to permit informed choices in their dealings. In applications for merger authorisations, the ACCC is directed by s 90(9A) of the CCA to take into account: – a significant increase in the real value of exports; – a significant substitution of domestic products for imported goods; and – all other relevant matters that relate to the international competitiveness of any Australian industry. This list of public benefits does not purport to be comprehensive or exclusive, and the particular circumstances may give rise to other public benefits. The only qualification is that expressed by the Tribunal in Re Rural Traders Co-operative (WA) Ltd [1979] ATPR 40-110 at 18,123, that:
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Business and the Law Before a benefit … can properly be regarded as a benefit … to the public for the purposes of the assessment of public benefit required by s 90(9), it must be seen as a benefit … to the community generally.
Solar Retailer Code of Conduct [23.490] The Australian Competition and Consumer Commission granted reauthorisation to the Clean
Energy Council for its revised Solar Retailer Code of Conduct for five years. The Council represents Australia’s renewable energy and energy efficiency industries. The Code is a voluntary system that solar retailers can sign up to and meet best practice standards that will benefit consumers and the industry. “Ensuring that solar retailers, as well as other industry participants, strive to improve standards of practice is important for consumers as household solar panels are a significant purchase,” ACCC Deputy Chair Delia Rickard said. “Achieving higher standards in the industry will increase consumer confidence, enable consumers to make better decisions and enhance compliance as the industry grows.” The Code enhances consumer protection by requiring ethical sales practices, increases disclosure to consumers about the costs of entering into agreements and reduces safety risk by requiring Code signatories to use accredited installers.
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“The solar panel market is evolving, which has led to different business models emerging. While this could lead to greater confusion for customers, signatories to the Code will be required to provide important information to consumers about the nature of the agreement they are entering into,” Ms Rickard said. ACCC, Media Release MR 184/15 (23 September 2015)
South Australian Councils’ Waste Collection Tender [23.500] The ACCC has granted authorisation to Council Solutions and a group of four Adelaide councils to jointly procure kerbside waste collection services [who are] … authorised to appoint a single provider for kerbside waste collection services to residents in their municipalities. “The ACCC considers that running a joint tender process is likely to improve the four councils’ purchasing power and encourage more competition from suppliers than if each council conducted a separate tender process,” ACCC Commissioner Sarah Court said. “It is common for groups of local councils to jointly procure waste services. The ACCC has authorised many such arrangements across Australia over the years.” “The joint tender process is likely to result in cost savings through encouraging more competitive bids, reducing transaction costs, and other efficiencies. These cost savings can be passed on to Adelaide residents in the form of lower costs or improved services,” Ms Court said. The ACCC considered a great deal of information both for and against the joint tender arrangements. This included strong objections from bodies representing the two national waste companies who currently hold the collection contracts for these councils. “Some suppliers raised concerns that the size of the proposed contract would deter some suppliers from tendering, resulting in a worse deal for ratepayers,” Ms Court said. 1042
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Chapter 23 Competition Law “While there may be some companies that choose not to participate, the larger tender is also likely to attract additional bidders, and overall we consider most of the potential suppliers which would bid if the councils contracted separately are also likely to compete for the joint contract.” “The councils have the experience and incentive to decide whether running a single tender process for a larger volume of work or four smaller, separate tenders, is likely to deliver the best outcomes for their respective communities.” The ACCC also considered the longer term impact of the joint tender on competition for the supply of waste collection services in Adelaide. While the proposed tender will cover around 180,000 rateable properties, unsuccessful suppliers will continue to have other opportunities to provide waste management services in other parts of Adelaide and around Australia. ACCC, Media Release 203/8 (12 October 2018)
Qantas and Emirates Alliance [23.510] The ACCC is granting re-authorisation to an alliance between Qantas Airways Limited (ASX: QAN) and Emirates for a further five years, subject to a condition.
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The global alliance covers Qantas and Emirates’ air passenger and cargo transport operations. The terms of the authorisation granted are largely unchanged from last month’s draft decision. “The continued coordination by Qantas and Emirates of their air passenger and cargo transport operations will likely lead to a range of public benefits such as improved connectivity and loyalty program benefits,” ACCC Commissioner Roger Featherston said. The ACCC has imposed a condition of authorisation to address continuing competition concerns on the Sydney –Christchurch route. “The alliance must report to the ACCC on seats and passengers flown, fares and route profitability on routes between Australia and New Zealand. The condition allows us to set a minimum level of capacity on the Sydney to Christchurch route at any time, if needed,” Mr Featherston said. … The ACCC considers that the alliance is likely to result in a range of public benefits. In particular, the ACCC considers that the alliance is likely to result in significant public benefits through increasing the number of flights and destinations available to Qantas and Emirates customers through their combined networks. … The ACCC also considers that the alliance is likely to result in public benefits through improved connectivity and convenience for customers with itineraries involving flights with both airlines. … The alliance will also provide improved loyalty program benefits for Qantas Frequent Flyer (QFF) and Emirates Skywards program members … The ACCC also considers that the alliance is likely to result in some, smaller, level of public benefit through: • scheduling optimisation; • avoidance of duplicated fixed costs; • stimulation of tourism. ACCC, Media Release (21 March 2018) Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-25 03:10:20.
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Business and the Law
23.5 THE ACCESS TO ESSENTIAL FACILITIES REGIME The access regime It certainly is not the purpose of our competitive system that it should produce a competition which destroys stability in an industry and reduces to poverty all those within it. Its purpose is rather to maintain that degree of competition which induces progress and protects the consumer. If our regulatory laws be at fault they should be revised. H C Hoover (1930).
[23.520]
Professor Allan Fels explained in ACCC Digest 4025 that:
The “access to essential facilities regime” ensures that any party can obtain access to any natural monopoly that is declared to be of national significance. The Australian government has recognised that it is inefficient to have duplication of some services and facilities, such as electricity grids or gas pipelines. These products are natural monopolies. The efficient way to ensure that these services are available for the use of any Australian that needs them is to have one service provider and have other users pay an access fee that can contribute to the initial capital cost in developing the service.
The recommendation of the Hilmer Report that a special legal regime should be established under which firms could be given a right of access to specified “essential facilities” on fair and reasonable terms was given effect by the Competition Policy Reform Act 1995 (Cth), which added Pt IIIA, “Access to Services”, to the then TPA. Part IIIA establishes a national access regime for essential services which, in the words of the ACCC (Access Regime (1995) p 2): introduces a new field of regulatory responsibilities and access rights which will have a significant impact on the provision of services that are critical to competition in related markets.
The term “essential service” is not defined but “service” is defined in s 44B as meaning:
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service provided by means of a facility and includes: (a)
the use of an infrastructure facility such as a road or railway line;
(b)
handling or transporting things such as goods or people;
(c)
a communications service or similar service;
but does not include: (d)
the supply of goods; or
(e)
the use of intellectual property; or
(f)
the use of a production process; except to the extent that it is an integral but subsidiary part of the service.
The term “facility” is not defined.
Existing “effective access regimes” [23.530] The national access regime operates concurrently with existing statutory Commonwealth, State and Territory access regimes (eg the Telecommunications Act 1991 (Cth), which provides for telecommunications access on prescribed terms). Part IIIA of the CCA provides for such access arrangements to be recognised as an “effective access regime” which is then governed by that legislation and not by Pt IIIA (s 44N).
The rationale for the access regime [23.540] The reason for the introduction of the access regime is clearly explained in ACCC, Access Regime (1995) pp 6-7: 1044
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Chapter 23 Competition Law We begin with a statute; it is to be interpreted and enforced by courts of law; necessarily we are in the hands of lawyers. Yet fundamentally the Trade Practices Act (together with its implementation, its interpretation and enforcement) is an instrument of economic policy; its subject matter, anti-competitive conduct of business enterprises within markets, is economic; the very terms used in drafting the statute … employ economic concepts. M Brunt, The Monash Trade Practices Lectures (1975).
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The owners of monopoly or near monopoly “bottleneck” facilities are in a position to charge monopoly prices for their services. Where they are vertically integrated into the competitive upstream or downstream markets they may also have incentives to restrict access to the facilities’ services by competitors in those markets or to offer terms and conditions of access which discriminate against them. Access to the services of a facility covered by Part IIIA means the right of business competing in markets upstream or downstream from the facility to purchase its services (subject to the availability of capacity) on reasonable commercial terms and conditions. In agreeing to the introduction of a national access regime, COAG accepted the conclusion of the Hilmer Report that the introduction of effective competition into potentially competitive markets which required the services of such “bottleneck” monopoly facilities, can be promoted by constraining the ability of the facility owners to exercise their market power by charging excessive or discriminatory prices for their services in those markets. For example, in the absence of such access obligations, the owner of a gas pipeline that also competes in the gas distribution and retailing sectors could restrict access to the pipeline by its downstream competitors to keep final gas prices at monopoly levels. Alternatively it could provide access to the pipeline on terms and conditions that discriminate against its competitors in the distribution sector. However, when rights of access to the services of such a vertically integrated facility are available, potential users of the service can choose whether to buy a bundled service (eg transport and energy) from the facility operator or to purchase separate unbundled services from different suppliers. Thus, access rights can promote competition in the competitive market while constraining the ability of “bottleneck” facility operators to charge excessive or discriminatory prices for their services.
Reference is made at [23.1610] to s 46 of the CCA which prohibits corporations with a substantial degree of market power from engaging in conduct that substantially lessens competition. A corporation which denies competitors access to essential facilities that it monopolises may be interpreted as an example of misusing market power. Under the equivalent provision in the United States (s 2 of the Sherman Act 26 Stat 209, 15 USC §§ 1-7), the courts have developed an essential facilities doctrine, the requirements for which were stated in MCI Communications Corp v American Telephone and Telegraph Co 708 F 2d 1081 (1983), as: (a)
control of the essential facility by a monopolist;
(b)
a competitor’s inability practically or reasonably to duplicate the essential facility;
(c)
the denial of the use of the facility to a competitor; and
(d)
the feasibility of providing the facility.
However, in Queensland Wire Industries Pty Ltd v BHP Ltd [1989] HCA 6, the High Court rejected the notion that s 46 incorporated a doctrine of access to the essential facilities such as had been developed in the United States. A significant factor in the High Court denying the existence of such a doctrine was the understandable reluctance of the courts to determine appropriate terms for, and conditions of, access. The enactment of Pt IIIA sets up appropriate administrative and regulatory arrangements under which such issues can be resolved without expensive and lengthy litigation. The national access regime adopts a light-handed approach to establishing rights of access to the services of the class of facilities covered by Part IIIA. This approach is based on commercial negotiations of access terms and conditions between the parties in the first instance, supported by a requirement that access disputes that cannot be resolved by the parties be arbitrated by the ACCC, having regard to the arbitration criteria set out in Part IIIA.
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1045
Business and the Law In looking at the same set of business facts or at the same actions of business firms, one judge will often reach conclusions about the effect on competition directly or opposite to the conclusion reached by another judge. Agreement amongst economists on such matters is not much greater. The Antitrust Bulletin (1970).
The extent of the access regime [23.550] The Explanatory Memorandum to the 2017 Amendments explains (at 12.2) that: • The Regime provides a regulatory framework for third parties to seek access to nationally significant infrastructure services that are owned and operated by others. • The Regime promotes effective competition in dependent markets. It achieves this by addressing the economic problem of natural monopoly in markets for infrastructure services that face an enduring lack of effective competition. Large, usually sunk, fixed costs and economics of scale, which are typical characteristics of natural monopoly, can serve as impediments to prospective competitors entering the markets. • A provider may have the ability and incentive to deny access to a service, or restrict output and charge monopoly prices, where there is a lack of effective competition in markets for that service. This can reduce economic efficiency where access to the service is required for third parties to compete effectively in dependent (upstream or downstream) markets. As a consequence, transactions that would enhance community wellbeing may not proceed.
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• The Regime provides a means of promoting competition in dependent markets, which rely on a service provided by nationally significant infrastructure to compete effectively. As part of this, the Regime considers if a facility owner is earning a commercial investment return so as not to impair investment incentives.
Hamersley Iron Pty Ltd v National Competition Council [1999] ATPR 41-705 [23.560] Hamersley operated a railway from its five iron ore mines in one region of Western Australian
to its facility at Dampier. Another company, Robe River, wanted to use part of the railway line to carry its ore thus saving time and money by not having to build significant additional railway track of its own. Robe River applied to the NCC for Hamersley’s rail track services to declare it an essential facility under Pt IIIA of the TPA but before the application was assessed Hamersley brought an action arguing that the rail track service was an integral part of its production process and therefore did not constitute a service under Pt IIIA. Kenny J held that the rail service was a production facility and not within the scope of Pt IIIA. Kenny J held (at [43]) that: the use of a production process extends, in my view, not merely to the use of the whole process but also to the use of any operation (or step or procedure) that is integral (and perhaps essential or non-subsidiary) to that process as a whole.
The decision that a 300-km railway line is part of a product process may seem surprising but it has been pointed out (L Gamertsfelder, “Why the Decision in Hamersley Iron Was Not Good Law” (2000) 74 Australian Law Journal 621 at 624) that: Once one takes the time to consider the matter carefully the decision becomes more explicable. For example, oil refineries or a facility used to manufacture motor vehicles will almost certainly fall within the exclusion but this would not cause a ripple of concern because of their localised nature. Indeed, the costs associated with establishing these types of facilities could far outstrip the costs associated with the laying of a 300-km railway line. The key issue is the manner in which a facility is utilised, not its physical dimensions.
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The operation of the access regime Undertakings [23.570] There is also provision for the owner/operator of a facility to enter into an undertaking with the ACCC which sets out the terms and conditions on which third parties will be granted access to the service provided by the facility (CCA, s 44ZZA). In considering whether to accept an undertaking the ACCC may have regard to the matters set out in s 44ZZA(3): (a) the legitimate business interests of the provider; (b) the public interest, including the public interest in having competition in markets (whether or not in Australia); (c) the interests of persons who might want access to the service; (d) whether access to the service is already the subject of an access regime; (e) any other matters that the Commission thinks are relevant.
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Declaration [23.580] If no “effective access regime” exists and no voluntary “undertakings” have been registered by the ACCC, the designated Minister (currently the Federal Treasurer) may make, on the recommendation of the National Competition Council, a declaration that a service is to be subject to the national access regime. (A declaration cannot be made if an undertaking has been accepted by the ACCC; conversely, an undertaking cannot be accepted for a service which is already declared.) Where the facility is owned or operated by a State or Territory authority and that State or Territory is a fully participating jurisdiction, the designated minister will be the responsible State or Territory Minister. Section 44H(4) of the CCA provides that the Minister cannot declare a service unless satisfied of all of the following four criteria: • whether access (or increased access) on reasonable terms and conditions as a result of the declaration would promote a material increase in competition;
The Treasury could not, with any marked success, run a fish and chip shop. Harold Wilson (British Prime Minister).
• whether total foreseeable market demand could be met by the facility over the declaration period at least cost when compared with two or more facilities; • whether the facility is of national significance, having regard to its size, importance to trade or commerce and to the national economy; • whether access (or increased access) would promote the public interest. The Minister’s decision is subject to appeal to the Australian Competition Tribunal.
Arbitration [23.590] Once a service has been declared, the owner/operator and the third party may negotiate for the terms and conditions for access. If the parties cannot reach agreement, the dispute may be referred to private arbitration and the resulting contract registered with the ACCC on it being satisfied that the agreement takes account of all relevant interests. If the parties do not agree to private arbitration, the dispute is referred to the ACCC to
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determine whether, and on what terms and conditions, access should be provided. Much of Pt IIIA of the CCA deals with Commission arbitrations. Under s 44X, the Commission must take the following matters into account: (a) the legitimate business interests of the provider, and the provider’s investment in the facility; (b) the public interest, including the public interest in having competition in markets (whether or not in Australia); (c) the interests of all persons who have rights to use the service; (d) the direct costs of providing access to the services; (e) the value to the provider of extensions whose cost is borne by someone else; (ea) the value to the provider of interconnections to the facility whose cost is borne by someone else; (f)
the operational and technical requirements necessary for the safe and reliable operation of the facility;
(g) the economically efficient operation of the facility; (h) the pricing principles specified in section 44ZZCA.
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The ACCC has extremely wide powers including requiring the provider to extend the facility at the third party’s expense. The ACCC’s decision may be reviewed by the Australian Competition Tribunal and there is an appeal to the Federal Court on questions of law.
Enforcement [23.600] Undertakings and determinations can be enforced by the Federal Court which has the power to make orders for injunctions, specific performance and compensation for losses.
23.6 ADMINISTRATION AND ENFORCEMENT Administration [23.610] Administration of the CCA is primarily the responsibility of one of Australia’s most powerful regulatory bodies, the ACCC.
Australian Competition and Consumer Commission (ACCC) I really question the need for a TPC at all. If the people get fat and lazy it opens the way for competition. D Fawcett, Business Review Weekly (17 January 1994).
[23.620] In 1995, following the enactment of the Competition Policy Reform Act 1995 (Cth), the Trade Practices Commission (the body previously entrusted with the administration of the TPA) was merged with the Prices Surveillance Authority (the body previously entrusted with the administration of the Prices Surveillance Act 1983 (Cth)) to form the ACCC. The establishment and functions of the ACCC are set out in Pt II of the CCA (and, in relation to prices surveillance, under s 17 of the Prices Surveillance Act). The ACCC is the only nationally operating agency dealing generally with competition matters and the only agency with responsibility for enforcement of the CCA and the State/Territory application legislation.
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Chapter 23 Competition Law
In addition to its enforcement role in ensuring compliance with Pt IV the ACCC is also responsible for determining applications by businesses for exemption from the restrictive trade practices provisions under the authorisation and notification provisions of Pt VII which require the Commission to be satisfied that the public benefit flowing from the conduct outweighs its anti-competitive detriment. It also has further functions conferred by s 28 in relation to the dissemination of information, law reform and research.
Australian Competition Tribunal [23.630] The Australian Competition Tribunal replaced the Trade Practices Tribunal from 1995. It is constituted under Pt III of the CCA to review ACCC decisions in relation to authorisations and notifications. It is presided over by a Federal Court judge and its members are appointed from a wide variety of backgrounds because of their knowledge of or experience in industry, commerce, economics, law or public administration. The Australian Competition Tribunal also hears appeals from decisions of the Minister or the National Competition Council (NCC) in access matters.
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National Competition Council [23.640] The National Competition Council was established by the 1995 Amendments to make recommendations on access declarations under the new Pt IIIA of the CCA “Access to Services” regime and to oversee the implementation of competitive policy by State/ Territory Government businesses, and to review the Competition Principles Agreement which establishes the national competition policy.
Federal Court [23.650] Jurisdiction with respect to restrictive trade practices matters under Pt IV of the CCA is conferred on the Federal Court or, within its jurisdictional limit, the Federal Circuit Court (s 86). If Pt IV issues are raised in State or Territory court proceedings the matter may be transferred to the Federal Court. A defence based on Pt IV may be raised in a State or Territory court proceeding in relation, for example, to a contract dispute.
Enforcement Public and private enforcement [23.660] Enforcement of the restrictive trade practices provisions of Pt IV of the CCA by the ACCC is supplemented by the availability of private actions. A large proportion of Pt IV actions are brought by the private sector and this facility obviously significantly strengthens the enforcement of the Act. An infringer may indeed face action brought by both the ACCC and private applicants. For example, in ACCC v Visy Industries Pty Ltd (No 3) [2007] FCA 1617 the Federal Court imposed a then record penalty of $36 million on Visy Industries for price fixing. (The case is discussed at [23.930].) Visy then faced civil actions for damages from companies who alleged they suffered loss or damage as a result of paying inflated prices because of the price fixing.
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Private actions [23.670] Private actions can be brought in the Federal Court for: • damages (CCA, s 82); • “such orders … as [the court] thinks appropriate” to compensate for, or prevent, loss or damage (s 87); • injunctions (except in the case of mergers offending s 50) (s 80); • divestiture orders (in the case of mergers offending s 50) (s 81); and
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• declarations (s 163A). Private actions account for the majority of the litigation under the Act. Their efficacy has been enhanced by the introduction in 1991 of “grouped proceedings” or “class actions” by the Federal Court of Australia Amendment Act 1991 (Cth) where claims are in respect of or arise out of the same, similar or related circumstances and the claims give rise to a “substantial common issue of law or fact” (s 33C(1)(c)).
Given the nature of the Competition and Consumer Act and our regulatory system, the ACCC needs to be an active regulator, taking strong enforcement action, and to be seen as such. This has a crucial multiplier effect. We also need to explain our role, and the logic underpinning our Act, so that Australians have faith that a market economy works for them. ACCC Chairman, Rod Sims.
Private actions have been facilitated by the amendment of s 83 which now provides that a party bringing certain actions (including an action for damages under s 82) may rely on both admissions of fact and findings of fact made in certain other proceedings (such as an action by the ACCC seeking a pecuniary penalty or an injunction under ss 77 and 80, respectively). This amendment is particularly significant in relation to private cartel actions brought by the victims of price fixing that may follow admitted contraventions. It should be noted that the ACCC’s Immunity Policy (see [23.890]) does not grant immunity in relation to private actions for damages.
ACCC action [23.680] ACCC actions can be brought in the Federal Court for: • criminal penalties for cartel conduct (CCA, s 79).(Criminal offences are prosecuted not by the ACCC but by the Commonwealth Director of Public Prosecutions); • pecuniary penalties (s 76); • injunctions (s 80); • divestiture orders (in the case of mergers offending s 50) (s 81); • non-punitive orders –community service orders, probation orders, disclosure orders and corrective advertising orders (s 86C); • punitive orders –adverse publicity orders (s 86D); • disqualification orders –order disqualifying a person from managing a corporation (s 86E); • enforcement of written undertakings (s 87B); and • declarations (s 163A). The ACCC’s enforcement options were widened considerably in 1992 by the power granted to the Federal Court under s 87B of the TPA to enforce written undertakings concerning conduct given by a person to the ACCC discussed in detail at 21.7. Section 87B provides the ACCC with an efficient and flexible procedure to deal with appropriate 1050
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cases administratively rather than through pursuing court action for pecuniary penalties, injunctions, divestiture orders or declarations. The ACCC’s enforcement options were further increased in 2001 with the ACCC being given the power to bring representative actions to recover damages for those who have suffered loss or damage as a result of conduct breaching Pt IV other than the secondary boycott provision. The ACCC’s enforcement priorities and the relevant considerations in choosing between litigation or an administrative solution is also discussed at 21.6. In investigating possible breaches of Pt IV the ACCC has wide powers to obtain information, documents and evidence under s 155, but the ACCC’s power to conduct “dawn raids” and enter premises to search for documents has been curtailed through amendments reflecting the Dawson Committee’s recommendation that the ACCC has to seek a magisterial warrant before entering premises to inspect documents. The proposed amendments also provide that an individual is not excused from answering a question or producing material on the grounds of self-incrimination or that to do so would render the individual subject to a pecuniary penalty. The ACCC’s argument for it being granted the power to issue “cease and desist” orders was recommended by the Senate Inquiry but not by the Dawson Committee which doubted that such a procedure would be speedier or more efficient than obtaining interim injunctions from the Court.
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Remedies
When you’re doing $30 million a year and stand to gain $3 million by fixing prices, a $30,000 fine doesn’t mean much … Face it, most of us would be willing to spend 30 days in gaol to make a few extra million dollars. Maybe if I were facing a year or more, I would think twice. Business Week (June 1975).
[23.690] The civil remedies that a court can order and the administrative remedy of enforceable undertakings available to the ACCC under s 87B of the CCA are discussed in relation to the consumer protection provisions in Chapter 18. If a defendant cannot pay both a fine and victim compensation the court must give preference to compensation (s 79B).
Pecuniary penalties [23.700] Section 78 of the CCA provides that contravention of Pt IV, other than contravention of the cartel provision, does not give rise to criminal proceedings. Although a pecuniary penalty under s 76 of CCA resembles a criminal fine, it is a civil penalty with the consequence that it attracts the civil standard of proof (on a balance of probabilities) rather than the criminal standard (beyond reasonable doubt). Criminal penalties can nevertheless be imposed for cartel conduct (see [23.770]). Pecuniary penalties can be ordered if a person has contravened or attempted to contravene Pt IV (s 76(1)). The former Chairman of the ACCC, Professor Allan Fels, has warned (Australian Financial Review (24 October 1995)) that: Price fixing behaviour does not have to be successful to be in breach of the Act. Anyone who attempts to induce a competitor to fix, control or maintain prices runs the risk of penalty and injunction proceedings.
[23.710] The pecuniary penalties were significantly increased in 1992. The maximum penalty for contravention by a body corporate of a provision of Pt IV of the CCA other than the secondary boycott provisions was increased 40-fold –from $250,000 to $10 million –on Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-25 03:10:20.
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the basis that “the deterrent value of the penalties no longer reflected the seriousness with which the government and the community viewed corporate misbehaviour” and was insufficient to counterbalance the profits derived from anti-competitive activity in contravention of Pt IV. This philosophy was further applied in the 2007 Amendments (s 76(1A), which increased pecuniary penalties for breaches (other than secondary boycotts) to the greatest of: • $10 million; • three times the value of the benefit directly or indirectly attributable to the act or omission; or • where the benefit cannot be valued, 10% of the turnover of the company in the 12 months preceding the act or omission. The highest pecuniary penalty to date has been $46 million –imposed on a Japanese corporation, Yazaki, in respect of anti-competitive cartel conduct in the supply of wire harnesses used in the production of the Toyota Camry (ACCC v Yazaki Corporation [2018] FACFA 73).
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Holding Redlich (11 April 2018)
[23.720] While Australia’s competition law
system is highly advanced and accords with international practice, it has some differences with other comparable jurisdictions. One notable difference is the method for applying sanctions. In most jurisdictions, pecuniary penalties are set by reference to a detailed and publically available methodology that focuses on the size of the infringing company, the economic impact of the company’s conduct and the seriousness and duration of the infringement. In contrast, pecuniary penalties in Australia are determined by the court exercising a discretionary judgment, which synthesises all factors and principles relevant to a particular case in a process of “instinctive synthesis”. In 2017, the Organisation for Economic Co- operation and Development (OECD) was tasked to undertake a study of how Australia compares internationally in its sanctioning practices for breaches of competition law, particularly regarding the imposition of pecuniary penalties. The
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OECD’s report, “Pecuniary Penalties for Competition Law Infringements in Australia” (Report), released on 26 March 2018, found two main differences between Australia and other comparable jurisdictions. Firstly, both the maximum and average pecuniary penalties imposed by Australian courts for breaches of competition law are substantially lower than those imposed in other comparable jurisdictions, particularly for large companies or for anti-competitive conduct that has lasted a long time. Secondly, Australia does not follow a structured methodology for the determination of pecuniary penalties. … The Report’s findings and recommendations The significant difference in the amount of pecuniary penalties in Australia and the other OECD jurisdictions used for comparative purposes (the European Union, Germany, Japan, Korea, the United Kingdom and the United States) was revealed by analysing a sample of five
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Chapter 23 Competition Law
major Australian cartel cases up to November 2017. By comparing the penalties imposed by Australian courts against the penalty that would have resulted from the fines regime in the other comparator jurisdictions, the Report found that the average pecuniary penalty in Australia was $25.4 million, whilst the average base penalty in the comparator jurisdictions for the same conduct would have been $320.4 million. This means that the average Australian penalty would have to increase by a factor of 12.6 times to reach the level of the average pecuniary penalty that applies in the comparator jurisdictions.
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The Report found that whilst penalties for breaches of competition laws had significantly increased around the developed world, that was not the case in Australia. Australia had lower pecuniary penalties despite its competition law allowing for pecuniary penalties at the same, if not higher, level than in the comparator jurisdictions. Prior to 2007, Australian courts only had the power to impose pecuniary penalties on companies up to a maximum of $10 million per contravention. Following legislative reforms, it was possible for the court to impose higher pecuniary penalties and, in 2009, criminal sanctions were introduced for cartel offences. Australia’s maximum pecuniary penalties are currently set at the greater of $10 million, three times the gain derived from the illegal conduct or 10% of annual turnover in the 12 months preceding the year in which the breach occurred. The largest collusion pecuniary penalty in Australia to date, $36 million, was imposed by the Federal Court against the packaging company Visy in 2007 as a result of a cartel it conducted with Amcor. Some other significant pecuniary penalties include Colgate Palmolive ($18 million), Woolworths ($9 million), Cement Australia ($18.6 million) and Cabcharge ($15 million). Most recently, on 4 April 2018, the Full Federal Court ordered Flight Centre to pay pecuniary penalties totalling $12.5 million for attempting to induce three international airlines to enter into price
fixing arrangements between 2005 and 2009. Those pecuniary penalties compare with the US$2.7 billion the European Union imposed on Google’s parent company, Alphabet, in 2017, the US$925 million penalty imposed on Citicorp in the United States in 2017, and the US$109.4 million the United Kingdom regulators imposed on Pfizer in 2016. The Report observed that the significant shortfall in Australian penalties was partly due to the residual effects of the pre-2007 statutory regime which, as referred to above had, set a maximum penalty amount but did not take into account the size of the infringing company’s conduct and accordingly resulted in proportionally low penalties being imposed on large companies. The Report found that even after the 2007 legislative reforms, this did not result in any significant uplift in the pecuniary penalties being imposed, as subsequent court judgments merely followed the pre- 2007 precedent. The Report recommended that the pecuniary penalty imposed on larger companies should be proportionally larger than those imposed on small or medium sized companies for the same or similar conduct. The Report indicated that the ACCC may not have given sufficient weight to this factor in making its submissions on penalties to the courts. … The ACCC’s response Following the release of the Report, the ACCC has indicated that it will now seek to pursue higher pecuniary penalties to address the disparity between Australia and other OECD jurisdictions and, in doing so, improve the deterrent value of sanctions imposed for breaches of Australia’s competition law. As deterrence is the principal consideration for imposing pecuniary penalties, the ACCC considers that the ability of current penalty levels in Australia to deter similar future conduct is compromised. … [The] Chairman of the ACCC, Mr Rod Sims elaborated on the ACCC’s response to the Report, noting that Australia’s current pecuniary penalty
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regime is too low to be a serious deterrent for big businesses and that penalties for breaches of Australia’s competition law cannot be simply be “an acceptable cost of doing business in Australia”, but must be “large enough to be noticed by senior management and company boards, and also shareholders. That is certainly not the case now”. Unlike the OECD jurisdictions considered in the Report, in Australia it is up to the courts, not the ACCC, to impose penalties for competition law breaches, “although the ACCC has a role in making submissions to the court as to the appropriate penalty”. Mr Sims acknowledged that the ACCC may not have pursued tough penalties with enough vigour, stating that “we acknowledge the OECD’s comment that in the past we may not have given the size of the contravening corporation sufficient weight in our penalty submissions to the court”.
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There is evidence that the ACCC’s practice of negotiating penalties with companies who have
breached the competition law may have resulted in penalties that were too low. For example, in ACCC v Australia and New Zealand Banking Group Limited [2016] FCA 1516, a cartel case where the Federal Court ordered penalties of $9 million against ANZ and $6 million against Macquarie, Justice Wigney observed that the agreed penalties were at the very bottom of the range of appropriate penalties and that he would have ordered a much higher penalty had there been no agreed penalty. The ANZ was found to have engaged in 10 incidents of collusion and, in the same year had made $8 billion profit. Mr Sims warned that the ACCC will now “have to be a little less likely to settle cases unless we get appropriate penalties” and that the ACCC would now begin pursuing penalties in the hundreds of millions in the case of the largest companies, closer to the maximum of 10% turnover. …
[23.730] The relevant principles to be applied in assessing the appropriate penalty were summarised by French J in TPC v CSR Ltd [1990] FCA 521 at [40]: The principle, and I think probably the only, object of the penalties imposed by s 76 is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravenor and by others who might be tempted to contravene the Act. It is rather naive to think a business will dob itself in. Australian Consumers Association’s Robert Drake, Business Review Weekly (15 August 1994).
The assessment of a penalty of appropriate deterrent value will have regard to a number of factors: (a)
the nature and extent of the contravening conduct;
(b)
the amount of loss or damage caused;
(c)
the circumstances in which the conduct took place;
(d)
the size of the contravening company;
(e)
the degree of power it has, as evidenced by its market share and ease of entry into the market;
(f)
the deliberateness of the contravention and the period over which it extended;
(g)
whether the contravention arose out of the conduct of senior management or at a lower level;
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Chapter 23 Competition Law
(h)
whether the company has a corporate culture conducive to compliance with the Act, as evidenced by educational programmes and disciplinary or other corrective measures in response to an acknowledged contravention; and
(i)
whether the company has shown a disposition to cooperate with the authorities responsible for the enforcement of the Act in relation to the contravention.
In ACCC v Alstom Australia Limited (unreported, MR 78/01, 6 April 2001) Finkelstein J, in imposing pecuniary penalties for price fixing and market sharing of $7 million (the company) and $150,000 (its managing director), observed that: If general deterrence is the principal object of imposing a penalty, the number of cases that still come before the court, and the seriousness of the conduct that is involved in some of them, suggests that past penalties are not achieving that object. For a penalty to have the desired effect, it must be imposed at a meaningful level. Most antitrust violations are profitable. Accordingly, the penalty must be at a level that a potentially-offending corporation will see as eliminating any prospect of gain.
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Primary and secondary liability: Liability of directors, officers and employees [23.740] The restrictive trade practices net is spread widely. Companies are responsible for the conduct and state of mind of their employees (CCA, s 84) but employees may also be personally liable for pecuniary penalties. Section 76 provides that a penalty (not exceeding $500,000 in the case of an individual) may be imposed not only on a person who has contravened or attempted to contravene a provision of Pt IV but also on a person who: • has aided, abetted, counselled or procured a person to contravene such a provision; • has induced, or attempted to induce, a person, whether by threats or promises or otherwise, to contravene such a provision; • has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of such a provision; or
The competition that is the main objective of the Act needs to be understood in its Australian context. It is not textbook competition that we haven’t got and are unlikely to get. It is the real competition that exists and the potential competition that is attainable in Australia having regard to structure, technology and market size and often it will have to be the competition of the few. TPC, First Annual Report (30 June 1975).
• has conspired with others to contravene such a provision. Personal liability for “aiding and abetting” a contravention requires proof that the individual was aware or ought to have been aware of the facts that gave rise to the contravention, although proof of intent is not required (Yorke v Lucas [1985] HCA 65). Under the Corporations Act (s 119A) corporations are prohibited from indemnifying their officers where they do not act in good faith. The CCA widens this prohibition substantially. Bodies corporate are not be able to indemnify their officers, employees or agents against liability to pay pecuniary penalties for breaches of Pt IV of the Act (ie the competition law provisions), or legal costs in defending or resisting proceedings in which they are found to have such a liability (s 77A). Such provisions are void and constitute an offence by the corporation. The effect of this is a corporation can only indemnify its officers when the officer wins the proceedings. However, ACCC investigations which may lead to “proceedings” being taken are not within the prohibition and may be indemnified.
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IN CONTEXT
Liability of solicitors [23.750] In 1999 the ACCC was successful in proceedings against a Perth solicitor over
his involvement in a real estate auction program that contravened the exclusive dealing provisions of s 47 of the TPA. The ACCC’s Media Release 54/99 notes that by consent, the Federal Court has declared that the solicitor, Mr David Miller, a partner in a Perth law firm, Knott Gunning: • aided, abetted, counselled or procured Sure Sales Systems to breach the prohibition contained in s 47 of the TPA against third-line forcing; and • was directly, or indirectly, knowingly concerned in or a party to that contravention. The ACCC alleged that Sure Sales Systems offered services to vendors in Western Australia on condition that the vendors acquired services from nominated third parties, including settlement services from Knott Gunning. The ACCC had also alleged that Mr Miller, who was the legal adviser to Sure Sales Systems, had prepared the standard contracts for use with the system and had provided advice on promotional material which had been distributed to the public.
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The ACCC’s media release notes that: The action taken by the ACCC in this case serves as a warning to all professionals, including members of the legal profession, of the obligations imposed on them by the Act, and the potential consequences of non-compliance with the Act. The ACCC will not hesitate to take action against any party it considers to have been involved in a contravention of the Act.
PART 2 RESTRICTIVE TRADE PRACTICES 23.7 CARTEL CONDUCT [23.760] Firms that do not individually possess market power can acquire it through collective arrangements. Over 200 years ago the Scottish economist Adam Smith wrote (in The Wealth of Nations (1776)) that: People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices. I should regret to find that the law was powerless to enforce the most elementary principles of commercial morality. Reddaway v Banham [1896] AC 199 at 209 per Lord Herschell.
The reality of human nature referred to by Adam Smith has an obvious capacity to subvert the competitive process and it is not surprising that provisions directed at horizontal restraints (collusive arrangements among competitors at the same functional level of the market about how they will compete or refrain from competing with each other) are contained in the CCA. The most egregious violations of competition law –often described as “cancers to the open market economy” (R V Miller, Miller’s Australian Competition and Consumer Law
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Chapter 23 Competition Law
Annotated (37th ed, Thomson Reuters, 2015)) –are cartel conduct, which is explained by the ACCC in these terms: Competition between businesses in the marketplace benefits consumers by giving them price alternatives and a wider range of goods and services. It benefits businesses by encouraging them to innovate and improve efficiency. This results in advantages for consumers, businesses and society as a whole. When businesses agree to act together instead of competing against one another, they are engaging in cartel conduct. The whole point of this conduct is to sell goods or services at higher prices than those which may be available to consumers in a competitive market. Restrictive practices and cartel behaviour cause harm to consumers and have serious consequences for the businesses involved. Consumers have a restricted choice in price, quality and service; they pay higher prices and innovation and efficiency are suppressed. Businesses involved risk significant penalties and legal costs and loss of business reputation and market share. In addition a cartel may have the effect of putting honest and well-run firms out of business.
The cartel provisions [23.770] Section 45AA of the CCA provides a simplified outline of the cartel provisions which are set out in the following 20 sections of Div 1 of Pt IV: • This Division sets out parallel offences and civil penalty provisions relating to cartel conduct. • A corporation must not make, or give effect to, a contract, arrangement or understanding that contains a cartel provision.
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• A cartel provision is a provision relating to: (a) price-fixing; or (b) restricting outputs in the production and supply chain; or (c) allocating customers, suppliers or territories; or (d) bid-rigging; by parties that are, or would otherwise be, in competition with each other.
While arrangements in relation to sharing markets rigging bids and controlling output require the requisite purpose to amount to a cartel provision, for price fixing it is sufficient if that is the purpose or effect (s 45AD). Price fixing is illegal per se. Arrangements solely between related bodies corporate are not caught (s 45AN). Special provision is made for joint ventures established for genuine commercial purposes which may be exempt from criminal and civil proceedings in respect of joint production, acquisition and supply arrangements (ss 45AO, 45AP). The cartel provisions apply only in respect of conduct that occurs in trade or commerce in Australia or between Australia and places outside Australia. The ACCC can grant an exemption from the cartel prohibitions by way of authorisation (see [23.440]). The seriousness with which cartel conduct is treated is expressed in the penalty provisions. In addition to the offending corporation being subjected to heavy maximum civil pecuniary penalties and criminal fines (the greater of $10 million or three times the total value of the benefits attributable to the conduct or 10% of the annual turnover over the preceding 12 months) individuals guilty of cartel conduct face criminal or civil penalties including:
Cartels are a cancer on our economy. Their price fixing, bid rigging and market sharing are a silent extortion that in many instances do far more damage to our economy, to business, and to consumers, than many of the worst consumer scams. Graeme Samuel, Former ACCC Chair.
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• up to 10 years imprisonment and/or fines of up to $420,000 per criminal cartel offences (s 79) • a pecuniary penalty of up to $500,000 per civil contravention. The first successful criminal prosecution of cartel conduct in Australia was of a Japanese shipping company in respect of its giving effect to pricing arrangements with other shipping lines relating to the transportation of motor vehicles to Australia. A fine of $25 million was imposed (Commonwealth DPP v Nippon Yusen Kabushiki Kaisha [2017] FCA 876). It is illegal for a corporation to indemnify its officers against legal costs and any financial penalty (s 77A). Orders disqualifying the individual from managing a corporation (s 86E) and community service orders (s 86C) may be made.
IN CONTEXT
The case for criminalising cartel conduct
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[23.780] The case for criminalising cartel conduct was cogently made by Heerey J in ACCC v Visy Industries Pty Ltd (No 3) [2007] FCA 1617 at [306]-[311]: Cartel behaviour of the kind with which this case is concerned is extremely destructive of the competition on which the prosperity of a free market economy depends. Often the profits can be immense, and the risk of detection slight. Of its nature, cartel behaviour is likely to occur in secret and between parties who seek mutual benefit. In the present case, detection occurred purely by chance when Amcor’s solicitors, in the course of quite unrelated litigation, stumbled across incriminating material. Even then the present resolution may not have been reached were it not for two additional factors. First, the Commission’s immunity policy and, secondly, the fact that there were not only witnesses prepared to give evidence, but also tape recordings of damning conversations. The progressive increase in the maximum penalties mentioned above shows how gravely the legislature regards this kind of conduct. Price fixing and market sharing are not offences committed by accident, or in a fit of passion. The law, and the way it is enforced, should convey to those disposed to engage in cartel behaviour that the consequences of discovery are likely to outweigh the benefits, and by a large margin. Critical to any anti-cartel regime is the level of penalty for individual contravenors. We tend to overlook the fact that corporations are constructs of the law; they only exist and possess rights and liabilities as a consequence of the law. Heavy penalties are indeed appropriate for corporations, but it is only individuals who can engage in the conduct which enables corporations to fix prices and share markets. Many countries with free market economies have recognised this reality by enacting laws which make cartel conduct by individuals subject to criminal sanctions, including imprisonment. In the United States this happened as long ago as 1890 with the Sherman Act 15 USC. More recently, as shown by the Organisation for Economic Co-operation and Development report Hard Core Cartels –Third Report on the Implementation of the 1988 Recommendation, Paris, 2006, the following countries have laws providing for terms of imprisonment for cartel conduct: Canada, France, Germany, Ireland, Israel, Japan, South Korea, Mexico, Norway, Slovak Republic and the United Kingdom.
Perfect competition is a theoretical concept like the Euclidean line, which has no width and no depth. Just as we’ve never seen that line there has never been truly free enterprise. Milton Friedman.
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Chapter 23 Competition Law
IN CONTEXT
The joint venture exception [23.790] The joint venture exception to the cartel provisions has been broadened by the
No one attending the gatherings was so stupid he didn’t know the meetings were in violation of the law. But it is the only way a business can be run. It is free enterprise. E F Loock, President, Allen-Bradley Corp, quoted in Fuller, The Gentlemen Conspirators: The Story of the Price Fixers in the Electrical Industry (Grove Press, 1962).
2017 Amendments to reflect the Harper Report’s view that too restrictive provisions may have the effect of limiting legitimate commercial transactions and increasing business compliance costs. The amended joint venture exception now applies to arrangements and understandings –and not only contracts –containing cartel provisions (recognising that not all features of a joint venture will be contained in a formal written agreement) and applies to joint ventures for the production, supply or acquisition of goods or services. However the exemption applies only to cartel provisions that are both for the purposes of the joint venture and are reasonably necessary for undertaking the joint venture, and to joint ventures that are not carried out for the purpose of substantially lessening competition. The exception is confined to ventures established for genuine commercial purposes. The exception simply places joint ventures beyond the reach of the cartel provisions but s 45 continues to catch joint venture arrangements that have the purpose, effect or likely effect of substantially lessening competition.
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Contract, arrangement or understanding [23.800] A key concept in relation to the cartel provisions is that of the contract, arrangement or understanding that enshrines the activity. It is the making, or giving effect to, of a contract or arrangement or the arriving at an understanding, containing a cartel provision which breaches the CCA. Given that cartel conduct is usually covert rather than overt it is usually enshrined in an “arrangement” or an “understanding” –rather than a contract (which is defined in s 4 to include a “covenant” to catch restrictions attached to land which may be binding on parties beyond the original parties to the contract). While the meaning of “contract” presents no difficulty the concepts of “arrangement” and “understanding” do. Conduct that may not amount to an arrangement or understanding may nevertheless constitute a “concerted practice” prohibited under s 45(1)(c) introduced in 2017 (see [23.1040]).
The nature of an arrangement or understanding [23.810] The terms “arrangement” and “understanding” clearly describe something less than a binding agreement although a great deal of judicial energy has been expended in laying down a precise definition. In TPC v Email [1980] FCA 86, Lockhart J held that: For there to be an arrangement or an understanding there must be a meeting of the minds of those said to be parties to the arrangement or understanding … There must be a consensus as to what is to be done and not just a mere hope as to what might be done or happen. Independently held beliefs are not enough.
In relation to an arrangement it was held in TPC v Nicholas Enterprises [1979] FCA 51 that … when each of two or more parties intentionally arouses in the others an expectation that he will act in a certain way, it seems to me that he incurs at least a moral obligation to do so. Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-25 03:10:20.
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In relation to an understanding it was held in Top Performance Motors Pty Ltd v Ira Berk (Queensland) Pty Ltd [1975] ATPR 40-004 that:
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An understanding must involve the meeting of two or more minds. Where the minds are at one that a proposed transaction between them proceeds on the basis of the maintenance of a particular state of affairs or the adoption of a particular course of conduct, it would seem that there would be an understanding.
“The ACCC is considering cases where algorithms are deployed as a tool to facilitate conduct which may contravene Australian competition law. In Australia, we take the view that you cannot avoid liability by saying ‘My robot did it’.” Rod Sims (November 2017).
The difficulty is to translate these general features into a statement of the necessary elements. The case law clearly establishes that there is a necessity for each of the parties to have communicated with the other and for each to have raised an expectation in the mind of the other. However, there is judicial disagreement on whether there is also the necessity for an element of mutual commitment between the parties such that each has “accepted an obligation qua the other” (TPC v Nicholas Enterprises Pty Ltd [1979] FCA 51 per Fisher J at [18]). In the appeal in that case (reported as Morphett Arms Hotel Pty Ltd v TPC [1980] FCA 62), the Full Federal Court in a judgment delivered by Bowen CJ commented that there could be an arrangement or understanding between two or more persons “restricted to the conduct which one of them will pursue without any element of mutual obligation, insofar as the other party or parties to the understanding are concerned”. This was clearly obiter dicta, Bowen CJ noting that it was not necessary to reach or express any final view on this question. The correctness of this proposition –that mutuality of obligation is not required for there to be a relevant understanding or arrangement –has itself been questioned by the Full Federal Court in TPC v Service Station Association Ltd [1993] FCA 405, the facts of which are given in [23.960]. Spender and Lee JJ commented (at [91]) that: It is difficult to envisage circumstances where there would be an understanding within s 45 … involving a commitment by one party as to the way it should behave, without some reciprocal obligation by the other party.
However, this statement was qualified, the court noting that “the question of whether it is necessary that there be an element of mutual commitment before s 45 can have application is not one which, in the circumstances of this case, it is necessary to decide” (at [124]).
Apco Service Stations Pty Ltd v ACCC [2005] FCAFC 161 [23.820] The trial judge found that a number of petrol suppliers in Ballarat had fixed petrol prices. It was
held that an understanding in relation to price fixing was something less than a binding contract or arrangement and that it was established as circumstantial evidence consisting of records of telephone calls between the service station operators matched against sharp price increases. The judge held that the purpose of the calls was to influence price fixing behaviour –that communicating the size and timing of price rises aroused expectations that those called would engage in the same behaviour. It was held that a “meeting of the minds” can be implied from a firm receiving pricing information where the firm is aware of the purpose of the information and acts consistently with it. 1060
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Chapter 23 Competition Law On appeal the Full Federal Court held that a mere hope or expectation falls short of an understanding. One party must assume an obligation or give an assurance or an undertaking that it will act in a certain way: The ACCC’s case against all respondents depended heavily on circumstantial evidence of the coincidence of telephone conversations between the parties and sharp price increases. This provided a powerful case against the initiating respondents. However, in the case of Apco it rather pointed the other way. For example, in the case of the other respondents, there was a marked increase in telephone traffic on price-increase days. As has already been mentioned however, with Apco there was, if anything a slight decrease. Thus, the circumstantial evidence was consistent with the finding that Apco and Anderson [Apco’s managing director] were not committed to increasing prices and Anderson made decisions whether or not to increase prices on the basis of his assessment of the market.
ACCC v Leahy Petroleum Pty Ltd [2007] FCA 794 [23.830] On similar facts to the Apco case the Federal Court held that without some commitment or moral obligation to increase prices a mere expectation that a person will act in a particular way is insufficient to establish an arrangement. The parties admitted making regular calls to each other and discussing prices but this conduct alone was held to be insufficient to establish a commitment between Geelong petrol retailers to increase their prices. As summarised in the headnote (ACCC v Leahy Petroleum Pty Ltd [2007] ATPR 42-162): The circumstantial evidence was too equivocal to override the direct oral evidence on lack of commitment:
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• There were other reasons why the participants would be regularly speaking to each other. • There were many examples of cases in which price rises did not eventuate following a cycle of telephone calls. • There were a significant number of occasions when competitors increased their prices in the absence of any circumstantial evidence that they were implementing any arrangement or understanding. • There were other relevant events, such as price changes elsewhere in Geelong or in Melbourne, that accompanied many of the alleged instances of pricefixing. • Contrary to the ACCC’s submissions, the price cycle for petrol in Geelong would have existed regardless of any price fixing agreement. • Information about prices was also conveyed by the use of display boards, and the public display of board prices by all or most competitors would ensure a high degree of uniformity for prices in any event.
Proving arrangements and understandings by direct evidence [23.840] A more difficult question concerns the evidence necessary to prove the existence of the arrangement or understanding. Direct and unequivocal evidence will rarely be available although potential conspirators would be unwise to ignore the wide powers granted to the ACCC under s 155 of the CCA to obtain information. Whistleblowing is becoming a more common feature of commercial and public life and the ACCC, like the other regulatory monoliths (the Australian Taxation Office and the Australian Securities and Investments Commission), is not infrequently alerted to evidence of misbehaviour by tip-offs. Professor Warren Pengilley, speaking from his
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The usual trade and commerce is cheating all round by consent. T Fuller, Gnomologia: Adagies and Proverbs (1732).
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experience on the Trade Practices Commission (“Price fixing policies: The legal minefield” (The Australian Accountant, April 1985) at 36), confirms that: employees are frequently prepared to “rat” in appropriate circumstances –especially if they are now superannuated and immune from any action by the company involved. Secretaries who have a falling-out with their bosses are equally prepared to turn evidence over. All of these employees have, or have had, access to photocopying machines and sometimes the evidence is quite damning.
IN CONTEXT
Whistleblowing
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[23.850] In TPC v Allied Mills Industries Pty Ltd [1981] FCA 11, the evidence of price fixing of glucose was provided by an employee who took detailed notes of company policy and then turned himself and the company over to the TPC. The past Chairman of the ACCC, Professor Allan Fels, confirmed a trend to whistleblowing in an article entitled “Recession brings out TPC dobbers” which appeared in the Australian Financial Review of 29 September 1993. It reports Professor Fels as stating that the high rate of retrenchments because of the recession has increased the number of disgruntled workers who have blown the whistle on employers and advised the Commission of possible breaches of the law. Further examples are referred to in an article by Natasha Bita (“Office Spies”, The Australian (12 November 1996)): Nothing is illegal if one hundred well- placed business men decide to do it. Andrew Young.
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The couple lingered in the restaurant leafing through travel brochures as the din from a business lunch at the next table grew louder. One of the diners was loudly pressing his lunch partner, a customer of his firm, into accepting an illegal pricing deal. The supplier’s loud attempt at persuasion gave the “honeymoon couple” enough evidence for Australia’s competition watchdog to prosecute him for breaches of trade practices law. The eavesdroppers had been planted by the Australian Competition and Consumer Commission to spy on the business lunch, in a set-up arranged by the customer. “An important business person had been putting illegal bullying pressure on a small-business customer, and we wondered how we’d get evidence,” explains the ACCC’s chairman, Professor Allan Fels. “It turned out they were having lunch, so we booked a table next to them and a couple of our people heard the whole conversation, while they were ostensibly planning their honeymoon.” Fels says most whistleblowers are either business competitors unhappy about a collusive deal or former employees. “It’s frequently disgruntled employees … they’re either dissatisfied about having lost the job with the company or they have a conscience problem,” he says. “Finally they find someone to complain to about it, and they just download in a big way.” In a price-fixing case one employee was so upset about his firm’s unethical conduct that he alerted the ACCC to a three-hour meeting organised by his colleagues to seal the deal. “It turned out it was perfectly within the law for us to tape him up with a cassette recorder, so he taped the whole thing then provided us with the tapes,” Fel says. “The problem was, the tapes only went for 45 minutes. He had to tell them he’d had some foreign food the day before, forcing him to leave the room more often than usual so he could get a fresh tape.”
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Chapter 23 Competition Law
In another case, the ACCC swooped on a meeting of some ice manufacturers after one of them objected to industry plans to increase the price of ice before Christmas in 1993. “There was one who didn’t want to take part but the others went ahead and called a meeting, so he told the ACCC,” Fels says. “They weren’t very well organised so he took along one of our employees, who took a complete record of that meeting. It included a comment that ‘the Trade Practices Commission must never hear about this meeting’.”
Proving arrangements and understandings by indirect evidence [23.860] In the absence of direct evidence, an inference of a meeting of minds required for an arrangement or understanding may be drawn from indirect or circumstantial evidence which may consist of: • evidence of parallel conduct;
Never get into a pissing match with a skunk. Daniel Ludwig, shipping Tycoon.
• evidence of joint action; • evidence of collusion; • evidence of similar pricing structures;
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• evidence of opportunities for the parties to reach an understanding.
TPC v David Jones (Australia) Pty Ltd [1986] FCA 19 [23.870] This case illustrates the proof of an arrangement or understanding through circumstantial evi-
dence, The market for Sheridan-brand manchester in Adelaide had been severely disrupted by discounting among a number of retailers during a five-month price war. After a meeting of retailers called by a director of the company distributing Sheridan products in South Australia at which a recommended price list was distributed, the pricing structures of the retailers exhibited significant uniformity. The retailers denied any arrangement or understanding among them to conform to the supplier’s recommended pricing structure but they did not tender any oral evidence and gave no explanation of their behaviour. Despite the lack of direct evidence, Fisher J held that, as a matter of inference from circumstantial evidence, an understanding had been entered into. His Honour (at 47,412) attached considerable importance to the similar pricing structures that the retailers adopted after the meeting: In my opinion these acts exhibit such a concurrence of “time, character, direction and result” that they, taken in conjunction with the meeting and the circumstances in which it was held, encourage the drawing of the inference that the acts were “the outcome of preconcert … [and that] there was a combination to achieve a common objective”.
[23.880] Caution must nevertheless be exercised in relying on circumstantial evidence. Parallel conduct, for example, may constitute circumstantial evidence from which an arrangement or understanding may be inferred, but as Lockhart J warned in TPC v Email Ltd [1980] FCA 86: Plainly, when a credible explanation is given by a defendant it may be sufficient to negate the inference of an arrangement or understanding.
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Or, to use the graphic metaphor of Sheppard J in TPC v Allied Mills Industries Pty Ltd [1980] FCA 108, “the fact that 100 mice when released from a cage, will make for the cheese does not suggest that they had a meeting and reached an understanding before doing so”. There may be a range of rational commercial considerations or economic theories to explain the parallel behaviour unconnected with any arrangement or understanding. In relation to parallel pricing, for example, economic theories of price leadership provide an alternative explanation to an inference of price fixing. The theory of price leadership suggests that small firms will almost invariably follow the dominant firm, since pricing higher will risk market share and pricing lower will risk a retaliatory price war or inability to service the increasing demand for the product. Alternatively, the theory of barometric price leadership suggests that in an oligopolistic market (one dominated by a few large firms), one firm (not necessarily the largest) is often considered by the other firms as most capable of reading the market and of setting prices at levels that most accurately reflect prevailing market conditions.
IN CONTEXT
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ACCC immunity and cooperation policy for cartel conduct In fast-moving, progress-conscious America, the consumer expects to be dizzied by progress. Daniel J Boorstin.
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[23.890] The Preface to the ACCC’s Policy Document on Immunity for Cartel Conduct notes that:
Cartels harm consumers, businesses and the economy by increasing prices, reducing choice or distorting the ordinary processes of innovation and product development. They adversely affect domestic and international competitiveness and ultimately result in reduced employment opportunities for Australians. Due to the detrimental nature of this type of conduct, the ACCC will always assess cartels as a priority. International experience and the experience of the ACCC has demonstrated that effective immunity and cooperation policies encourage businesses and individuals to disclose cartel behaviour and this in turn assists the ACCC to stop the harm arising from this illegal conduct and to take action against participants. Cartels usually involve secrecy and deception. Collusion is difficult to detect –there may be little documentary evidence and parties often go to great lengths to keep their involvement secret. In these circumstances, discovery and proof of the existence of cartels can be more difficult than discovery and proof of other forms of corporate misconduct. An immunity and cooperation policy in relation to cartels encourages insiders to provide information and enables the ACCC to penetrate the cloak of secrecy. When the extent of the immunity to be provided, or the process for recognising cooperation with law enforcement authorities is certain, persons are more likely to take advantage of such a policy and disclose illegal and harmful conduct. Just as importantly, an immunity and cooperation policy that provides incentives to businesses and individuals to disclose illegal behaviour is also a powerful disincentive to the formation of cartels, as potential participants will perceive a greater risk of ACCC detection and court proceedings. An immunity and cooperation policy does not offer a reward to “good corporate citizens”. It is a detection tool designed to deliver benefits to all Australians by identifying, stopping and taking action against harmful and illegal behaviour.
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Chapter 23 Competition Law
The policy applies to corporations and individuals who have engaged in cartel conduct, whether as a primary contravener or in an ancillary capacity. Cartel participants may seek both civil and criminal immunity. The ACCC is responsible for granting civil immunity while it is the Commonwealth Director of Public Prosecutions who is responsible for granting criminal immunity but the CDPP applies the same criteria. Parties not eligible for immunity may cooperate with the ACCC’s investigation. The Policy notes that as a matter of general principle the courts afford more lenient treatment to persons who cooperate in investigations and provide assistance in court proceedings.
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Eligibility for immunity for corporations (with similar criteria for individuals) is based on the following criteria: (i)
the corporation admits that its conduct in respect of the cartel may constitute a contravention of the CCA
(ii)
the corporation is the first person to apply for immunity in respect of the cartel under this policy
(iii)
the corporation has not coerced others to participate in the cartel
(iv)
the corporation has either ceased its involvement in the cartel or indicates to the ACCC that it will cease its involvement in the cartel
(v)
the corporation’s admissions are a truly corporate act (as opposed to isolated confessions of individual representatives)
(vi)
the corporation has provided full, frank and truthful disclosure, and has cooperated fully and expeditiously while making the application, and undertakes to continue to do so, throughout the ACCC’s investigation and any ensuing court proceedings.
ACCC, Immunity and Cooperation Policy for Cartel Conduct (2014)
Price fixing [23.900] The most notorious horizontal practice is price fixing. Price is a key factor in competition and the most visible. Price competition is the most general objective of competition policy and the CCA enshrines this imperative by the per se prohibition of price fixing between competitors. It is regarded as so detrimental to competition that the prohibition does not require an assessment of its effect on competition. Effective competition is largely dependent on price competition and arrangements that compromise a company’s ability to compete on price are obviously detrimental to competition and to the consumers ultimately served by a competitive marketplace. “Price fixing” is a shorthand term for wider conduct which includes conditions having the purpose, or likely to have the effect, of directly or indirectly:
Who thinks the law has anything to do with justice? It’s what we have because we can’t have justice. William McIlvanney.
(a)
fixing, controlling or maintaining; or
(b)
providing for the fixing, controlling or maintaining of;
the price for, or a discount, allowance, rebate or credit in relation to: (c)
goods or services supplied, or likely to be supplied, by any or all of the parties;
(d)
goods or services acquired, or likely to be acquired, by any or all of the parties;
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(e)
goods or services re-supplied, or likely to be re-supplied, by persons or classes of persons to whom those goods or services were supplied by any or all of the parties to the contract, arrangement or understanding; or
(f)
goods or services likely to be re-supplied by persons or classes of persons to whom those goods or services are likely to be supplied by any or all of the parties.
TPC v TNT Australia Pty Ltd [1995] FCA 1046 [23.910] The facts in this case disclosed the following arrangements reached at a series of five meetings between 1987 and 1990, attended by representatives of the three companies:
i.
That the companies would not “poach” each other’s customers … that if one was requested to quote by a customer of another, it would either fail to do so or would submit a quotation above the price charged by the other company, the existing supplier, a practice described as “giving cover”;
ii.
That if one received the custom of customers of another, compensation would be made by returning customers of the same value by the process of up-rating them or driving them away by the provision of poor service;
iii.
That there would be a balancing of accounts of customers lost and gained and payment of compensation;
iv.
That no quotes would be given to customers of another firm over the telephone; and
v.
That uniform prices would be charged for what were referred to as “air satchels”.
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Burchett J commented at [10] that: As a result, between 1987 and mid-1991, the market shares of the companies were systematically protected from the effects of competition, and in particular their ability to set prices in the relevant market, the express freight market, was freed from the constraints of competition. Not only were the arrangements and their objects and consequences in flagrant breach of the obligations imposed on the companies, in the public interest, by law; the means for effecting the intended illegal results were themselves damaging to the public interest in a healthy economy, and were in direct conflict with the fundamental purposes of the Trade Practices Act. From the point of view of those purposes, an arrangement to maintain a cartel by deliberately providing poor service in order to compel customers to turn or to return to a supplier with whom they might be dissatisfied, must be particularly pernicious. Arrangements so fundamentally affecting the operations of the companies could not have been reached, and maintained for such a lengthy period, without the involvement of senior management. The contraventions of the law were serious, deliberate, and systematic.
In formally imposing the heavy penalties of over $14 million on the companies and 20 management executives, Burchett J stated that: It need hardly be said that, on any view of the purposes of the law providing for penalties, very considerable penalties must be called for by a case of this kind. The law cannot tolerate systematic and deliberate defiance of rules laid down by parliament in the interests of the community as a whole.
[23.920] The per se prohibition dictates extreme caution in discussing prices with competitors. As a result of the decision of the High Court in ACCC v Flight Centre Travel Group Ltd [2016] HCA 49 parties may be held to be competitors in circumstances wider than the usual understanding of that term. It was held that where an agent (Flight Centre) exercised its own discretion in the pricing of the principals’ (the airlines’) services they were in competition with each other. By attempting to induce airlines to agree that the airlines would not sell tickets through their own channels at prices below those that Flight Centre 1066
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Chapter 23 Competition Law Competition law is not necessarily about the legal enforcement of competition. It is about who is to decide whether industrialists shall on a particular occasion be free to act not competitively, and in what way they are going to be free not to act competitively. Q C Jeremy Lever et al, Enterprise law of the 1980s (American Bar Association, 1980).
could offer its customers, Flight Centre was guilty of attempting to engage in price fixing. A penalty of $12.5 million was imposed. Trade association meetings present a particularly hazardous environment. The necessary understanding can be inferred from circumstantial evidence of discussions at meetings and mere presence at a meeting may, in Warren Pengilley’s words, “tar you with the collusion brush”. Pengilley’s pragmatic advice is (in “Price fixing policies: The legal minefield” (The Australian Accountant, April 1985) at 37) that: if you are in a meeting where prices are being discussed, you should head for the nearest door, fire escape, laundry chute or window and do it with plenty of noise and/or ceremony so that everyone remembers that you left.
This is advice is particularly important given that price-fixing behaviour does not have to be successful to be in breach of the Act. Penalty and injunction proceedings may be taken against persons who not only price fix but who attempt to price fix or attempt to induce price fixing (CCA, s 76) (as in the Flight Centre case noted above).
ACCC v Visy Industries Holdings Pty Ltd (No 3) [2007] FCA 1617
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[23.930] The Federal Court imposed a then record penalty of $36 million on Visy (and $2 million on Visy
executives) for price fixing and market sharing with its main competitor (Amcor) in the market for corrugated fibreboard packaging. (Amcor escaped liability because it disclosed the existence of the cartel to the ACCC and received immunity from ACCC action.) Between them, Visy and Amcor controlled around 90% of the corrugated fibre packaging market (the cardboard carton), which was worth some $1.8 billion to $2 billion per year. In the late 1990s both companies incurred significant trading losses due in part to a price war between them. Both companies nominated executives to consult on and coordinate price rises and collude when negotiating quotes for customers. The arrangements made to end the price war –essentially agreements that they would retain their respective market shares, not seek to enter contacts with each other’s principal customers and which were secretly “negotiated” in Melbourne hotels –led to the ACCC action. In imposing a penalty twice the highest previously imposed Heerey J commented on the cartel conduct generally as well as the particular circumstances of the case: The law, and the way it is enforced, should convey to those disposed to engage in cartel behaviour that the consequences of discovery are likely to outweigh the benefits, and by a large margin. Every day every man, woman and child in Australia would use or consume something that at some stage has been transported in a cardboard box. The cartel in this case therefore had the potential for the widest possible effect … The cartel here went on for almost five years. Had it not been accidentally exposed, it would probably still be flourishing. It was run from the highest level in Visy, a very substantial company. It was carefully and deliberately concealed. It was operated by men who were fully aware of its seriously unlawful nature … The corporate culture of Visy in relation to its obligations under the Trade Practices Act was non-existent. None of the most senior people hesitated for a moment before embarking on obviously unlawful conduct. There was in evidence a Visy document entitled “Trade Practices Compliance Manual” … but it might have been written in Sanskrit for all the notice anybody took of it … The penalty proposed is more than twice the highest previous penalty imposed by this Court. That is reflective of 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.
The penalties imposed in this case predated the introduction of both the current penalty regime and the cartel provisions. The same scenario today would lead to a significantly greater penalty being imposed, and the Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-25 03:10:20.
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Characterising conduct as price fixing
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[23.940] In most cases of alleged price fixing the most difficult element to be proved is the element of collusion –the existence of a “contract, arrangement or understanding”. The subject matter of the collusion, the purpose or effect of “fixing controlling or maintaining or providing for the fixing, controlling or maintaining of, the price for, or a discount, allowance, rebate or credit …” (CCA, s 45AD) generally causes less difficulty. Prices can be “fixed” “even if all that is proposed is an increase to a certain figure without any provision as to when, or by what machinery or what amount a further change may take place” (TPC v Parkfield Operations Pty Ltd [1985] FCA 27 at [15] per Fox J). There was held to be price fixing in TPC v Nicholas Enterprises Pty Ltd [1979] FCA 51 (Adelaide Hotels case) where a number of Adelaide hotels fixed the allowance offered to the public on each purchase of 12 bottles of beer at two such bottles instead of three as was the case before the collusion (ie the arrangement was that a dozen would mean 14 not 15!).
Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd [1983] FCA 140 [23.950] It was held that the issuing by two Sydney FM radio stations of a combined advertising rate card
did not constitute price fixing. The combined card was introduced to draw the attention of advertisers to the potential of advertising on the stations. Clients could negotiate more favourable rates. The Full Federal Court held that: We are quite unable to accept that the combined card represented such a price-fixing arrangement. All that the respondents were doing was to offer a service additional to those which they were separately offering, at a price which represented the total for the time being of the separate rates –arrived at in a competitive market. It was clear that, if an advertiser preferred to do so, it could negotiate exactly the same coverage, possibly at a lower cost, by dealing with both companies separately. All the combined card offered was convenience, for which the advertiser may have had to sacrifice an ability to negotiate a lower rate than the standard contract offered. When two or more competitors agree to sell a joint package of goods or services, at a price agreed between them, in addition to the goods or services which they ordinarily sell in competition with each other and with others, the necessary provision for arriving at a price for those goods or services is not, in our opinion, a provision for fixing controlling or maintaining prices within the meaning of s 45A. This is certainly true in those cases where the individual competitors are entirely free to fix the price of their ingredient of the package, and to change it at any time. We believe the proposition would still be correct without that proviso, but we do not need to reach a concluded opinion on that point in this case.
Central to this finding was the proposition expressed by the court that: There must, we believe, be an element of intention or likelihood to affect price competition before price “fixing” can be established. This will often be a matter of inference, requiring no direct evidence for it to be established.
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Chapter 23 Competition Law
TPC v Service Station Association Ltd [1993] FCA 405 [23.960] The Trade Practices Commission failed to prove both collusion and “price fixing” in TPC v Service Station Association Ltd [1993] FCA 405. The action was brought against the trade association and several of its executives in respect of a campaign called “Prosper from petrol” which urged service stations not to attempt to maximise their profit by volume sales through discounting but to set their price by raising the margin, that is, the difference between the price they paid the oil companies for the supply of the petrol and the price at which they retailed it. Service station proprietors had been addressed at a series of meetings by a representative of the Association who made statements to the effect that the price of petrol was unrealistically low and that service station proprietors should carefully examine their prices. The Association also discussed the undesirable effects of low pricing in its journal newsletter. At one particular meeting following a statement by the Association representative that to maintain viability a margin of 10% on fuel sales would probably be required, the meeting broke up into small groups to discuss what was happening in the area. Soon after, petrol prices rose sharply although there was no uniformity in prices or price rises. The decision of Heerey J in the Federal Court, that there was insufficient evidence of an arrangement or understanding and the Association and its representatives were not guilty of inducing or attempting to induce an arrangement to fix or control, was upheld on appeal. The Association’s motive to convince proprietors to look at their pricing policy was lawful and did not constitute price fixing:
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• There was an absence of any evidence of mutual promises or undertakings between dealers or between dealers and the Association, and the communications from the Association did not urge such mutual binding of dealers between themselves. On the contrary, the explicit and repeated message was that dealers had to make their own decisions with the consequence (again specifically stated) that differing prices would often be charged. • There was no evidence of attempted sanction or enforcement against any dealer in relation to any arrangement or understanding. The message from the Association was that ultimately the decision was a matter for each dealer. • On the evidence, prices were not in fact fixed, controlled or maintained.
IN CONTEXT
Recommended pricing [23.970] Vertical recommended price lists (eg those distributed to retailers by a manu-
facturer) are governed by the RPM provisions of s 48 and Pt VIII of the CCA. Horizontal recommended price lists (eg those distributed by trade associations to their members who compete against each other in the relevant market) are governed by the cartel price fixing provisions. If the competitors who comprise the trade association agree to accept the recommended prices as the actual prices they will charge, the agreement obviously constitutes price fixing. The attitude of the ACCC – as expressed in its 1982 brochure, Recommended prices –is that the fundamental questions posed in respect of prices recommended by trade associations are: (a)
whether the provision of the recommended price lists is really a means by which the association or its members seek to regulate the industry’s prices, for example, by using the price list as a means of continuing an agreement or understanding between members and informing each member what each other member is going to charge; or
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The aim and result of every price fixing agreement, if effective, is the elimination of one form of competition. The power to fix prices, whether reasonably exercised or not, involves power to control the market to fix arbitrary and unreasonable prices. The reasonable price fixed today may through economic and business changes become the unreasonable price of tomorrow. United States v Trenton Potteries Co 273 US 392 (1927) at 397 per Stone J.
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(b)
whether the recommended price lists are provided to (and used by) members solely as an aid to enable members individually to decide the price at which he or she wants to sell (or purchase) goods or services.
If the answer to (a) is “yes” a breach of the CCA is very likely. However, if the answer is in truth “no” to (a) but “yes” to (b) there is no breach.
Cutting prices is usually insanity if the competition can go as low as you can. Michael E Porter.
The CCA only prohibits agreements that fix prices. This includes agreements that purport to “recommend” prices but which in reality fix prices. A provision is not to be taken to be a cartel provision by reason only that it recommends or provides for recommending a price, discount, allowance, rebate or credit (s 45AD(6))). It is the substance and not the form of the agreement that is the relevant consideration (s 45AD(11)). .
Bid rigging
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[23.980] Bid rigging occurs when competitors agree with the purpose that they will not genuinely compete against each other for particular tenders and will, in effect, take it in turns to win the tender. The parties may achieve this result by agreeing that one party will submit a substantially lower tender price than the inflated prices submitted by the other parties, or by agreeing that only one party will submit acceptable tender terms. The term is not defined in the CCA but it includes the practices set out in the definition of “cartel provision” (in s 45AD(3)(C)): • one or more parties to the arrangement bidding but others not doing so; • some parties to the arrangement lodging less competitive bids; • some parties to the arrangement withdrawing from the bidding process; • some parties participating in the bidding process proceeding with their bids but in a manner that favours other bidders; and • parties agreeing on a material component of the bid in advance. The following case examples are extracted from ACCC, Cartels case studies & legal cases (https://www.accc.gov.au/business/anti-competitive-behaviour/cartels). Again it should be noted that today under the new cartel provisions it is likely that much higher penalties would be imposed. Queensland pre-mixed concrete cartel The Pioneer, Boral and CSR cartel involved bid rigging, price fixing and market sharing in the pre-mixed concrete market in south-east Queensland from 1989 until 1994. The participants had more than 50 regular meetings and phone conversations. In addition to fixing prices, they agreed on market shares and not to compete on specified major projects. Market shares were maintained by the companies recognising certain customers (referred to as “pets”) as belonging to certain suppliers and agreeing not to compete for their business. The participants even engaged an accountant to monitor market shares so they could enforce compliance with the agreement. The arrangement led to considerable overcharging on major construction jobs, including federal, state and local government projects. Penalties of $6.6 million were imposed on each company. Penalties were also imposed on six executives, the maximum being $100,000. The case demonstrated a blatant disregard 1070
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Chapter 23 Competition Law for the law, as each of the corporate groups had previously been found to have engaged in similar conduct. Marine Hose Cartel This case involved price fixing, bid rigging and market sharing by four foreign companies that supplied rubber hosing to transfer oil and gas from production and storage facilities to offshore tankers. The four companies involved (Dunlop Oil & Marine, Bridgestone Corp, Trelleborg Industrie SAS and Parker ITR) each appointed members to a committee that allocated jobs and coordinated bidding and quoting for these jobs. The designated winner of the contract was referred to as the “champion” and the cartel used such codes and other covert tactics to conceal their activities. The cartel was international and the key meetings were held overseas, but the successful court action was based on the cartel giving effect to their agreement in the Australian market, following global enforcement action taken by competition authorities in the USA, UK, Europe and Japan. In 2010 the Federal Court of Australia made orders restraining the parties from repeating such conduct and imposed penalties exceeding $8 million.
Controlling output
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[23.990] Restricting or controlling outputs as the name suggests, refers to agreements between competitors with the purpose of limiting the volume or type of particular goods or services available on the market by the use of sales quotas or other arrangements. The ACCC gives the following example: Tasmanian Atlantic salmon growers In 2002 the Tasmanian Atlantic salmon industry was in financial difficulty and decided that supply was outstripping demand. The industry association, the Tasmanian Atlantic Salmon Growers Association, decided that if all members culled stocks by around 10 per cent, this would meet demand and avoid further price falls. It sought legal advice but did not correctly brief its lawyers. The advice that the cull would not breach competition laws was consequently flawed. After a meeting of growers approved the plan, agreements were circulated. One member, Tassal, subsequently culled its stocks. The ACCC investigated and the cull was stopped. Due to the parlous state of the industry and the fact that legal advice had been sought and cooperation shown, the ACCC chose not to pursue penalties. It instead obtained court orders that the industry establish a trade practice compliance training program and stop any future culls.
Sharing markets [23.1000] Allocating markets, or market sharing, refers to agreements between competitors with the purpose of dividing markets between themselves which of course has the effect of sheltering them from competition. Market sharing may take the form of the parties agreeing not to produce the other’s products, or not to supply in the other’s territory, or not to solicit the other’s customers. The Visy case discussed in relation to price fixing also involved market sharing through the parties agreeing to maintain their market shares and not deal with each other’s customers. The following case examples of market sharing are extracted from ACCC, Cartels case studies & legal cases (https://www.accc.gov.au/business/anti-competitive-behaviour/ cartels). Today under the new cartel provisions the penalty imposed would be much higher:
Always at work upon [the common law] is the maturing judicial mind, sometimes consulting it like the oracle at Delphi, while at other times shaping it to present needs. J Fleming, Barbarism to Verdict (HarperCollins, 1994).
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There are three cardinal rules –don’t take somebody else’s boyfriend unless you’ve been specifically invited to do so, don’t take a drink without being asked, and keep a scrupulous accounting in financial matters. W H Auden.
TPC v Simsmetal Ltd [1996] ATPR 41-449 In 1995 a manager from Simsmetal, the largest scrap metal merchant in the southern hemisphere, attempted to coerce a South Australian competitor into a market sharing agreement. He proposed that the two companies would not compete for suppliers of foundry grade scrap steel. He then threatened to use Simsmetal’s considerable financial resources to “destroy” the competitor’s business if he didn’t agree, and to “look after” him if he complied. The smaller operator secretly recorded the demands at the second meeting. The Federal Court took a dim view of the matter, particularly since it was less than a year after Simsmetal were penalised for similar conduct in Victoria. The Court made an order restraining the company from repeating the conduct, applied a penalty of $2 million and awarded $100,000 towards the ACCC’s costs. TPC v TNT Australia Pty Ltd [1995] ATPR 41-375 This case involved TNT Australia, Ansett Industries and Mayne Nickless. In five significant meetings between 1987 and 1990, attended by representatives of each of the companies, a series of agreements were reached to allocate customers and share the market. The conduct included agreements between the companies not to poach each other’s customers. When customers moved from one provider to another, the companies balanced their accounts of customers lost and gained, and paid or received compensation. The companies also agreed to “burn” switching customers by deliberately providing poor service in order to compel customers to return to a supplier with which they might have been dissatisfied. In one instance a customer’s perishable freight was intentionally delayed and eventually kept at the back of the freight facility and not sent, to drive them back to their previous freight supplier, who in turn charged higher prices when the customer returned to them. Each of the companies acted on these agreements on many occasions. The practices were believed to have been in place for 20 years. In 1995, fines of $11 million were imposed.
23.8 ANTI-COMPETITIVE CONTRACTS, ARRANGEMENTS AND UNDERSTANDINGS THAT SUBSTANTIALLY LESSEN COMPETITION [23.1010] Most cases of businesses agreements to act together instead of competing against one another will be caught by the cartel provisions. A backstop to the cartel provisions is nevertheless provided by s 45 of the CCA which simply prohibits collusive conduct that substantially lessens and which may therefore catch conduct falling outside the cartel provisions. Section 45(1), headed “Contracts, arrangements or understandings that restrict dealings or affect competition” provides that: (1) A corporation must not: (a) make a contract or arrangement, or arrive at an understanding, if a provision of the proposed contract, arrangement or understanding has the purpose, or would have or be likely to have the effect, of substantially lessening competition; or (b) give effect to a provision of a contract, arrangement or understanding, if that provision has the purpose, or has or is likely to have the effect, of substantially lessening competition; or (c) engage with one or more persons in a concerted practice that has the purpose, or has or is likely to have the effect, of substantially lessening competition. 1072
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Chapter 23 Competition Law
Section 45(1) prohibits, in general terms, two types of conduct –the making or giving effect to collusive arrangements substantially lessening competition, and the engaging in concerted practices which substantially lessen competition. It does not apply to trading arrangements entered into between related companies. Section 45(3) contains a specific definition of “competition” for the purposes of s 45 which focuses on the relevant markets in which competition is considered and includes the market in which the corporation (or related body corporate) supplies or acquires (or would but for the anti-competitive provision). Prior to the 2017 Harper Amendments the CCA prohibited exclusionary provisions – primary or collective boycotts which were per se illegal and prohibited irrespective of an anti-competitive purpose or effect but this provision has been removed for the reason that it is no longer necessary since, in practice, such conduct is materially the same as cartel conduct in the form of market sharing.
Anti-competitive contracts, arrangements and understandings
Americans are fascinated by their own love of shopping. This does not make them unique. It’s just that they have more to buy than most other people on the planet. And it’s also an affirmation of faith in their country, its prosperity and limitless bounty. They have shops the way that lesser countries have statues. Simon Hoggart.
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[23.1020] The first limb of s 45(1) is elegant in its broad generality –it directly and succinctly prohibits substantially anti-competitive arrangements and understandings that is any collusive activity that has the purpose or effect of substantially lessening competition. The usual civil consequences apply on contravention of s 45(2) but there is no criminal liability. Conduct falling within s 45 can be authorised on public benefit grounds but the bottom line is nevertheless clear and unambiguous: to enter into collusive arrangements among competitors is a dangerous course of action. The generality of s 45 is unrestricted. Collusion in relation to advertising, terms of trading, trade association activity and even voluntary codes of practice under which competitors agree to abide by a code of ethics, potentially restrict competition by foreclosing the opportunity for unilateral action. In such cases the public benefit is not difficult to demonstrate and an authorisation is generally granted by the ACCC.
Eastern Express Pty Ltd v General Newspapers Pty Ltd [1991] FCA 321 [23.1030] The shareholders of the applicant were a number of real estate agents based in Sydney’s eastern suburbs who formed a company to publish a local newspaper, the Eastern Express, to compete with the long-established monopolist in that market, the Wentworth Courier, published by the respondents. The applicant claimed that the respondent, by lowering its advertising rates, had engaged in predatory pricing in contravention of s 46 of the CCA (“misuse of substantial market power”). The action backfired badly. Not only did the applicant fail to establish that the respondent’s conduct contravened s 46 (upheld on appeal Eastern Express Pty Ltd v General Newspapers Pty Ltd (1992) ATPR 41-167) but the respondent’s cross-claim –that the applicant had contravened s 45 by reason of the arrangement between its shareholders to subscribe to advertising in the Eastern Express according to a quota determined by their shareholding which in turn was determined by the amount of advertising they had previously placed with the Wentworth Courier –was successful. Wilcox J acknowledged (at 52,908) that: any contracts which were merely designed to ensure that Eastern Express got off to a good start, in relation to the number and quality of its advertisements, ought not be regarded as substantially lessening competition. On the contrary, any such contracts should be seen as an essential prerequisite to anyone making a serious challenge
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His Honour nevertheless held (at 52,908) that such arrangements in the long term substantially lessened competition in the market (the advertising of real estate within Sydney’s eastern suburbs):
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But it is another thing to justify such a contract in the long term. Once the new publication had made a successful start and established a reputation amongst readers and advertisers, it ought not need propping up by a contractual commitment … There is no doubt that the quota provisions lessen competition in the relevant market … Those agents who are Eastern Express shareholders are contractually bound, upon pain of having to pay for any shortfall, to lodge with that company’s publication advertising roughly equivalent to their previous total volume of local free advertising. This obligation must inhibit their freedom of action within the market and the opportunity for usual market forces to affect the advertising decisions of themselves and their clients. The question, then, is whether the degree of lessened competition is such that, making a qualitative judgment and taking into account the need for Eastern Express to engender some support to enable it to challenge [the respondents], it should be categorised as substantial. I think that it should, for two reasons. First, whilst it would in my view have been permissible to bind agents to support the early issues of Eastern Express, so that it could build its reputation and establish its competitive proposition, article 4A(2) goes too far in binding agents to support each and every issue indefinitely … This is a permanent hindrance of competitive forces which has no justification after the establishment phase. Secondly, although the article binds the agent in point of law, it is likely seriously to interfere with the freedom of choice of the vendor. There is evidence from a number of agents, and it is not challenged, that in practice most vendors allow themselves to be guided by their agents in determining their advertising programme. This is hardly surprising, the whole purpose of retaining an agent is to harness his or her selling expertise and contacts. But, if an agent has a contractual commitment to put a substantial volume of advertising in a particular newspaper, the objectivity of the agent’s advice is inevitably compromised. From the competition point of view, the vice in the situation is that the vendor’s decision is less likely to reflect competitive factors.
The ironic aftermath to this case was the takeover in October 1993 of Eastern Express Pty Ltd by General Newspapers Pty Ltd. The merger was governed by the new provisions introduced in 1992 that replaced the old s 50 “dominance” test with a new s 50 “substantial lessening of competition test” (see [23.1880]). The merger was not objected to by the ACCC because of s 50(6) which, then, provided that “market” for the purposes of s 50 means “a substantial market for goods or services in Australia, in a State or in a Territory”. The market relevant for ss 45 and 46 purposes –the market in which real estate agents, predominantly in the eastern suburbs of Sydney, acquired services from local newspapers circulating in the eastern suburbs, such services being the publication of display advertisements for real estate –was not a “substantial market” in terms of s 50(6).
Concerted Practices [23.1040] As a result of the Harper Report recommendations the CCA has been amended to repeal the former price signaling provisions –which prohibited banks from signaling their pricing intentions to each other in a bid to undermine competition –with a new provision prohibiting concerted practices. Section 45(1)(c) provides that a person must not: … engage with one or more persons in a concerted practice that has the purpose, or has or is likely to have the effect, of substantially lessening competition.
The term “concerted practice” is not defined but is explained in the Explanatory Memorandum as “any form of cooperation between two or more firms (or people) or 1074
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Chapter 23 Competition Law
conduct that would be likely to establish such cooperation, where this conduct substitutes, or would be likely to substitute, cooperation in place of the uncertainty of competition”. The Explanatory Memorandum provides the following guidance: It is not necessary that any (or all) of the parties to a concerted practice should act: • in the same manner; • in the same market; or • at the same time. It is intended that the concept of a ‘concerted practice’ should capture conduct that falls short of a contract, arrangement or understanding as the courts have interpreted each of those terms in section 45. A concerted practice does not require, but may involve: • the formality or legally enforceable obligations characteristic of a contract; • the express communication characteristic of an arrangement. A concerted practice may be established in the absence of any direct contact between the firms, for example where firms communicate indirectly through an intermediary such as a peak industry body; or
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• the commitment character of an understanding. A concerted practice may exist even if none of the parties is obliged, either legally or morally, to act in any particular way.
The battle promises to be fought with bags of bagels and bran muffins, free beer and wine, expanded legroom, baggage, closets and overhead bins. R Blumenthal (on airline competition), NY Times (30 September 1986).
In ACCC v Australian Egg Corporation Ltd [2017] FCAFC 152 the Full Court held that the Australian Egg Corporation –an industry body –did not engage in cartel conduct in its “call to action” to its members to make productivity decisions besides overall industry to profitability address and correct an oversight of eggs. The conduct fell short of creating reciprocal obligations between the parties to act in a certain way –in this case restricting egg production –and therefore did not constitute a “contract arrangement or understanding”. This is a case where an action under the new concerted practices prohibition may have succeeded. The Explanatory Memorandum provides the following examples: Concerted practice In a small country town, there are three petrol stations: X, Y and Z. Immediately before adjusting its prices, X sends an email to Y and Z with a price. After several emails, it becomes clear to Y and Z that immediately after sending the email with the price, X changes its price to match the email. Y and Z join in, and each emails their own proposed price adjustments to the other two. A practice develops so that, with a few exceptions, where one petrol station emails their prices, the three stations all change their prices to match the price in the email. At no point do any of them expressly or implicitly agree to reciprocate the communication or to change their prices accordingly. On some occasions after one of the stations announces a price rise, one of the other stations chooses not to match the price, and thereby gains extra customers on that occasion by increasing their price by less than the other two stations and having the lowest price. There are no consequences of this occasional divergence from the usual practice. X, Y and Z are each likely to have contravened section 45 by engaging in a conceited practice with the purpose, effect or likely effect of substantially lessening competition. Even though none of the parties committed to communicate or change their prices, and even though there were some occasions where a petrol station did not change its prices in accordance with the email, the effect of the overall practice was that the petrol stations could increase their prices safe in the knowledge that this would be unlikely to result in a loss of customers as the others would most likely reciprocate. This practice has substantially reduced price competition for petrol in the town.
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Business and the Law Concerted practice as a single instance of conduct Salmon fishers in a small geographic region form an industry association that meets regularly, usually to discuss general industry issues. At one meeting, one fisher (X) states that they will restrict their output to a certain quantity for the next three months, in order to increase the price of salmon in the region. X shares this information in the hope that the other fishers will similarly restrict their output, so that X can adopt the strategy without fearing it will lose customers to the other fishers. X has shared commercially sensitive information which reduces uncertainty as to X’s likely output over the next three months. X is likely to have contravened section 45, by engaging in a concerted practice with the purpose or likely effect of substantially lessening competition, even if X was unable to convince all of the other salmon fishers to adopt a similar strategy and even some or all of the others did not adopt such a strategy (ie even if the ultimate effect was not a substantial lessening of competition).
There is widely expressed support throughout Australia for the central philosophy of the Trade Practices Act. The idea of competition and its benefits has been embraced by the public, the business community and political parties alike. However, the Committee has observed a very strong and widely- held sentiment in many segments of the community, importantly including the Government itself in relation to its own commercial activities, that competition is something for others, not for oneself. Trade Practices Act Review Committee, Report to the Minister for Business and Consumer Affairs (August 1976).
Concerted practice as communication of commercial information, reciprocity not required Bank X and Bank Y are two competing banks. A week before banks are expected to announce their respective interest rates for the next quarter, X sends Y a document setting out the interest rate it will announce the following week. Y did not ask for this information, and does not act on this information by either reciprocating with information about its own intended interest rate or changing its strategy to match X’s interest rate. The different actions of X and Y will have different implications under section 45. X is likely to have contravened section 45, by engaging in a concerted practice with the purpose or likely effect of substantially lessening competition, even if this was not the actual effect because Y did not act on the information. X’s communication to Y has made Y a party to a concerted practice. However, Y is not likely to have contravened section 45, as Y did not use the information to inform a decision or change strategy, and this conduct did not have the purpose, effect or likely effect of substantially lessening competition. Y could further ensure it did not breach section 45 by expressly rejecting X’s approaches and requesting that X not communicate any further information of this nature. Mere parallel conduct Company X manufactures and distributes the most popular budget television, which is stocked by all major television retailers and two smaller retailers. X supplies the televisions to large retailers for $300 each, and charges the smaller retailers $320 each due to the lower quantity ordered. The major retailers are able to sell the televisions for $320 and make a commercial profit. However, the two smaller retailers independently determine that they cannot sell the televisions for any less than $340 and still make a commercial profit. The conduct of the two smaller retailers is unlikely to constitute a concerted practice. The two smaller retailers have a similar cost base, and have taken this cost base into account in independently determining the prices they will charge for the television. This is merely innocent parallel conduct, which the concerted practices prohibition in section 45 is not intended to capture.
23.8A COLLECTIVE BARGAINING Collective bargaining and boycotts [23.1050] The ACCC website explains that: collective bargaining is an arrangement where two or more competitors come together to negotiate with a supplier or a customer over terms, conditions and prices, and that a collective boycott occurs when a group of competitors agree not to acquire goods or services from, or not to supply goods or services to, a 1076
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Chapter 23 Competition Law
business with whom the group is negotiating, unless the business accepts the terms and conditions offered by the group. Collective bargaining allows competitors to come together and negotiate collectively. The Competition Policy Review Explanatory Memorandum explains that: Collective bargaining by businesses may be detrimental to competition and consumer welfare. Such behaviour may allow firms to exploit consumers, force out competition, and reduce general economic welfare. The same is true of collective boycotts, where a bargaining group refuses to deal with suppliers or customers. However, in certain circumstances collective bargaining conduct can be beneficial for competition. Similarly, in some circumstances a collective boycott can be an appropriate and useful tool to support collective bargaining.
Collective bargaining by definition will always be a “contract, arrangement or understanding” which activates the collusion provisions of the CCA. Businesses may nevertheless obtain immunity through the ACCC granting an authorisation on public benefit grounds. The CCA also provides protection by way of notification but this immunity is available only to small businesses (see [23.1080]).
ACCC authorises Independent Cinemas to bargain collectively
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[23.1060] The ACCC has authorised Independent Cinemas Australia (ICA), and its current and future independent cinema members, to share information and collectively bargain with film distributors on the terms and conditions of film licensing agreements.
“Authorisation is likely to benefit the public as it should reduce negotiation costs for independent cinemas and distributors who participate,” ACCC Commissioner Roger Featherston said. “Any cost reductions and improved terms from collective bargaining may help the viability of small cinemas, and allow them to reinvest into their cinemas, creating a better experience for cinema-goers.” “Collective bargaining will also assist smaller cinemas in negotiating film season length and session times that are more appropriate for local demand. This may result in a greater variety of films being shown, providing greater film diversity and choice for local consumers,” Mr Featherston said. The ACCC took submissions from a wide range of cinemas, film distributors and other interested parties, conducting two rounds of consultation, publishing a draft determination, and holding a pre-decision conference. While there were a number of submissions in support, film distributors raised concerns about cinemas sharing information and the possibility that they would insist on the same outcome for all cinemas. After considering all the evidence and submissions, the ACCC considers that authorisation is likely to result in limited public detriment. Participation in the collective bargaining is voluntary for all parties, and the authorisation does not allow cinemas to engage in any collective boycott of films supplied by distributors. “The information sharing component is not likely to harm competition. Independent cinemas face competition from large chains, and this authorisation will not override any confidentiality arrangements protecting distributors’ commercially sensitive information,” Mr Featherston said. Authorisation is granted for five years, rather than the 10-year period sought.
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Business and the Law “With the film industry subject to changing technology and consumer preferences, there is some uncertainty about the impact of authorisation on the industry. If ICA seek reauthorisation in 2023, the ACCC will test the evidence and assess whether the expected benefits outweigh any detriments,” Mr Featherston said. ACCC, Media Release MR 40/18 (16 March 2018)
ACCC denies authorisation for banks to collectively bargain with Apple and boycott Apple Pay [23.1070] The Australian Competition and Consumer Commission has issued a determination denying
authorisation to the Commonwealth Bank of Australia, Westpac Banking Corporation, National Australia Bank, and Bendigo and Adelaide Bank (the banks) to collectively bargain with Apple and collectively boycott Apple Pay. “The ACCC is not satisfied, on balance, that the likely benefits from the proposed conduct outweigh the likely detriments. We are concerned that the proposed conduct is likely to reduce or distort competition in a number of markets,” ACCC Chairman Rod Sims said.
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The banks sought authorisation to bargain with Apple for access to the Near-Field Communication (NFC) controller in iPhones, and reasonable access terms to the App Store. This access would enable the banks to offer their own integrated digital wallets to iPhone customers in competition with Apple’s digital wallet, without using Apple Pay. “While the ACCC accepts that the opportunity for the banks to collectively negotiate and boycott would place them in a better bargaining position with Apple, the benefits would be outweighed by detriments,” Mr Sims said. The banks argued that access to the NFC controller on iPhones would enable them to offer competing wallets on the iOS platform which would lead to the following public benefits: • increased competition and consumer choice in digital wallets and mobile payments in Australia; • increased innovation and investment in digital wallets and other mobile applications using NFC technology; • greater consumer confidence leading to increased adoption of mobile payment technology in Australia. The ACCC accepted that Apple providing the banks access to the iPhone NFC controller is likely to lead to increased competition in mobile payment services and that this was a significant public benefit. However, the ACCC considered the likely distortions to and reductions in competition caused by the conduct would also be significant. Three likely detriments in particular stood out. “First, Apple and Android compete for consumers providing distinct business models. If the Applicants are successful in obtaining NFC access, this would affect Apple’s current integrated hardware-software strategy for mobile payments and operating systems more generally, thereby impacting how Apple competes with Google,” Mr Sims said. “Second, digital wallets and mobile payments are in their infancy and subject to rapid change. In Australia, consumers are used to making tap and go payments with payment cards, which provide a very quick and convenient way to pay. There is also a range of alternative devices being released that allow mobile payments; for example, using a smartwatch or fitness device. It is therefore uncertain how competition may develop.” “Access to the NFC in iPhones for the banks could artificially direct the development of emerging markets to the use of the NFC controller in smartphones. This is likely to hamper the innovations that are currently occurring around different devices and technologies for mobile payments,” Mr Sims said. 1078
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Chapter 23 Competition Law The conduct is also likely to reduce the competitive tension between the banks in the supply of payment cards. “Finally, Apple Wallet and other multi-issuer digital wallets could increase competition between the banks by making it easier for consumers to switch between card providers and limiting any ‘lock in’ effect bank digital wallets may cause,” Mr Sims said. ACCC MR 43/17 (31 March 2017)
Small business collective bargaining [23.1080] The benefits for small businesses negotiating as a group can be significant. The Explanatory Memorandum to the 2017 Amendments notes that: Small businesses will typically have less bargaining power than one large supplier, putting them at a disadvantage in individual negotiations. By negotiating as a collective, small business may be able to negotiate with bargaining power equal to a larger firm, and achieve a more efficient and pro-competitive outcome.
All that can be usefully said in the face of these arguments is that these are the types of problems which naturally arise when, for understandable reasons, the legislature chooses to forbid commercial conduct which is not criminal or immoral, but may be economically undesirable. The Paul Dainty Corp Pty Lid v National Tennis Centre Trust [1990] ATPR 41- 029 at 51,445.
The ACCC (in its guide to The Benefits of Working with Other Small Businesses –Collective Bargaining and Collective Boycotts (March 2016)) notes the following benefits: • reducing and/or sharing the time and cost of putting supply arrangements in place
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• creating more opportunities to negotiate terms of supply that better reflect the group’s own needs (as compared to just signing a standard form contract) • gaining better access to information –for example by sharing information between small businesses, or sharing the costs of engaging a professional advisor that you would not afford on your own • creating new marketing opportunities –as a group, your combined volume may become more attractive to larger or new buyers • streamlining and coordinating your ordering and delivery, creating supply chain efficiencies.
There may also be benefits to the business that the small business group is collectively negotiating with or through: • reduced costs from negotiating with a representative or subset of the group, rather than each member separately • more supply certainty from bulk ordering and savings from aligning transport and distribution • better access to information –more effective and efficient negotiations enable the transfer of information between the parties.
Collective bargaining notifications can be lodged only by small businesses determined by a monetary threshold –each member of the group must reasonably expect to have less than $3 million a year in total transactions with the target business. Hasher thresholds apply for certain particular industries –petrol retailing ($15 million); new motor vehicle retailing ($20 million); farm machinery retailing ($10 million); and primary production ($5 million). A trade union is not able to apply. The legal protection provided by a collective bargaining notification commences 14 days after the notification is validly lodged, unless the ACCC objects within this period. The
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legal protection provided by a notification for collective boycott conduct commences 60 days after the notification is validly lodged, unless the ACCC objects within this period. Small business, like big business, is nevertheless subject to the CCA and, without immunity conferred by authorisation or notification, collective bargaining participants are vulnerable. Many small businesses’ collective bargaining arrangements have been authorised by the ACCC including the following recorded on the ACCC’s website: • The ACCC granted authorisation to enable members of the NSW Farmers’ Association who grow chicken, turkey and duck meat to collectively bargain with processors. • The ACCC authorised Clubs Australia, which represents 6,500 licensed clubs, to negotiate and/or enter into agreements on behalf of its current and future members with suppliers of major goods and services. • The ACCC granted authorisation to Lottery Agents Queensland (LAQ) to continue to negotiate lottery agent agreements on behalf of its members. The 10-year authorisation covers collective negotiations with Golden Casket Lottery Corporation and other potential future Queensland lottery providers. LAQ represents over 1,000 agents in Queensland.
Collective bargaining by newsagents
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[23.1090] The Australian Newsagents’ Federation (ANF), through its affiliates and state branches, represents almost 2000 newsagents around Australia. Newsagents are often small, family-owned and operated businesses. The ANF was granted authorisation to enable it to collectively bargain on behalf of its current and future members with a range of suppliers, many of whom are large, well-resourced businesses. The target businesses included suppliers of products available for retail sale in newsagencies, such as newspapers and magazines, greeting cards and confectionary. They also included suppliers of services to newsagents such as insurance, electricity, petrol and electronic sales software. The ANF identified a list of proposed target businesses that it wished to negotiate with but it also requested authorisation to enable it to approach other businesses not named in the application but who may supply newsagents at a future date. The ACCC accepted that there were public benefits from allowing newsagents to pool resources and undertake a more co-ordinated approach to negotiating. The ACCC considered that this would result in transaction cost savings and improve newsagents’ input into contracts. The ACCC considered that generally newsagents are likely to comprise a small proportion of total purchasers in respect of the range of goods and services proposed to be acquired, aside from magazine and newspapers acquisitions (which have previously been authorised by the ACCC). Further, many of the proposed negotiations involved target businesses that are much larger than the bargaining group. In these circumstances, there is likely to be little risk of anti-competitive detriment if the authorisation allowed collective bargaining to occur with future target businesses. ACCC, Small Business Collective Bargaining (December 2017) 1080
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Chapter 23 Competition Law
It is, however, the notification process that is potentially of the most significant benefit to small business and the Harper Review considered that for it to be more widley used reform should be introduced into the collective bargaining notification process: • enabling notifications to cover future members of the bargaining group and multiple counterparties; • enabling the Commission to impose conditions on notifications involving collective boycotts; • extending the time allowed for the Commission to consider notifications involving collective boycotts before they come into force; and • giving the Commission a “stop power” to require collective boycotts to cease in exceptional circumstances.
These reforms have been introduced by the 2017 Amendments.
Class exemptions for small business bargaining
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[23.1100] As a result of the 2017 Amendments the ACCC has new powers (under s 95AA) to make “class exemptions” for specific types of conduct that pose very little risk to competition, or lead to public benefits. A class exemption will effectively provide a “safe harbour”, so businesses can engage in certain conduct without risk of breaching the competition law and do not need to seek authorisation or notify the ACCC. In April 2018 the ACCC released for public consultation a Discussion Paper seeking feedback about a potential class exemption to allow small businesses, agribusiness and franchisees to negotiate collectively with their customers or supplies including franchisors. The Discussion Paper notes that: Collective bargaining by a group of businesses is currently not allowed under Australian competition law, unless the group first obtains formal approval from the ACCC. A collective bargaining class exemption would provide a “safe harbour”, so businesses that qualify can collectively bargain without the risk of breaching competition law. “Businesses can sometimes be better off negotiating with their customers or suppliers as a group. Working together, they may be able to negotiate more efficiently with larger businesses to achieve better terms and conditions than they can on their own,” ACCC Deputy Chair Mick Keogh said. “Businesses can already seek case-by-case legal protection to collectively bargain through an ACCC ‘authorisation’ or ‘notification’, but this requires the group to submit an application with supporting information and pay a lodgement fee. These processes are public and can take a number of months to finalise,” Mr Keogh said. “In contrast, once a collective bargaining class exemption is in place, eligible businesses would automatically get an exemption. This would allow those businesses to gain easier access to the benefits of collective bargaining and begin negotiating sooner.” “Over the years the ACCC has considered many collective bargaining arrangements. Most come from groups of primary producers or other small businesses wanting to collectively bargain with a larger business; for example, farmers wanting to bargain with the company who buys their produce. “This has given us a good evidence base about the types of collective bargaining that produce public benefits and are unlikely to harm competition, and are therefore likely to be suitable for this exemption,” said Mr Keogh. ACCC, ACCC Considering Collective Bargaining Exemption, Media Release 162/18 (23 August 2018) Andrew, Terry, and Giugni Des. Business and the Law, Thomson Reuters (Professional) Australia Pty Limited, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/usyd/detail.action?docID=5719173. Created from usyd on 2020-08-25 03:10:20.
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23.9 SECONDARY BOYCOTTS [23.1110] Sections 45D-45EA of the CCA prohibit secondary boycotts –action by one person in concert with a second person (where “a person” can be an individual, corporation or trade union) that hinders or prevents a third person from: • supplying goods or services to a business; • acquiring goods or services from a business; or
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• engaging in trade or commerce involving the movement of goods between Australia and places outside Australia. Section 45D … possesses difficulties of application. These … are compounded by the use of words, such as “substantial” and “likely”, which are more appropriate to a maze than to legislative provisions exposing officials of trade unions and others to actions for substantial damages in respect of activities which they may genuinely regard as coming within their legitimate field of endeavour. Tillmanns Butcheries Pty Ltd v AMIEU [1979] FCA 85 at [9] Deane J.
In a primary boycott the collective action is taken directly against the target. In a secondary boycott there is collective action/collusion between two or more parties for the purpose of preventing a third party (the target of the boycott), such as potential customers and suppliers, from dealing with or otherwise doing business with a selected person (the indirect target). A secondary boycott is, in essence, concerted action by parties A and B who engage in conduct to prevent C from dealing with D who is the target of the action. With the exception of consumer boycotts which are not caught, the secondary boycott provisions are of general application (s 45D). Most cases nevertheless involve trade union action –for example members of a trade union taking action to hinder or prevent a supplier dealing with a customer. Such boycotts are prohibited if they have the purpose and effect of substantially lessening competition or causing substantial damage to the business of the customer. In such cases the union itself is taken to have engaged in the secondary boycott as well as the employees (s 45DC). Employees are nevertheless able to engage in secondary boycott action of which the dominant purpose substantially relates to their pay or employment conditions (s 45DD). The negotiation of employment terms and conditions (remuneration, conditions of employment, hours of work or working conditions of employees) is excluded from most of the competition law provisions of the CCA by s 51(2)(a). The reason for this exclusion is that the negotiation and determination of employment terms and conditions are governed by a separate regulatory regime, currently contained in the Fair Work Act 2009 (Cth). The secondary boycott provisions have had a chequered history. They are obviously political (the union movement’s predictable lack of support is balanced by the business community’s strong support) and controversial (raising issues of freedom of association and protection of the right to organise under UN/International Labour Organisation conventions). The secondary boycott provisions were repealed in 1993 to the extent that they related to industrial disputes (the application of s 45D to non-industrial boycotts was not affected), but reinstated in 1997. Monetary penalties can be imposed –up to $750,000 for companies and up to $500,000 for individuals engaged in commercial secondary boycotts (there is no monetary penalty for union members engaged in industrial secondary boycotts). The Competition Policy Review Bill that introduced the Harper reforms proposed increasing the maximum pecuniary penalty in line with other competition breaches but the Labor Party successfully opposed this significant penalty increase. Injunctions and damages can be ordered by a court and the ACCC can bring representative proceedings. Administrative action through enforceable undertakings is also available to the ACCC. 1082
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Leon Laidley Pty Ltd v The Transport Workers’ Union of Australia [1980] FCA 15 [23.1120] The applicant was an independent distributor of bulk fuel for Amoco. The fuel was purchased
from Amoco and collected and distributed by Leon Laidley Pty Ltd in its own vehicles and by its own drivers. The Transport Workers’ Union (TWU) was concerned because Laidley’s employment of its own drivers encroached on the work of drivers employed by Amoco. The TWU members employed by Amoco demanded of their employer that it cease deliveries to Amoco and commenced strike action to cease delivery to Laidley. It was held that these circumstances constituted a secondary boycott. The concerted action by A and B (the TWU and its officers and members) directed at C (Amoco) hindered or prevented the supply of bulk fuel to the target of the action D (Laidley) which was engaged in for the purpose, and would have or be likely to have the effect of causing substantial loss or damage. The defence provided by s 45D(3) of the TPA, that the dominant purpose for which the conduct was engaged in was substantially related to the remuneration, conditions of employment, hours of work or working conditions, was rejected. Although a purpose of the TWU was to protect the employment of the tanker drivers employed by Amoco, the dominant purpose was to cause substantial loss or damage to Laidley (at 42,130):
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The strike plainly occurred as a means of bringing pressure to bear upon Amoco to cease supplying bulk fuel to the applicant unless and until Amoco’s own drivers, and no others, were used to transport the fuel. Once Amoco capitulated, as it did, and refused to supply the applicant, the strike ceased: but with the implied threat that industrial action would revive if Amoco recommended supply to the applicant in circumstances where the applicant’s fuel was delivered by drivers other than employees of Amoco. Loss or damage to the business of the applicant was intended. No doubt the respondents hoped that the applicant would capitulate in order to avoid the loss or damage to its business; but unless it did, there would be no supply by Amoco.
The TWU’s appeal was dismissed (Transport Workers’ Union of Australia v Leon Laidley Pty Ltd [1980] ATPR 40-149), but although Laidley won the battle he lost the war. Amoco’s response to the TWU’s threats of industrial action was to terminate Laidley’s distributorship. The government’s immediate response was to enact s 45E that was aimed at ensuring that companies in the future did not succumb to union pressure. Section 45E prohibits a supplier of goods or services from making or giving effect to an arrangement with a union if that arrangement has the purpose of hindering the supplier supplying goods or services to any person the supplier usually supplies. A similar provision applies in relation to persons who acquire goods or services.
ACCC v Maritime Union of Australia [2001] FCA 1549 [23.1130] The Commission instituted proceedings against the MUA alleging that the MUA had engaged
in a variety of conduct for the purpose, and with the effect, of stopping Patrick Stevedore Holdings Pty Ltd and other stevedores using non-MUA labour from engaging in international trade or commerce in breach of the boycott provisions of the Act (in particular the MUA’s encouragement to the London-based International Transport Workers Federation to ban any ships loaded by non-union labour in Australia, MUA blockades of Patrick terminals which prevented truck deliveries to the wharves and MUA’s refusal to allow tugboat companies to help ships berth at Patrick terminals during the dispute). In September 1998 this litigation was settled with a court-enforceable undertaking from the MUA not to repeat the boycott conduct and the establishment of a damages fund (of up to $7.5 million) for small businesses damaged by the boycotts during the dispute.
The Australasian Meat Industry Employees’ Union v Mudginberri Station Pty Ltd [1986] HCA 46 [23.1140] Substantial damages were awarded against a meat-workers’ union which had set up a picket line at the entrance to an abattoir which members of the Meat Inspectors Association refused to cross. The union
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Compliant ACCC Turns Blind Eye to Bargaining Rorts Judith Sloan, The Australian (23 June 2015)
[23.1150] Sweetheart deals between unions and employers end up hurting the consumer.
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Thank god the Australian Competition & Consumer Commission sorted out the meaning of fresh when it comes to bread bought from supermarkets. It was really a big deal that was causing serious harm to consumers –or not. And where would we be if the ACCC were not keeping a watch on pesky door- to- door salespersons? It just doesn’t bear thinking about. But when it comes to really big stuff that produces serious economic losses caused by profoundly anti- competitive conduct involving registered trade unions, the ACCC just runs a mile. What’s a secondary boycott between friends? Why should the ACCC care that a business can be hurt commercially, even sent broke, by an illegal secondary boycott? The ACCC will cite difficulty in getting evidence or potential witnesses being
uncooperative, notwithstanding the sweeping powers in the legislation to compel witnesses to answer questions. We have a body that is there to protect the best interests of consumers and to foster competition, but simply finds it too difficult to investigate egregious instances of anti-competitive behaviour if it involves trade unions. To be sure, there are some carve-outs for unions in the Competition and Consumer Act. Under section 51(2)(a), contracts, understandings or arrangements that relate to remuneration, conditions of employment, hours of work or working conditions of employees are specifically excluded from the purview of the ACCC. But there are two important employment-related categories of conduct that are covered by the act. These are secondary boycotts and trading restrictions in industrial agreements.
23.10 EXCLUSIVE DEALING The nature of exclusive dealing [23.1160] Exclusive dealing refers to practices that impose vertical restraints – restrictions other than price restrictions imposed by a firm at one stage in the p roduction/ distribution process on the conduct of firms at another stage. Exclusive dealing embraces exclusivity in vertical distribution arrangements. It encompasses a range of practices that discourage competition through curtailing the freedom of parties in the distribution chain to acquire or resupply goods or services except on the conditions imposed. Exclusive dealing is specifically dealt with under s 47 of the CCA and is prohibited only if it has the purpose or effect of substantially lessening competition in a market (s 47(10)). 1084
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Chapter 23 Competition Law
A refusal to supply for an exclusive dealing reason is also caught. Exclusive dealing can be granted immunity from contravention of the Act through authorisation or notification (see 23.4). Since the 2017 Amendments s 47 does not apply to arrangements entered into between related companies (s 47(12)) –a change reflecting the general tenet of competition law that companies within a corporate group are treated as a single economic entity and are not considered to be competitors. The law reports abound with examples of exclusive dealing. Brewery/hotel ties under which hotels are required to purchase exclusively from a particular brewer (solus agreements); leasing refrigeration equipment on the condition that it be used solely for storing the lessor’s product (tying or second-line forcing); and provision of finance on condition that insurance cover be taken out with a nominated company (third-line forcing) are typical of product exclusivity arrangements constituting exclusive dealing which are prohibited if they substantially lessen competition (or which are illegal per se, in the case of third-line forcing). Supplying consumer products for resale on the condition that retail sales must be made within particular territories or that particular classes of consumers cannot be supplied, or granting territorial monopolies are examples of customer and territorial restrictions which also constitute exclusive dealing and which are prohibited if they substantially lessen competition.
Vertical restrictions reduce intrabrand competition by limiting the number of sellers of a particular product competing for the business of a given group of buyers. Continental TV Inc v GTE Sylvania Inc 433 US 36 (1977) at 54 per Powell J.
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Practices constituting exclusive dealing [23.1170] Exclusive dealing under s 47 of the CCA comprises a number of practices encompassing both dealing on a particular exclusive dealing condition and a refusal to deal for an equivalent exclusive dealing reason.
Supply or acquisition on an exclusive dealing condition [23.1180] The following practices constitute exclusive dealing: • supplying goods or services on the condition that the acquirer will not deal, or will limit its dealings, with a competitor of the supplier (CCA, s 47(2)(d)); • supplying goods or services on the condition that the acquirer will not deal with or in, or limit its dealings with or in, particular customers or particular locations (s 47(2)(f)); • supplying goods or services on the condition that the acquirer will acquire particular goods or services from a third party (third-line forcing) (s 47(6)); and • acquiring goods or services on the condition that the supplier will not deal in or will limit its dealings with particular customers or in particular locations (s 47(4)). In the categories of exclusive dealing referred to above the restraint is imposed because the supplier (or, in the case of s 47(4), the acquirer) has sufficient bargaining power in relation to the goods or services sought that the restraint is tied to the supply or acquisition of particular goods or services. For example, a brewery may offer to supply beer to a hotel on the condition that the hotel purchases all its beer from that brewery and does not deal with a competing brewery. The realities of the marketplace render this scenario unlikely but a brewery that owns or holds the head-lease of hotel premises could impose the desired result more effectively by tying the exclusivity restraint to the lease or licence of the premises. Exclusive dealing is therefore also constituted by restraints similar to
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Business and the Law Two different “types” of competition may be affected by an exclusive dealing agreement, competition between suppliers, that is inter-brand competition and competition between distributors of the same brand, that is intrabrand competition. S Corones, Restrictive Trade Practices Law (Law Book Co, 1994).
those referred to above which relate to the granting, renewing, terminating, or refusing to grant or renew a lease or licence of land (s 47(8) and 47(9)).
Refusal to supply for an exclusive dealing reason [23.1190] Exclusive dealing is also constituted by a refusal to deal for an exclusive dealing reason. The categories of exclusive dealing referred to at [23.1180], which relate to the imposition of a particular exclusive dealing condition, are matched by a corresponding provision which relates to refusal to supply for the particular exclusive reason (CCA, s 47(2)(d)/s 47(3)(d); s 47(2)(f)/s 47(3)(f); s 47(4)/s 47(5); s 47(6)/s 47(7); s 47(8)/s 47(9)).
IN CONTEXT
Refusal to supply products or services
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[23.1200] When refusing to supply is allowed As a general rule, suppliers have the right to choose who they wish to deal with and there are many reasons why a supplier may refuse to supply goods or services. For example, a supplier may choose not to supply a business on the basis of the reliability of that business, the cost of delivery, or the presentation of goods and services. Similarly, a wholesaler or manufacturer may find it s 47(9)too costly or inconvenient to sell to everyone who asks. If a supplier decides not to supply a business and their reason is not an improper one, the client business will have to renegotiate terms with that supplier or seek alternative suppliers. When refusing to supply is breaking the law There are a few circumstances, where a suppliers’ refusal to supply is breaking the law. This may occur when a supplier is: • misusing their market power • involved in a boycott • imposing minimum resale prices on retailers • engaging in exclusive dealing • acting unconscionably. https://w ww.accc.gov.au/b usiness/a nti-c ompetitive-b ehaviour/r efusal-to-s upplyproducts-or-services
Exclusive dealing condition or reason [23.1210] The requirement of supply (or acquisition) on “condition” is widely drawn. Section 47(13)(a) of the CCA defines “condition” for the purposes of s 47 to include: any condition, whether direct or indirect and whether having legal or equitable force or not, and includes a reference to a condition the existence or nature of which is ascertainable only by inference from the conduct of persons or from other relevant circumstances. 1086
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Chapter 23 Competition Law
Application of Streets Ice Cream Pty Ltd [1975] ATPR (Com) 8609 [23.1220] The supply of a refrigerated cabinet on condition that it was used exclusively for the supplier’s product was held to constitute exclusive dealing. Although no formal restriction on the retailer’s freedom to acquire from the supplier’s competitors was imposed, in practical terms smaller shops were restricted to one brand as they did not have sufficient space for more than one brand of refrigeration equipment. There was a supply “on condition”.
[23.1230] In Re Ku-ring-gai Co-operative Building Society (No 12) Ltd [1978] FCA 50, Deane J at 17,944 noted that: The practice of exclusive dealing does not necessarily involve the imposition of a condition. It involves supply upon a condition. The condition may well have been suggested by the recipient of supply. It may have been imposed by some third party. It may arise, by implication, from all the circumstances in which the goods or services were supplied.
The task of transferring the product from the manufacturer to the consumer can be achieved in a number of ways … The manufacturer will be keen to exercise some sort of control over the distribution channel for a variety of reasons: firstly, to make sure that the product is aimed at the right sort of people; secondly, to maintain the quality of his product; thirdly, to obtain maximum profit. Such control might, however, be inimical to the free interplay of competitive forces. R Edwards, Issues in Marketing Law (UNSW Press, 1982).
In relation to a refusal to deal for an exclusive dealing reason, it should be noted that s 4F(b) of the CCA provides that a person shall be deemed to have engaged, or to engage, in conduct for a particular reason if the person engaged or engages in the conduct for reasons that included or include that reason and that reason was, or is, a substantial reason.
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The competition test [23.1240] Section 47(10) of the CCA provides that, exclusive dealing is prohibited only if it has the purpose or has or is likely to have the effect of substantially lessening competition. Competition for the purposes of s 47(10) is competition in any markets affected by the restraint (ie either the supplier’s market or the acquirer’s market). The essence of exclusive dealing –the requirement by one firm that another firm to whom it supplies or from whom it acquires will not deal with its competitors –may have pro-or anti- competitive effects. The Hilmer Report commented (p 50) that: The potential anti-competitive element in exclusive dealing is market foreclosure, removing distribution outlets or supply sources from use by potential competitors. Exclusive dealing may also enhance efficiency where, for example, a manufacturer finds it less costly to deal with a relatively small number of dedicated distributors, or where distributors will not promote a new product unless they have the security of knowing that the product of their promotional efforts will not be reaped by others.
Authorisation on public benefit grounds is available for all categories of exclusive dealing and all practices can be notified (which confers immunity until and unless the ACCC revokes the notification on the grounds that there is insufficient redeeming public benefit).
Product exclusivity [23.1250] Section 47(2)(d) of the CCA provides that: A corporation engages in the practice of exclusive dealing if the corporation: (a) supplies, or offers to supply, goods or services; … on the condition that the person to whom the corporation supplies, or offers or proposes to supply, the goods or services or, if that person is a body corporate, a body corporate related to that body corporate:
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Business and the Law (d) will not, or will not except to a limited extent, acquire goods or services, or goods or services of a particular kind or description, directly or indirectly from a competitor of the corporation or from a competitor of a body corporate related to the corporation. The market impact of vertical restrictions is complex because of their potential for a simultaneous reduction of intra- brand competition and stimulation of inter-brand competition. Continental TV Inc v GTE Sylvania Inc 433 US 36 (1977) at 51 per Powell J.
Section 47(3)(d) mirrors this provision in relation to a refusal to supply for the equivalent exclusive dealing reason. Practices falling under ss 47(2)(d) and 47(3)(d) are prohibited only if they substantially lessen competition (s 47(10)) but authorisation and notification (Pt VII) are available. The prohibition is extremely wide and s 47(2)(a)-(c) covers more than simply supply on an exclusive dealing condition or refusal to supply for an exclusive dealing reason. For example, an offer to supply at a discount to the normal market rate in return for exclusivity is caught. Section 47(2)(d) catches a number of practices: • solus agreements; • requirements contract; • tying and forcing arrangements.
Solus agreements
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[23.1260] A solus agreement is an agreement in which the supplier imposes as a condition of its supply to a retailer that the retailer deal exclusively with it. This obviously constitutes exclusive dealing under s 47(2)(d) of the CCA. The retailer is, in the terms of the prohibition, prevented from acquiring goods or services from a competitor of the supplier.
TPC v Massey Ferguson (Aust) Ltd [1983] FCA 124 [23.1270] The respondent offered to supply tractors to dealers on the condition that the dealers did not
acquire a competitor’s tractors and for refusing supply when dealers either acquired or would not agree to stock competing brands. This conduct contravened TPA s 47(2)(d)/s 47(3)(d) –it was held to be likely to have the effect of substantially lessening competition in the wholesale market throughout Australia in respect of tractors and agricultural headers. There were few competitors and only rarely did more than one dealer service large rural areas.
In re Tooth & Co Ltd; In re Tooheys Ltd [1979] ATPR 40-113 [23.1280] The Trade Practices Tribunal refused to authorise exclusive dealing ties imposed by the only
two brewery companies in New South Wales on the hotels to which they supplied beer. The hoteliers were prevented from selling bulk (as opposed to packaged) beer obtained from any source other than the brewery concerned. Although the ties affected only 23% of the sale of all beer in New South Wales, the ties affected 41% of the bulk beer trade in New South Wales and 75% of the hotel bulk trade in New South Wales. The Tribunal held that the exclusive dealing ties gave rise to a number of anti-competitive detriments: • They denied access by each of the two New South Wales brewers to the other’s tied hotels in respect of its bulk beer; nor was there any evidence of competition between the two brewers in the ties themselves. • They impeded the market penetration of interstate brewers by shutting off access to an important segment of the market. 1088
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Chapter 23 Competition Law • They enhanced barriers to entry by a new brewer into the New South Wales market by foreclosing an important segment of the market. • They contributed to barriers to entry by new hoteliers into retail markets in that, for the majority of cases, newcomers were restricted to purchasing an interest in a business with predetermined stocking policies. • They contributed to the unduly narrow range of competitive instruments used by Tooth and Tooheys in wholesale markets, in that they reduced the pressure –especially upon Tooth –to compete in product development, marketing and price (and associated internal efficiencies). • They eliminated the ability of the tied hotelier to bargain with more than one supplier for better terms and to take her or his business elsewhere; they thus severely limited the ability of the tied hotelier to bargain for better terms from the brewer to whom he or she was tied. • They made it difficult – if not impossible – for the tied hotelier to obtain supplies of bulk beer in times of short supply (arising eg from a brewery strike). • They restricted the ability of, and the competitive pressure for, the tied hotelier to vary the bulk beers that she or he served –to substitute one brand for another or to extend the range –in accordance with public demand. • Over time, the ties inhibited response to changing demands and conditions of supply within an important segment of the beer industry.
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Requirements contracts [23.1290] A “total requirements” contract is in effect a solus agreement and obviously falls within s 47(2)(d) of the CCA. A “partial requirements” contract may or may not be caught. It depends on whether the condition imposed means that the acquirer “will not except to a limited extent acquire from a competitor of the supplier”. The Act does not define “limited extent” but in the case of soft drink merchandisers tied to the supplier’s product, the ACCC has not taken action if 25% of the space is available to competitors’ brands (A A Ransom and W Pengilley, Restrictive Trade Practices: Judgments, Materials and Policy (Legal Books, 1985) p 825). A “requirements” contract may be a “quantity requirements” contract or a “percentage requirements” contract. A 100% requirements contract is obviously exclusive dealing and a lesser percentage will also be exclusive dealing up to the point when the acquirer is, to greater than a limited extent, dealing with a competitor. A quantity requirements contract is less certain because, at least theoretically, the customer is free to acquire further supplies from the supplier’s competitor.
Tying and forcing arrangements [23.1300] The Hilmer Report (pp 49-50) described tying arrangements as: [Arrangements where] the sales of two or more products are tied –the seller will only sell unrelated products as a bundled package, or offers one product only on the condition that the buyer also purchases one or more other products.
The Committee noted that: Tying arrangements may enable firms to extend market power from one market with low elasticity of demand into an unrelated market; may permit price discrimination which would otherwise be impossible; may be used to raise entry barriers; or may facilitate avoidance of
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[Requirements contracts] may well be of economic advantage to buyers as well as to sellers, and thus indirectly of advantage to the consuming public. In the case of the buyer they may assure supply, afford protection against rises in price, enable long-term planning on the basis of known costs, and obviate the expense and risk of storage in the quantity necessary for a commodity having a fluctuating demand. From the seller’s point of view, requirements contracts may make possible a substantial reduction of selling expenses, give protection against price fluctuations and … offer the possibility of a predictable market. Standard Oil Company of California v United States 337 US 293 (1949) at 306 per Frankfurter J.
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Business and the Law price regulations on one good. There is a broad spectrum of tying arrangements, with many having a positive implication for economic welfare. For example, a supplier may be able to achieve production or distribution efficiencies or technical superiority by tying together two or more particular products.
Tying arrangements may be of several types. In second-line forcing and full-line forcing a supplier with leverage through a particular product (the tying product) ties, or forces, a second product (second-line forcing) or an entire line of products (full-line forcing) to that product. Another variation, third-line forcing, involves a requirement that a third party’s product be bought in conjunction with the seller’s product. Third-line forcing under s 47(6)(7) of the CCA is, unlike second-and full-line forcing, illegal per se without any necessity to consider anti-competitive purpose or effect. Cases of second-, or full-, line forcing (the principles are the same) have included tying the supplier’s brand of soft drinks to refrigerated merchandising cabinets supplied (Application of Southern Cross Beverages Pty Ltd [1981] ATPR 40-200) and tying photocopy paper to photocopying machine service contracts (Application of Nashua Australia Pty Ltd (1975) 1 TPCD 168). It is obviously a prerequisite of “tying” that there be two products, not simply one; and the discussion of this issue in relation to third-line forcing should be referred to.
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ACCC v Visa Inc [2015] FCA 1020 [23.1310] The background to this action is explained in the opening paragraphs of the judgment: Visa Worldwide Pte Ltd (Visa Worldwide) is part of a global business network that supplies and operates the world’s largest retail electronic payment network. That network involves the use of Visa branded payment cards which, amongst other things, can be presented by cardholders to merchants throughout the world as a means of payment. Visa branded payment cards are the most widely used payment cards in Australia and throughout the world. Each day many millions of payment transactions are processed through the Visa payment card network, including millions of transactions with an international element which involve currency conversions.
The ACCC instituted proceedings alleging that Visa had contravened s 46 and s 47 of the CCA by conduct which imposed conditions on financial institutions that wished to participate in the Visa payment card network which restricted them, in some circumstances, from using services offered by providers of Dynamic Currency Conversion services to process transactions that involved or required the exchange or conversion of different currencies. The alleged contravening conduct involved not only point of sale payment transactions with an international element, but also cross-border transactions involving the withdrawal of money from automatic teller machines. Visa admitted that this conduct contravened s 47(2) and the ACCC did not pursue the s 46 action. The main issue was therefore that of penalty. The Court held that there could be little doubt that the contravention of s 47 of the Act by Visa is a very serious contravention: Visa Worldwide was and is a large corporation with a pivotal role in relation to the operation of the Visa payment card network in Australia. As the Visa entity responsible for contracting with issuing and acquiring financial institutions in Australia, at the time of the contravention it effectively had the power to control and regulate the use of the Visa payment card network in Australia by financial institutions. It had the capacity to exclude other service providers, such as DCC providers, from accessing and participating in the Visa payment card network in Australia.
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Chapter 23 Competition Law Given that the Visa payment card network was the largest such network operating in Australia, Visa’s conduct had the capacity to significantly affect competition in markets related to the Visa card payment network. That included the market in question here: the market for the supply of currency conversion services on the Visa payment card network.
A pecuniary penalty of $18 million was imposed – a record fine for a single offence – in addition to costs of $2 million.
Customer and territorial exclusivity [23.1320] The Hilmer Report (p 50) noted that: Territorial restrictions or restrictions as to the types of customers which may be served can be used to restrict competition. For example, a manufacturer might grant exclusive territories to its retailers, resulting in increased profits for those retailers at the expense of consumers. In some circumstances, however, the grant of an exclusive territory might be warranted to encourage retailers to provide an appropriate level of services, such as where there are free- rider issues. A case-by-case approach is necessary to determine the effects of competition and efficiency of territorial or customer restrictions.
Supplier imposed restrictions [23.1330] Section 47(2)(f) of the CCA provides that:
Exclusive distributor agreements of [the customer or territorial] type may serve the producer’s goals both of increasing efficiency and of maintaining demand. R Whish, Competition Law (Butterworths, 1989).
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A corporation engages in the practice of exclusive dealing if the corporation: (a) supplies, or offers to supply, goods or services; … on the condition that the person to whom the corporation supplies, or offers or proposes to supply, the goods or services or, if that person is a body corporate, a body corporate related to that body corporate;
…
(f)
in the case where the corporation supplies or would supply goods, will not re-supply the goods to any person, or will not, except to a limited extent, re-supply the goods:
(i) to particular persons or to persons other than particular persons or classes of persons; or (ii) in particular places or classes of places or in places other than particular places or classes of places.
Section 47(3)(f) mirrors this provision in relation to a refusal to supply for the equivalent exclusive dealing reason.
Mark Lyons Pty Ltd v Bursill Sportsgear Pty Ltd [1987] FCA 282 [23.1340] The Australian distributor of Salomon Ski Boots refused to supply the current range of ski boots
to a retailer who organised sales of discounted ski equipment from temporary locations. It was held that the distributor’s refusal to supply constituted exclusive dealing under s 47(3)(d) of the TPA which substantially lessened competition in the Australian ski boot market. Wilcox J stated (at 48,804) that:
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Business and the Law The court is concerned with a retailer who is not content merely to offer the relevant goods from its own premises at normal prices; that is list prices subject to “shop” discounts from time to time. The applicant conducts sales outside its own shops, in the “territory” of other retailers, at heavily discounted prices. The vigour of its competition with those retailers gave rise to the complaints made to the Australian distributor and to his concern at the effect upon the other retailers of the applicant’s activities. Only by eliminating that competition, which he sees as disruptive, can the Australian distributor hope to restore what he called “a bit of sanity” to the market. The Australian distributor is well placed to evaluate the extent of the competition within the Australian ski-boot market. His comments to Salomon clearly demonstrate that he saw the denial of the supply of in-line boots to the applicants as being likely to result in a lessening of competition –competition which he regarded as excessive and unfortunate –in the Australian ski-boot market. The Australian distributor’s assessment, obviously, was that the retailer was not just “one of a number of competitive retailers in the market”, but rather a retailer unfairly undercutting his competitors.
Acquirer imposed restrictions [23.1350] Section 47(4) of the CCA provides that: A corporation also engages in the practice of exclusive dealing if the corporation: (a) acquires, or offers to acquire, goods or services; or (b) acquires, or offers to acquire, goods or services at a particular price;
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on the condition that the person from whom the corporation acquires or offers to acquire the goods or services or, if that person is a body corporate, a body corporate related to that body corporate will not supply goods or services, or goods or services of a particular kind or description, or any person will not, or will not except to a limited extent, supply goods or services, or goods or services of a particular kind or description: (c) to particular persons or classes of persons or to persons other than particular persons or classes of persons; or (d) in particular places or classes of places or to places other than particular places or classes of places. The statutory description of [the] conditions and reasons [in s 47 is] replete with double negatives and proliferating alternatives, [and] defies accurate synopsis. Stephen J, TPC v Tooth & Co [1979] ATPR 46-127 at 18,366.
Section 47(5) mirrors this provision in relation to a refusal to acquire for the equivalent exclusive dealing reason. These practices are prohibited if they substantially lessen competition (s 47(10)) but authorisation and notification (Pt VII) are available. Section 47(4) and 47(5) relates to the imposition of territorial and customer restrictions on the supplier by the distributor and is the opposite of s 47(2)(f) and s 47(3)(f) which relates to the imposition of territorial and customer restrictions on the distributor by the supplier. They cover for example exclusive distributorships, franchises and agencies.
Third-line forcing [23.1360] Third-line forcing is a particular form of tying which involves a requirement that a third party’s product be bought in conjunction with the seller’s product. The ACCC’s Exclusive Dealing Notification Guidelines (November 2017) explain that: Third line forcing occurs when a supplier of goods or services imposes a condition requiring the buyer to also acquire goods or services from a particular, unrelated, third party, or refuses to supply because the buyer will not agree to that condition. The conditional supply may relate to the product itself or to the supply of the product at a particular price or discount. Common business arrangements involving third line forcing include:
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Chapter 23 Competition Law • a property developer offering blocks of land for sale on condition that purchasers use a nominated builder to construct their house • a franchisor offering franchise services on condition that franchisees purchase goods and/or services from nominated suppliers • a mobile phone retailer offering discounted handsets on condition that purchasers sign up to a data plan from a particular telecommunications service provider.
Prior to the Competition Policy Review reforms introduced in November 2017 third line forcing was a per se breach, which meant that unless a notification or authorisation was in place, it was prohibited outright, regardless of whether it had an anti-competitive purpose or effect. Every year, the ACCC received hundreds of notifications to allow parties to engage in third line forcing which in most cases, raised no competition concerns. Today third line forcing is as with other exclusive dealing practices, prohibited only if substantially lessens competition. Section 47(6) of the CCA provides that: A corporation also engages in the practice of exclusive dealing if the corporation: (a) supplies, or offers to supply, goods or services;
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(b) supplies, or offers to supply, goods or services at a particular price; or (c) gives or allows, or offers to give or allow, a discount, allowance, rebate or credit in relation to the supply or proposed supply of goods or services by the corporation; on the condition that the person to whom the corporation supplies or offers or proposes to supply the goods or services or, if that person is a body corporate, a body corporate related to that body corporate will acquire goods or services of a particular kind or description directly or indirectly from another person not being a body corporate related to the corporation.
Section 47(7) mirrors this provision in relation to a refusal to supply for the equivalent exclusive dealing reason. Third-line forcing can be authorised on public benefit grounds. Immunity through the notification procedure is also available.
TPC v Legion Cabs (Trading) Cooperative Society Ltd [1978] FCA 47 [23.1370] A taxicab cooperative provided radio services to members and operated a service station. It required members to purchase a quota of Shell petrol otherwise a higher membership subscription was payable or loss of membership was possible. The cooperative was paid a rebate by Shell on petrol sold to members. The court held that to provide radio services to members at a particular price on condition that they purchased Shell petrol constituted third-line forcing.
ACCC v Black & White Cabs Pty Ltd [2010] FCA 1399 [23.1380] A condition of the offers made by B&W Cabs to provide network services and taxi licence services to operators was that they acquire services supported by Cabcharge, an unrelated company providing a charge account system, a payment system and payment processing systems. This conduct amounted to third-line forcing.
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Business and the Law
Castlemaine Tooheys Ltd v Williams & Hodgson Transport Pty Ltd [1986] HCA 72 [23.1390] One of the most important decisions on third-line forcing is Castlemaine Tooheys Ltd v Williams
& Hodgson Transport Pty Ltd [1986] HCA 72. The Federal Court and, on appeal, the Full Federal Court, held that the practice of delivered pricing constituted third-line forcing. The brewery’s customers were given the choice of either collecting the beer from one of Castlemaine Tooheys’ four regional depots or having it delivered to their premises from the Brisbane brewery. In practice the retailers almost invariably had the beer delivered, as the relevant liquor licence fees were then lower (because the licence fees were based on the cost of the beer at the point it left the brewery). If the retailers selected the delivered beer option, the brewery arranged delivery itself through its “preferred carrier”, Queensland Railfast Express (QRX). A rival carrier, Williams & Hodgson Transport Pty Ltd, offered to deliver the beer to retailers at a lower price. Williams & Hodgson argued that the established arrangement constituted third-line forcing through the supply of goods (beer) on the condition that the acquirer (the publican) accepted services (delivery) from another person (QRX). This argument succeeded in the Federal Court and the Full Federal Court but was rejected on appeal to the High Court. One reason was that provided by Wilson J at [3]: Here the transactions under scrutiny encompassed no more than the supply of goods. The beer was to be supplied at the premises of the retailer. Each supply was a single transaction which could not be broken up into its several elements of sale and delivery without doing violence to the reality. Delivery to the premises was an essential and therefore inseparable concomitant of the supply of the beer.
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Thus, third-line forcing requires two distinct goods or services –those forced on the reluctant acquirer as a condition of acquiring other goods or services. In this case there were not two products (beer and delivery), but one (delivered beer). The alternative view favoured by the majority of the High Court was that s 47(6) of the TPA applies only when the product of the tied party (the QRX delivery services in this case) is acquired by the customer and not the person imposing the tie. In this case the delivery services supplied by QRX were acquired by the brewery and not by the licensee. Brennan J argued at [6]: Section 47(6) applies only when there are two contracts or arrangements: the first, between the corporation which supplies and the person who acquires goods or services; the second, which may be made directly or indirectly, between the person who acquires those goods or services and a third person. Here there is no contract or arrangement, whether direct or indirect, between a licensee who acquires delivered beer from the brewer and QRX pursuant to which the licensee acquires delivery services from QRX. From start to finish QRX’s contract or arrangement is with the brewer alone. Insofar as the licensee derives a benefit from the delivery of beer to his premises, he acquires that benefit from the brewer and not from QRX. It is submitted that a person may acquire services simply by accepting them and that a licensee accepts delivery services by QRX. But a licensee does not accept any services from QRX; the licensee accepts the delivered beer supplied to him by the brewer. If it were legitimate (and it is not) to distinguish between the beer supplied and the delivery services, nevertheless the licensee would accept both the beer and the delivery from the brewer under the contract of sale of the beer. The brewer does not seek to force licensees to accept the services of a carrier nominated by the brewer. The brewer simply asserts its right to choose the carrier to deliver its beer to the point of sale at the licensee’s premises in discharge of its obligation to the licensee to deliver the beer there. The position is no different from what it would be if the brewer’s own employees delivered the beer.
Commentators have argued that this is an artificial and literal interpretation of s 47(6) which may be explained by the Court taking the view that (J Lipton, “Third-line Forcing in Australia” (1996) 4 Trade Practices Law Journal 77 at 80): where the conduct in question is part of a well-accepted commercial practice which may not have a particularly marked detrimental effect on competition in a market, there is no reason to prevent the conduct from taking place.
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Chapter 23 Competition Law
Paul Dainty Corp Pty Ltd v National Tennis Centre Trust [1990] FCA 163 [23.1400] The plaintiff wanted to hire the National Tennis Centre but wanted to use its own ticketing service and not the ticketing service that the Trust had contracted with to provide ticketing services at its venues. Woodward, Northrop and Sheppard JJ held, at 51,448, that s 47(6) was not contravened: If it be legitimate to distinguish between the hire of the venue and the ticketing (as it would seem to be in the present case more so than in the case of the beer and its delivery, because the ticketing is not over and done with when PDC takes occupation of the part of the venue covered by its licence), nevertheless PDC accepts both the venue and the ticketing arrangements from the relevant centre under the contract for hire of the venue. The centre does not seek to force PDC to accept the services of Bass. It simply asserts its right to supply a ticketed venue to all promoters such as PDC, and to choose the company that will carry out the ticketing. The position is no different from what it would be if the centre’s own employees sold the tickets and accepted responsibility for the proper investment and distribution of the proceeds.
[23.1410] In light of these decisions it appears that there will be no contravention of s 47(6) of the CCA if the contract with the third party is with the original supplier and not the ultimate acquirer.
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The Hilmer Report recommended that third-line forcing not be illegal per se and, in common with the other practices constituting exclusive dealing be subjected to a competition test and notification. The Report (pp 52 and 53) noted that: The basis for a distinction between third-line forcing and other forms of tying is not clear. Per se prohibitions are appropriate where conduct has such strongly anti-competitive effects that it is almost always likely to lessen competition. Third-line forcing does not fall into this category. For example, the practice of building societies requiring borrowers to take out property or life insurance with a nominated insurer provides insurers with large captive markets and less incentive to compete. However, where borrowers are permitted to choose from a list of insurers who are prepared to enter into concession agreements with the lenders, and who are operating with the authority of the Insurance Commissioner, competition is unlikely to be substantially lessened … The variety of problems and anomalies arising from the divergent treatment of third-line forcing and other forms of tying suggests that a more consistent approach would be appropriate. Accordingly, third-line forcing should only be prohibited if it substantially lessens competition … As there appears to be no significant policy rationale for distinguishing between third-line forcing and other vertical agreements, notification should be extended to third-line forcing
The Harper Report agreed and saw no need for third-line forcing to be singled out from other forms of vertical trading conditions and be prohibited per se (at [3.10]): “As notifications to the ACCC demonstrate, third-line forcing is a common business practice and rarely has anti-competitive effects”. Franchising provides the obvious example. Franchisors frequently require franchisees to acquire “approved products” from “approved suppliers” to ensure quality control, uniformity and consistency across the system. Such provisions only rarely are shown to have a substantially anti-competitive purpose or effect and the notifications lodged by franchisors to ensure immunity are rarely revoked.
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Perhaps the law need not always align itself with common sense, but when that happy coincidence occurs, lawyers and judges should not reflexively recoil from it. Communications Workers of America v Western Electric 860 F 2d 1137 (1st Cir 1988).
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Business and the Law [Third line forcing] can be the subject of kickbacks given to the supplier of the tying products by the supplier of the tied product. The “kickbacks” used to be common in the petrol industry in Australia in the 1950s and 1960s where petrol suppliers were paid by manufacturers of tyres, batteries and accessories (“TBA” items) to tie their petrol retailers into certain TBA brands … Some may argue that this is all a matter of morality and has little to do with economics. I believe this view is correct. All that can be said is that economics is not the only matter relevant to competition law. W Pengilley (1989).
23.11 RESALE PRICE MAINTENANCE RPM and competition [23.1420] In essence, RPM is the practice of a supplier specifying the price below which goods or services sold or supplied cannot be resold or resupplied: the CCA prohibits suppliers imposing a “floor” but not a “ceiling” in respect of the price at which goods or services can be resupplied. A supplier may wish to impose RPM to prevent discounting of its product which may annoy other distributors in the network and lead to internecine infighting that may threaten the stability of the retail network. Suppliers obviously prefer their distributors to devote their efforts to inter-brand rather than intra-brand competition. Suppliers also want to ensure that their products are not used by retailers as “loss-leaders” which may adversely affect the consumers’ perception of their quality. They are concerned that if their product is discounted it may suggest to consumers that it is not of the same quality as competing products. The practice is nevertheless illegal per se and is prohibited, irrespective of its competitive effect, for reasons clearly enunciated by Smithers J in TPC v Stihl Chain Saws (Aust) Pty Ltd [1978] ATPR 40-091 at 17,985: It is clearly the intention of the parliament to lay down conditions for the conduct of corporate trade and commerce which will ensure that traders operate in competitive conditions and that the public has the benefits which flow there from. So far as resale price maintenance is concerned the object of the Act is to create conditions in which the public will benefit from traders competing with each other in respect of prices unfettered by price restraints imposed by suppliers of goods upon retailers.
Protection from legal action is available on public benefit ground by way of authorisation and notification –the former commencing from the date of authorisation and the later 14 days from notification. RPM was common in Australia until prohibited in 1971. Former Prime Minister Bob Hawke claims much of the credit for breaking the practice. In Robert J Hawke: A biography (Landsdowne Press, 1982), author Blanche d’Alpuget describes the meeting between Lionel Revelman, a director of Bourkes department store in Melbourne and Bob Hawke, then President of the ACTU. Bourkes had suffered at the hands of larger retailers who had successfully pressured manufacturers into refusing to supply Bourkes because of their undercutting of agreed retail prices. Hawke was keen to broaden the activities of the union movement and to extend its influence beyond industrial matters into the political arena. The formation of a joint venture between Bourkes and the ACTU was designed to satisfy the ambitions of both parties. Although the venture was ultimately unsuccessful it achieved its immediate object of breaking RPM. The predictable refusal of major manufacturers not to supply Bourkes because of its policy of discounting was met by the predictable response that the ACTU would advise its affiliates to withdraw labour from those manufacturers. The most intransigent supplier was Dunlops, a shirt manufacturer that refused to supply to Bourkes unless its 15% mark-up was raised to the required 22.5%. Faced with Hawke’s threat that if they supplied no more shirts to Bourkes they would make no more shirts, Dunlops surrendered and Hawke announced that the 1096
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Chapter 23 Competition Law
practice of RPM in Australia had been abolished. Soon after, RPM was prohibited by the Trade Practices Act 1971 (Cth).
Resale price maintenance [23.1430] Section 48 of the CCA states, in its entirety, that: A corporation or other person shall not engage in the practice of resale price maintenance.
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The brevity of the prohibition is, however, compensated for by Part VIII, ss 96-100, which define the practices constituting RPM. Suppliers engage in RPM at their peril. It is illegal per se, thus prohibited irrespective of its effect on competition. Further, unlike horizontal price fixing under ss 45 and 45A where there may be problems of proof, vertical price fixing (or RPM) is relatively easy to prove because there is usually a “victim” –a disgruntled retailer who has been singled out because the retailer has broken ranks –who can provide the ACCC with the necessary evidence. In cases of both vertical RPM and horizontal price fixing there is an injury to competition and to the consumers served by competition. But in the case of RPM there is a more immediate victim –the retailer who is the unwelcome recipient of the RPM. Not all retailers have the resources of the ACTU to call on as in the Dunlops/Bourkes case, but there is “blood on the floor” –a “victim”, generally a discounter, who can provide the ACCC with the direct evidence on which proceedings can be based. This is graphically illustrated by TPC v General Corporation Japan (Aust) Pty Ltd [1988] FCA 390. General Corporation had withheld supplies of television sets and videos to a South Australian retailer who complained to the TPC. Fisher J relates that “an officer of the TPC was present and with the assistance of a loudspeaker attached to the telephone was able to hear what was said” during various telephone conversations. The recommendations of the Hilmer Report resulted in changes to the RPM provisions, so that RPM now applies to services as well as goods. By their very nature some services, for example lawnmowing, cannot be resold, but other services such as concert tickets supplied by an entertainment centre to a ticketing agent for resale, telecommunications services purchased in bulk and financial information supplied by electronic means, can be resupplied. The 1995 amendment also extended the authorisation procedure to RPM. The Committee recognised (at 255) that RPM may give rise to efficiency-enhancing behaviour:
Resale price maintenance is a curiosity among restrictive practices in that the manufacturers who operate it and the traders who take part in it and support it often have quite different interests to promote. Moreover, the market in price- maintained goods often has elements of a competitive situation mixed up with restrictive features in such a way that the resulting effect on the public interest is particularly difficult to determine. A D Neale, The Antitrust Laws of the USA: A Study of Competition Enforced by Law (National Institute of Economic and Social Research Economic and Social Studies, 1981).
An efficiency-enhancing role for RPM occurs where it enables producers to improve sales by enhancing customer services or product quality. Where there are problems with “free-riding” on provision of services, RPM can encourage all retailers to provide desirable services, which may increase the desirability of manufacturers’ products. Manufacturers might adopt RPM to attract dealers or to maintain their loyalty, particularly where dealers are easily able to change allegiance. RPM can be used to enhance a reputation for product quality, at least during the initial period of the product’s life cycle. Manufacturers with reputations for high quality and value may adopt RPM to prevent loss leader sales because such sales detract from the product’s reputation and lessen incentives for other retailers to carry the product.
Similar comments were made by the Harper Review, which were noted in the Explanatory Memorandum to the 2017 Amendments (at 8.4): The Harper Review noted that RPM may have varied impacts on competition. In some circumstances, RPM may facilitate anti-competitive collusion. However, RPM will not have a
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Business and the Law substantial effect on competition in a market if the good or service is subject to strong competition. RPM may be pro-competitive and beneficial for consumers where, for example, it creates an incentive for retailers to invest in training their staff on the use of a complex product. The Harper Review also noted that RPM is becoming more commonplace in online markets, which are an increasingly significant part of the economy. A number of online business models now use distribution arrangements which may constitute RPM, but provide benefits such as expanding the range of product sold in Australia.
IN CONTEXT
The Trouble with Price Maintenance Graeme Samuel (Chairman, ACCC), Business Review Weekly (3 July 2003)
[23.1440] Are some products too prestigious for discounting? Does a marked-down price
or a sale price destroy a brand’s aura and weaken consumer loyalty? To maintain an aura and prestige, a product may carry a statement declaring its retail price, which retailers ignore at the risk of being refused further supplies. But protecting a product’s image this way can make life difficult for retailers who want to draw customers by offering discounts and deter buyers chasing the best price.
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In 1996, Hugo Boss Australia, a manufacturer of men’s suits described as having classic lines, was found to have engaged in unlawful resale price maintenance under the Trade Practices Act. The Federal Court imposed penalties totalling $515,000 on Hugo Boss and a further $75,000 on its managing director, Aaron Kanat, for his personal involvement. Resale price maintenance interferes with the rights of retailers to run their businesses in their own way, to discount when they believe it will increase sales and attract more customers. They operate in a very competitive environment in which consumers are constantly comparing prices. Each retailer’s activities should be conditioned primarily by consumer preferences, not by the unilateral decisions of suppliers. Manufacturers can come under pressure from large retailers to apply resale price maintenance to other retailers. Manufacturers’ fear of large retailers is understandable because of their substantial market share. Unfortunately, some manufacturers seem to prefer court and a fine to the risk of upsetting a large retailer. In the 1990s, Colgate-Palmolive withheld supplies of toothpaste and other products from a small Tasmanian retail chain, Chickenfeed Bargain Stores, because it advertised Colgate lines at prices below Woolworths. It seems that Colgate staff were more worried about annoying Woolworths than protecting the rights of its competitor. In imposing penalties of $500,000 and five year injunctions against Colgate, Justice Mark Weinberg of the Federal Court said: The prohibition upon resale price maintenance is intended to create conditions under which the public will benefit from traders competing with each other in respect of prices, unfettered by price restraints imposed by suppliers of goods upon retailers. Deliberate contravention of that prohibition should be visited with heavy penalties.
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Chapter 23 Competition Law
“I should make it clear that, were it not for the fact that the parties have agreed that pecuniary penalties totalling $500,000 should be imposed, I would probably have fixed upon a higher figure.” Retailers frequently complain that their competitors are advertising and selling at lower prices. But suppliers cannot punish the cheaper seller by withholding supplies or imposing other harsh terms. Traders have the right to discount without threats.
IN CONTEXT
RPM and Public Benefit [23.1450] The ACCC’s Resale Price Maintenance Notification Guidelines (November
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2017) gives the following example:
In 2014, Tooltechnic sought authorisation from the ACCC to engage in RPM. (Tooltechnic could not lodge a notification because, at that time, notification was not available for RPM conduct.) Tooltechnic sought authorisation to amend agreements with its dealers to include a requirement that dealers not sell any Festool products below minimum prices, as nominated by Tooltechnic. Festool products were expensive and complex, and Tooltechnic encouraged its dealers to provide high levels of pre-and post-sale services to customers. Tooltechnic was concerned that there was a risk customers would access pre-and post-sale services from one retailer but purchase the product at a discount from another retailer who did not provide the services, thereby reducing the incentive to provide the services. Tooltechnic sought authorisation to address this risk, as it was concerned that high- servicing retailers may not gain sufficient return on product sales to continue providing these services. In granting conditional authorisation the ACCC considered that, in this case, RPM conduct would likely address ‘market failures’ in respect of the sale of Festool products. In particular, the ACCC considered that, as a result of the RPM conduct, retailers would be likely to invest in pre-and postsale services, as the risk of free-riding would be addressed. Such an increase in service was likely to generate public benefits including that some customers would make more informed decisions in purchasing quality power tools and customers would continue to receive the choice of a premium trade quality power tool product which is accompanied by a high level of pre-and post-sales service. The ACCC noted that the risk of harm from RPM conduct would be minimised where the product was subject to strong competition from other goods. In this instance, this was the case –Tooltechnic only had a very small share of the market. The ACCC granted authorisation to Tooltechnic subject to conditions, including a requirement that Tooltechnic report annually on pricing and sales information on the relevant products and provide any additional information requested by the ACCC. Importantly, the ACCC emphasised in its determination that, though RPM may in certain circumstances address market failure and generate benefits, this will depend on the circumstances of each case.
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Business and the Law At one stage during the conversation Mr Woods said: “That’s illegal under the TPA” and Mr Steel said: “It would be unwise to take it to the TPC. I know more about the TPA than you’ll ever know … I’m not interested in bargaining with you and I’m not giving you a choice, I’m giving you an ultimatum. Either stop advertising discounts or suffer the consequences.” I reject completely the submission that the words in question were simply intemperate remarks. It was an ultimatum deliberately delivered with all the weight of the large company which employed him and it was intended, in contravention of the Act, to induce Mr Woods to raise his prices to the public … TPC v Dunlop Australia Ltd [1980] FCA 76 per Keely J.
Conduct constituting RPM [23.1460] The specific conduct constituting RPM is defined in s 96(3) of the CCA: • making it known to resellers that the supplier will not supply goods unless the reseller agrees not to sell below the supplier’s specified price; • inducing or attempting to induce a reseller not to sell the supplier’s goods at less than the supplier’s specified price; • entering into an agreement or offering to enter into an agreement for the supply of goods with a term that the reseller will not sell below the supplier’s specified price; • withholding supply for the reason that the reseller, or a person to whom the reseller has resold the goods, has not agreed not to sell below the supplier’s specified price or has sold or is likely to sell the supplier’s goods below the supplier’s specified prices; • withholding supply for the reason that a third person has not, or is not likely to, maintain the specified minimum price; and • using in relation to the supply of goods a statement as to price which is likely to be understood by the purchaser as a minimum sale price. (“Using” a statement of price in relation to goods is widely defined in s 99 to include applying the statement to the goods to any label or container or in any sign, advertisement or other document.) Section 96A extends the application of Pt VIII to services by providing that references to goods are to be read as including references to services and references to the sale of goods are to be read as including references to there supply of services. The concept of “specified price” is central to the RPM provisions. The Act (s 96(4)) deems certain conduct to be the specification of a price: • referring to a price for the goods specified by a third party; • the specification by the supplier of a price formula, or the reference by the supplier to the pricing formula of a third party; and • the making of a statement about price that is likely to be understood as a minimum price. An exemption from the RPM prohibition is provided for conduct between related bodies corporate.
ACCC v Jurlique International Pty Ltd [2007] FCA 79 [23.1470] Jurlique, a manufacturer and supplier of premium skin care products, and its former managing director, were held to have engaged in RPM through:
• attempting to induce retailers not to sell Jurlique products at prices less than the prices specified by Jurlique from time to time; • entering and offering to enter into agreements for the supply of Jurlique products, one of the terms of which included that the products were not to be sold for a price less than a price specified by Jurlique; • withholding supply of Jurlique products for the reason that the retailer had sold the products at prices below the retail prices specified by Jurlique; and 1100
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Chapter 23 Competition Law • using in relation to Jurlique products statements of prices that were likely to be understood as the price below which products were not to be sold. Pecuniary penalties of $3-4 million (for the companies) and $200,000 (for the former managing director) were imposed. Spender J noted that significant advertising funding was applied to differentiate the Jurlique product from its competitors and that it gained “what it considered to be an advantage in the promotion of its image and stocking of its product by maintaining undiscounted prices for its products”. This gave Jurlique advantages over companies which complied with the law. His Honour commented (at [80]) that: the maintenance of an expensive retail price is part of the allure of prestige products, and confers a competitive advantage to those products over those which are variously seen as discounted.
Most cases of RPM are constituted by “inducing or attempting to induce” or through “withholding supply” for the obvious reason that these RPM methods are more subtle and provide the opportunity for the supplier to argue that RPM was not a factor.
Inducing or attempting to induce RPM [23.1480] The concept of “inducing or attempting to induce” is particularly wide. The following statements extracted from decided cases have been held to constitute RPM by “inducing or attempting to induce”.
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TPC v Sharp Corp of Australia [1975] ATPR 40-010: Would you please note that all future advertisements for Sharp electronic calculators should show your uniform retail price.
TPC v Pye Industry Sales Ltd [1978] ATPR 45-088: [the price] is way too low … we are trying to stabilise our price structure and you are upsetting things.
TPC v Simpson Pope Ltd [1980] FCA 83: toe the line … your prices are too low. We want you to lift them to the going price in the industry.
Ron Hodgson (Holdings) Pty Ltd v Westco Motors (Distributors) Pty Ltd [1980] FCA 3:
“Recommendation” implies a freedom to follow or not to follow, to accept or to reject the recommendations according to one’s own discretion. Bertram v Clemons [1955] LMD 94.
Westco Motors as with other Mazda Distributors throughout Australia have spent many thousands of dollars to project an image of quality over the years and do not intend to have this standard lowered with blatant discount advertising.
The Heating Centre Pty Ltd v TPC [1986] FCA 73: If you entertain the idea of discounting the product, I would find a million and one ways of stopping supply. We urge you in the strongest possible terms to maintain your suggested retail price.
TPC v Prestige Motors Pty Ltd [1994] FCA 495 [23.1490] The distributor in Western Australia of Toyota vehicles distributed a bulletin to dealers which: “discouraged” a dealer from engaging in (at [13]):
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1101
Business and the Law (i)
advertising “$ amounts” off the recommended retail price, of a Toyota; or
(ii)
advertising which, although not specifying a “$ amount” off the recommended retail price, implied that a discounted price was on offer; or
(iii)
advertising an offer to sell at a price below the recommended retail price without the approval of the advertising committee; or
(iv)
advertising an offer to sell at a price below a price fixed under an advertising committee discount programme.
The bulletin requested each Toyota dealer to confirm that the instructions set out in the bulletin were accepted and informed each dealer that failure to comply with the instructions would result in Prestige Motors withholding supply of the next model Toyota until after the release of those vehicles had been announced. It was held that these communications constituted RPM and penalties of $100,000 (on the company) and $7,500 (on its director) were imposed.
TPC v General Corporation of Japan (Aust) Pty Ltd [1988] FCA 390 [23.1500] This case also provides a colourful example of “inducing or attempting to induce” RPM. The judgment includes the following conversation between the supplier and the retailer: Mr Chiappin said: “Tom, did you advertise the GC 146TV at $319?” Mr Antonio said: “Yes, John.” Mr Chiappin said: “Why did you advertise at such a low price Tom?” Mr Antonio replied: “We’re just beating the competition John.”
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Mr Chiappin said: “Tom, I’m not going to tolerate my TVs being advertised at that price. You will advertise the 146 at $389 or you won’t advertise at all. You’re not going to screw up my product.” Mr Antonio said: “Listen John, if anything we’re praising your TV set … aren’t you pleased it is selling? You shouldn’t haggle. You shouldn’t give me a hard time.” Mr Chiappin said: “No way Tom. You’re not going to do that at those prices. You get in a hassle with Harding and Manning or Gil Finlay, you don’t do it in your own backyard, you don’t do it on TV, and involve all the other retailers in the f…g gulf. If you haven’t got the stock you won’t be f…ing around, will you?”
ACCC v OmniBlend Australia Pty Ltd [2015] FCA 871 [23.1510] The Federal Court of Australia ordered Omniblend, an online retailer of kitchen appliances
including Omniblend blenders, to pay a pecuniary penalty of $17,500 for aiding, abetting, counselling and procuring an overseas supplier, Taiwan Star International, to engage in resale price maintenance by inducing Omniblend’s competitor not to sell Omniblend blenders at a price less than the price specified by TSI, and, subsequently, withholding supply of Omniblend blenders to that competitor. The Court noted that even if this conduct was motivated by Omniblend acting in defence of its commercial interests it did not excuse its conduct from legal perspective.
Withholding supplies or refusal to deal [23.1520] The Mikasa case (see [23.1570]) is an example of RPM through a refusal to supply for the reason that a retailer was likely to sell at prices less than the price specified. Section 98 deems a supplier to have engaged in RPM through withholding supplies in several circumstances: 1102
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Chapter 23 Competition Law
• where the supplier refuses or fails to supply the goods requested; • where the supplier refuses supply except on disadvantageous terms; or • where the supplier supplies the goods but discriminates against the person supplied in relation to method; and • time or place of delivery or otherwise. A supplier does not breach RPM provisions if supply is withheld for sound and legitimate commercial reasons. However, if RPM is a substantial reason for withholding it is irrelevant that it is not the only reason.
Ron Hodgson (Holdings) Pty Ltd v Westco Motors (Distributors) Pty Ltd [1980] FCA 2 [23.1530] The Federal Court held that although there were sound and adequate reasons to terminate a
motor vehicle franchise, a substantial and operative reason for the termination was the fact that the dealer had been selling Mazda vehicles below the distributor’s recommended price.
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[23.1540] Evidentiary provisions laid down in s 100 facilitate proof of withholding by reversing the onus of proof. Where it is proven that a supplier has withheld supply and that within the previous six months the supplier became aware that the person refused supply had been involved in discounting the product, the supplier bears the onus of proving that the withholding of supply was not for an RPM reason. The recorded telephone conversations placed in evidence in the General Corporation case provide a straightforward but graphic example of a refusal to supply. The judgment sets out the following conversation between Mr Chiappin (General Corporation’s South Australian sales manager) and Mr Thompson, a director of the retailer who had advertised 14-inch television sets at $399 –substantially below the specified price of $459: Mr Chiappin said: “You know the arrangements.” Mr Thompson said: “Sorry?” Mr Chiappin said: “You know the arrangements that I made with him.” Mr Thompson said: “What’s that?” Mr Chiappin said: “That he was not to do it at that price.” Mr Thompson said: “Yes, but I mean, that’s something that I’ve … I’ve heard some of the conversations.” Mr Chiappin said: “Look you advertise it and say what you want, OK.” Mr Thompson said: “Yes.” Mr Chiappin said: “As you know we’re out of stock.” Mr Thompson said: “You are out of stock of what?” Mr Chiappin said: “Everything.” Mr Thompson said: “You saying you won’t supply me?” Mr Chiappin said: “Well I’m not saying anything, OK. Now I went through it with Tom last week, I told him how to do it. I told him …” Mr Thompson said: “John if the market’s dead, I mean …” Mr Chiappin said: “Look. Please, go and do business with someone else.” [Later] Mr Chiappin said: “I’m not going to supply you because I can’t tell you that I can’t supply you but what I am telling you is that I don’t have any stock.”
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1103
Resale price maintenance is more flexible than exclusive territories as a method of limiting price competition among dealers, and it may be the only feasible method where effective retail distribution requires that dealers be located close to one another; any free rider or other arguments that are available to justify exclusive territories are equally available to justify resale price maintenance. R A Posner, “The Next Step in the Antitrust Treatment of Restricted Distribution: Per Se Legality” (1981) 48 University of Chicago Law Review 6 at 9.
Business and the Law
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When one finds deliberate breaches of the TPA committed by a subsidiary of one of the greatest manufacturers of electronic consumer goods, after years of attempts to enforce compliance, one can only suspect that the penalties have not been taken very seriously. Their deterrent effect has been insufficient, it appears, to counterbalance the profit apparently derived from protecting recommended prices against the effects of competition between their dealers. TPC v Sony (Australia) Ltd [1990] FCA 360 per Pincus J.
Subsequently Mr Thompson said: “Look if we advertise it below that we no longer get any stock from you?” Later in the conversation Mr Chiappin said: “Look all I’m saying to you, Roger, is that I just haven’t got any stock. My warehouse is empty.”
[23.1550] A supplier does not breach RPM provisions if it withholds supply for sound and legitimate commercial reasons (eg failure to comply with contractual arrangements in relation to payment, display, servicing and so on, or because supplies are not available). In the General Corporation case the court had little difficulty in regarding the claim that the supplier was out of stock as a mere charade which purported to translate an RPM reason for refusal to deal into a genuine and legitimate reason beyond the scope of the RPM provisions. Fisher J noted that “taken in context … there is no doubt and no dispute that Mr Chiappin was stating that he refused to supply products to Whyalla Video”.
Recommended prices [23.1560] The RPM provisions do not prevent suppliers from recommending resale prices. Indeed, it is to prevent the recommended prices from being interpreted as inducing or attempting to induce RPM that s 97 of the CCA expressly provides that a supplier is not to be taken as inducing or attempting to induce RPM in certain cases: For the purposes of paragraph 96(3)(b), the supplier is not to be taken as inducing or attempting to induce, a second person as mentioned in that paragraph in relation to any goods: (a) by reason only of a statement of a price being applied to the goods as mentioned in paragraph 99(1)(a) or being applied to a covering label, reel or thing as mentioned in paragraph 99(1)(b), provided that the statement is preceded by the words “recommended price”; or (b) by reason only of his or her having given notification in writing to the second person (not being a notification by way of a statement being applied as mentioned in paragraph (a)) of the price that he or she recommends as appropriate for the sale of those goods, provided that there is included in the notification, and in each writing that refers, whether expressly or by implication, to the notification, a statement to the following effect: “The price set out or referred to herein is a recommended price only and there is no obligation to comply with the recommendation.”
The recommended price will, however, become a specified price and will constitute RPM if any steps are taken to require compliance with the recommended price. This was clearly expressed in Festival Stores v Mikasa (NSW) Pty Ltd [1971] 18 FLR 260, a case decided under the Trade Practices Act 1971 (Cth), the predecessor to the current RPM provisions.
Festival Stores v Mikasa (NSW) Pty Ltd [1971] 18 FLR 260 [23.1570] Prior to RPM being prohibited in 1971 the respondent, the supplier of “Mikasa” brand tableware,
had published catalogues stating retail prices and, when selling the goods to retailers, had shown in its invoices retail prices less discount. On the enactment of the 1971 legislation prohibiting RPM, Mikasa issued a revised catalogue which stated that the prices specified in the catalogue were suggested and recommended prices only with which there was no obligation to comply. In a circular letter covering the distribution of the catalogue, Mikasa wrote (at [32]): 1104
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Chapter 23 Competition Law Gentlemen, Please note this invoice is at wholesale selling price, not as previously. Owing to the Resale Price Maintenance Act being promulgated it is now necessary to invoice in this manner. You will find in this catalogue a recommended retail price with which by law there is no obligation to comply. Yours faithfully, Mikasa (NSW) Pty Ltd
The Industrial Court held that the terms of the notification did not support the notion that the catalogue price was to be regarded for business purposes as merely a recommended price (at 269 per Spicer CJ, Smithers J): No doubt such a recommendation is also, at least indirectly, a recommendation of the stated price as the price below which the goods be not sold. But there is a distinction between recommending a specified price as the price below which goods are not sold, and specifying a price below which they are not to be sold … but in commercial life that which is called a recommendation and is in form merely a recommendation may, according to circumstances be understood as a command or threat of consequences for non-observance and may be intended to be so understood. [And if that is so] … it would seem that which is in form a recommendation is in substance and reality a specification of a price below which the goods are not to be sold.
The Industrial Court held that all that had changed was the manner of invoicing. In fact by stating in the circular letter that “by law” there was no obligation to comply, Mikasa was held to have been suggesting that there were other kinds of obligations requiring compliance with the “recommended price” (at 269 per Spicer CJ, Smithers J): The notification was calculated to intimate to retailers that the company still required the retailer to observe the prices stated in the catalogue although no legal obligation was involved. So interpreted the notification was likely to be understood by retailers as the price below which the goods were not to be sold.
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This decision was upheld on appeal by the High Court.
The “loss-leader” exception [23.1580] Specific provision is made in s 98(2) of the CCA to permit a supplier to withhold supply from a retailer whose loss-leader sells the supplier’s goods. A supplier is allowed to withhold supplies of goods from a person who, within the preceding 12 months, has sold goods obtained from the supplier at less than their cost for the purposes of promoting business or attracting to that person’s place of business persons likely to purchase other goods. Section 98(3) provides, however, that the exemption does not apply in relation to genuine seasonal clearance sales of goods not acquired for the purpose of being sold at the particular sale, and also does not apply in situations where the sale took place with the consent of the supplier.
The general mass, if they consider the law at all, regard it as they regard some monster in the zoo. A P Herbert.
TPC v Orlane Australia Pty Ltd [1984] FCA 3 [23.1590] The Full Federal Court held that the reference in s 98(2) of the TPA to the cost of goods refers to the cost of goods in the context of obtaining them from the supplier (at [17], [27] per Smithers, Morling and Beaumont JJ): In our opinion, that context suggests that the cost referred to is the cost of obtaining or landing the goods; that is, “landed” or “delivered” cost or, as it is put, net acquisition cost. … [i]n the context of loss leader selling, the “simplest and most obvious meaning” of the expression “loss” is a selling price that is below the delivered cost to the seller … any departure from the acquisition cost test is fraught with difficulties of application.
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IN CONTEXT
Protecting brand integrity [23.1600] The manufacturer of a prestige product may perceive a need to maintain an
artificially high price for the product to retain its exclusivity. The dangers in this strategy have been starkly exposed by ACCC v Hugo Boss Australia Pty Ltd [1996] FCA 799. The manufacturer, a significant participant in the market for exclusive label men’s suits, was fined $515,000 (and its managing director personally fined $75,000) for communicating and enforcing as a term of its supply agreement with retailers a pricing policy that retailers should not discount suits below a level approved by the managing director. Lockhart J held that this conduct was a “deliberate and systematic imposition of a pricing policy nationally” and upheld penalties which had been decided between the parties. In a media release (MR 101/96 (25 July 1996)) the Chairman of the ACCC, Professor Allan Fels, commented that: the “serious” breach should be a warning to other manufacturers and wholesalers. These were not isolated acts but rather a systematic pattern of instructions to some of its retailers about the maximum discounts they should offer on some lines of Hugo Boss suits, in order to niche the product. The ACCC is aware that suppliers try to maintain a prestige image for their products by stopping retailers discounting. They should realise that this is unlawful … the ACCC will be quick to take action.
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The managing director of Hugo Boss was reported as commenting that … “All I can say is that the ACCC has enormous persuasive power”.
23.12 MISUSE OF MARKET POWER Competition by its very nature is “deliberate and ruthless” Laws for the regulation of trade should be most carefully scanned. That which hampers, limits, cripples and retards must be done away with. Elbert Hubbard.
[23.1610] Section 46 of the CCA prohibits misuse of market power. Section 46 is not designed to stop competitive conduct by corporations with substantial market power; it is designed to stop such corporations engaging in conduct that damage the competitive process. In Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6, Mason CJ and Wilson J explained (at [24]) that:
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the object of s 46 is to protect the interests of consumers, the operation of the section being predicated on the assumption that competition is a means to that end. Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away. Competitors almost always try to “injure” each other in this way … and these injuries are the inevitable consequence of the competition s 46 is designed to foster.
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Chapter 23 Competition Law
IN CONTEXT
Promoting competition, not competitors [23.1620] Competition is a very useful means to an end. What we know from decades
It may be true that the law cannot make a man love me, but it can keep him from lynching me, and I think that’s pretty important. Martin Luther King Jr.
of experience both domestically and internationally is that pursuing and promoting vigorous competition delivers the benefits we wish to provide to the public. It encourages and rewards innovation, leads to lower prices, improves choices and services that consumers want. It does this partly by weeding inefficiency out of our economy, allowing the best performers to rise to the top.
But therein lies an uncomfortable truth about competition. Competition is a hard master –as well as rewarding strong performers and delivering benefits to millions of Australian consumers, it also punishes those who are unable to provide the best prices, and more relevant services and conditions –and it is important to remember that businesses compete on service and conditions –not just price. Firms that cannot compete will go out of business, firms that do not innovate go out of business, firms that offer inferior products will go out of business. It is exactly this system that has delivered the productivity growth and economic growth that Australians enjoy. But the consequence of a robust competitive system is that inefficient firms go out of business. When governments intervene to protect inefficient firms, the economy and productivity do not grow as fast as they otherwise would.
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It does not always sit comfortably with business owners when I remind them that the ACCC’s job is to promote and protect competition, not competitors. As the High Court confirmed in the Queensland Wire Industries Pty Ltd v Broken Hill Pty Ltd case: Competition by its very nature is deliberate and ruthless. Competitors jockey for sales, the more effective competitors injuring the less effective by taking sales away. One way in which firms in some industries can increase their efficiency and reduce their costs is through economies of scale. A large firm may well be able to sell at lower prices than a smaller competitor while obtaining the same rate of return, because its larger scale of operations means that it has a lower unit cost. This in itself is an inherent benefit to the larger business of achieving those efficiencies. G Samuel (Chairman, ACCC), Promoting Competition or Protecting Consumers –The Role of Competitions Policy and its Implications for Australian Businesses (Speech, Perth, 12 October 2007).
While the objective of a misuse of market power law is to prevent firms from engaging in unilateral conduct that harms the competitive process the challenge is distinguishing between vigorous competitive activity which is desirable, and economically inefficient monopolistic practices that may exclude rivals and harm the competitive process.
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From a “purpose” to an “effects” test [23.1630] The single most significant change introduced by the 2017 Amendments in response to the Harper Review was the amendment of s 46 to move from a “purpose” test to a “purpose or effect” test. The Harper Review noted that the focus of the former s 46 – which prohibited corporations with a substantial degree of power from taking advantage of that power for particular anti-competitive purposes –was focused on prohibited damage to a competitor which was inconsistent with the overriding objective of CCA, which is to protect competition rather than individual competitors.
IN CONTEXT
“Purpose” or “Effect”: The Harper Recommendation
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An Act of Parliament can do no wrong, though it may do several things that look pretty odd. Holt CJ, City of London v Wood (1701) 12 Mod 669 at 687.
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[23.1640] The most controversial recommendation of the Harper Report which dominated
the reform debate was the recommendation that an “effects” test be added to s 46 of the CCA which would mean that unilateral conduct having a substantially anti-competitive effect would be prohibited in addition to unilateral conduct having a substantially anti-competitive purpose: An effective provision to deal with unilateral anti-competitive conduct is a necessary part of the competition law. This is particularly the case in Australia, where the small size of the Australian economy frequently leads to concentrated markets. The Panel considers that section 46 can be re-framed in a manner that will improve its effectiveness in targeting anti-competitive unilateral conduct and focus it more clearly on the long-term interests of consumers. The Panel regards the threshold test of “substantial degree of power in a market” as appropriate and well understood. In contrast, the “take advantage” limb of section 46 is not a useful test by which to distinguish competitive from anti-competitive unilateral conduct. This test has given rise to substantial difficulties of interpretation, which have been revealed in the decided cases, undermining confidence in the effectiveness of the law. Perhaps more significantly, the test is not best adapted to identifying a misuse of market power. Business conduct should not be immunised merely because it is often undertaken by firms without market power. Conduct such as exclusive dealing, loss- leader pricing and cross-subsidisation may all be undertaken by firms without market power without raising competition concerns, while the same conduct undertaken by a firm with market power might raise competition concerns. Further, the focus of the prohibition on showing the purpose of damaging a competitor is inconsistent with the overriding policy objective of the CCA to protect competition, and not individual competitors. The prohibition ought to be directed to conduct that has the purpose or effect of harming the competitive process. The Panel also considers that the supplementary prohibitions, which attempt to address concerns about predatory pricing [ss 46(1AAA) and (1AA)], do not advance the policy intent of section 46. Accordingly, the Panel proposes that the primary prohibition in section 46 be re-framed to prohibit a corporation that has a substantial degree of power in a market
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Chapter 23 Competition Law
from engaging in conduct if the conduct has the purpose, effect or likely effect of substantially lessening competition in that or any other market. The proposed test of “substantial lessening of competition” is the same test as is found in section 45 (anti- competitive agreements), section 47 (exclusive dealing) and section 50 (mergers) of the CCA, and the test is well accepted within those sections. Conduct undertaken by a firm with substantial market power can have pro- competitive and anti-competitive features. The issue for courts, and for firms assessing their own conduct, is to weigh the pro-competitive and anti-competitive impacts of the conduct to decide if there has been a substantial lessening of competition. To clarify the law and mitigate concerns about over-capture, the Panel proposes that section 46 include legislative guidance with respect to the intended operation of the section. Specifically, the legislation should direct the court, when determining whether conduct has the purpose, effect or likely effect of substantially lessening competition in a market, to have regard to the extent to which the conduct: • increases competition in a market, including by enhancing efficiency, innovation, product quality or price competitiveness; and • lessens competition in a market, including by preventing, restricting or deterring the potential for competitive conduct in a market or new entry into a market. The proposed reform to section 46 is intended to improve its clarity, force and effectiveness so that it can be used to prevent unilateral conduct that substantially harms competition and that has no economic justification.
The age of chivalry has gone. That of sophists, economists and calculators, has succeeded. E Burke, Reflections on the Revolution in France (James Dodsley, 1790).
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The report recommended that authorisation should be available in relation to s 46. The introduction of an “effects” test has been considered and rejected by previous reviews, most recently by the Dawson Report (Ch 3): Not only would the introduction of an effects test alter the character of s 46, but it would also render purpose ineffective as a means of distinguishing between legitimate (pro- competitive) and illegitimate (anti-competitive) behaviour. The section is aimed against anti-competitive monopolistic practices, not competition, even aggressive competition. The distinction is sometimes a difficult one, but it is one that s 46 seeks to maintain and in doing so seeks to balance the risk of deterring efficient market conduct against the risk of allowing conduct that would damage competition and reduce efficiency. For example, predatory pricing is prohibited under s 46. Pricing is predatory where a corporation sells at unsustainably low prices in an attempt to drive competitors from the market. However, predatory pricing may be difficult to distinguish from legitimate pro-competitive conduct, such as vigorous discounting. Vigorous competition is desirable because it is likely to deliver economically efficient outcomes. An effects test, which would disregard purpose, would make it even more difficult to draw a distinction between pro-competitive and anti-competitive behaviour than is currently the position under s 46 where purpose may be called in aid. Under an effects test the proscribed purposes in s 46 (substantially damaging a competitor; preventing entry to the market; deterring competitive conduct) would become proscribed effects. Normal competitive behaviour by a firm with substantial market power which injured a competitor would be likely to satisfy an effects test. For example, a large firm which established a new outlet in a specific market would not necessarily be behaving in an anti-competitive manner but rather to increase competition in the market. However, it is likely that the
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effect would be to damage incumbent firms. An effects test would apply and capture behaviour with an adverse impact on competitors, but not necessarily on competition. The introduction of an effects test would be likely to extend the application of s 46 to legitimate business conduct and discourage competition. It is also relevant to note that the operation of an effects test would not necessarily be confined to large corporations, but could extend to small business as well. An effects test could, in the view of the Committee, discourage legitimate competitive practices by small businesses having the effect of injuring a competitor or discouraging a potential competitor, in the same way as with larger businesses. The seeds of every company’s demise are contained in its business plan. Fred Adi, Company Director.
There was a sustained campaign by the “big business” lobby against the introduction of an effects test but its opponents include Professor Graeme Samuel, a former ACCC Chairman and Professor Stephen King, a former ACCC Commissioner who have argued (in “Let Companies Compete and Consumers Take the Gains”, Australian Financial Review (8 April 2015)) that –
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The proposed recast of s 46 is, troubling. The section is titled “misuse of market power”. But the proposed [amendment] has nothing to do with “misuse” of market power. It applies to all conduct by big business. The primary prohibition effectively threatens big business with substantial penalties if it engages in any conduct that has the purpose, effect or likely effect of substantially lessening competition. This is ambiguous and places faith in the courts to disentangle conduct that is anti-competitive and harms consumers from pro-competitive conduct that helps consumers but might harm competitors. The proposed legislative guidance will not help the courts. Rather it just restates obvious principles. If actions are pro-competitive then they are not anti-competitive. And the court must determine if the lessening of competition is trivial or substantial. At the same time, the change renders useless existing guidance from previous cases. This will drown the commercial activity of big business in a sea of uncertainty. One can only wonder how a committee that on the one hand recommends pro-competitive reforms to commerce, can then proceed to urge a significant intrusive constraint on the commercial activities of big business. The only winners will be the lawyers and economists who will need to sit at the right hand of business CEOs to guide them on the legality of every significant transaction and the ACCC that will need a big budget increase to deal with the mass of authorisation applications. The Harper panel suggests that the ACCC issue guidelines on its approach to enforcing the section. This will not effectively reduce business risk and uncertainty. The guidelines cannot and will not bind the courts. The guidelines cannot prevent or limit private parties from taking a business to court under s 46. Indeed, the guidelines will not even bind the ACCC. It can ignore them or change them as it sees fit. The section is a misconceived approach to satisfy the urgings of small business groups. These groups would have been better to focus their attention on the effectiveness of the provisions attacking unconscionable conduct. The proposed section is a fundamental contradiction to the economic philosophy underpinning our competition policy. In a later piece (“Competition Law Is Not About Protecting Poor Competitors” (9 September 2015) Australian Financial Review) written after speculation that the government would not adopt the effects test they wrote:
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Chapter 23 Competition Law
The proposed amendment was bad for consumers and the Australian economy. The relevant section 46 is titled Misuse of market power, as is the relevant chapter in the Harper Report. But the proposed Harper amendment had nothing to do with misuse of market power. It removed the need to demonstrate that big business had misused its market power to bring about a substantial lessening of competition. Rather, it effectively threatened big business with substantial penalties if it engaged in any conduct that has the purpose, effect or likely effect of substantially lessening competition. Superficially, this sounds fair enough. But thoughtful analysis quickly shows it would harm consumers. Why? The High Court has noted that competition by its very nature is deliberate and ruthless. Competition, that benefits consumers, damages competitors. If the damage is sufficiently serious, competition may eliminate a competitor. Under the Harper amendment, a business with significant market power that engaged in vigorous competitive behaviour ran a risk. Its behaviour might be completely consistent with the behaviour of any competitive business. But competition means that better businesses thrive and poorer performers wither and possibly fail. In the extreme, an effective competitor could eliminate some of its rivals. This could be viewed as a substantial lessening of competition, with an efficient business surviving, growing, and potentially becoming dominant in a market. But that is not a misuse of market power by the big business. Prohibiting a highly efficient business from profitably out-competing its rivals by offering better products at a lower price would be the antithesis of competition. Effective competition law should not protect poor competitors from this process, which is designed to promote the interests of the public at large, not specific business sectors. Under the Harper amendment, businesses would curb their competitive behaviour because of the legal risk. This would have drowned the commercial activity of big business in a sea of uncertainty. Lawyers and economists would need to sit at the right hand of business CEOs to guide them on the legality of every significant transaction. The proposed amendment was a fundamental contradiction to the economic philosophy underpinning our competition laws. As the Harper panel tabulates, similar changes have been considered and rejected in no less than 10 reviews over the past four decades. The section was a misconceived approach to satisfy the urgings of small business groups. It is a stark example of the inherent and irreconcilable conflict between the promotion of policies to satisfy the aspirations of small business and the public interest focus of competition policy. Let us hope that this unfortunate blight on an otherwise excellent Harper report is dead, buried and cremated.
The essential notions with which s 46 is concerned … are those of markets, market power, competitors in a market and competition [and it is] simply inadequate to superimpose upon the economic notions and objectives which s 46 reflects some indefinite moral or public purpose qualification. Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd [1989] HCA 6 at [2] per Deane J.
The Government’s November 2015 response to the Harper Review recommendations advised that it would consult further on the Harper recommendation to strengthen the misuse of market power provision by adding an “effects” test under which it would no longer be necessary to prove a business with substantial market power acted with the “purpose” of substantially lessening competition. Under the Harper recommendation conduct which was “likely” to have the effect of substantially lessening competition would also be caught. In December 2015 the Government released a Discussion Paper, Options to strengthen the misuse of market power law, which, not surprisingly, addressed a number of options to
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strengthen s 46 and, also not surprisingly, attracted a large number of submissions from parties representing both sides of the debate. On 16 March 2016, the Government announced that it would adopt the Harper recommendation and introduce an “effects” test. The then Deputy Prime Minister, Barnaby Joyce, stated that: These reforms will address a long standing weakness in the existing competition rules and will ensure that we have a more transparent and competitive marketplace that treats all supply chain participants fairly. Importantly, and for the first time in Australia, the Australian Competition and Consumer Commission will have meaningful provisions to protect businesses that have been subject to misuse of market power.
The new s 46 legislates an “effects test” –it does not require evidence that a corporation has taken advantage of its market power and simply prohibits a corporation with substantial market power from engaging in conduct having the purpose, effect, or likely effect, of substantially lessening competition.
Section 46
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[23.1650] Section 46(1) provides that: A corporation that has a substantial degree of power in a market must not engage in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition in: (a) that market; or (b) any other market in which that corporation, or a body corporate that is related to that corporation: (i) supplies goods or services, or is likely to supply goods or services; or (ii) supplies goods or services, or is likely to supply goods or services, indirectly through one or more other persons; or (c) any other market in which that corporation, or a body corporate that is related to that corporation: (i) acquires goods or services, or is likely to acquire goods or services; or (ii) acquires goods or services, or is likely to acquire goods or services, indirectly through one or more other persons.
The revised Explanatory Memorandum sets out the key features of the new law: New Law Section 46 only applies to corporations with substantial market power The conduct must have the purpose, effect or likely effect of substantially lessening competition
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Current Law Section 46 only applies to corporations with substantial market power The conduct must have one of three specific purposes, related to damaging an actual or potential competitor
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Chapter 23 Competition Law
New Law The conduct must occur in a market where there is an actual or likely supply or acquisition of goods or services, by the corporation or another prescribed entity The conduct does not need to “take advantage” of substantial market power There is a general provision only, with no specific prohibition on predatory pricing or other forms of conduct (however described)
Current Law The conduct may occur in any market
The conduct must “take advantage” of substantial market power Predatory pricing and other specific forms of conduct are expressly prohibited
To offset the broader reach of the new law “effects test: law, the authorisation regime has been extended to misuse of market power and the ACCC can provide immunity if s 46 conduct would result in public benefits outweighing any public detriment. The ACCC’s Misuse of Market Power Guidelines explains:
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Section 46 does not prohibit a firm from obtaining a substantial degree of market power. Nor does it prohibit a firm with a substantial degree of market power from ‘out-competing’ its rivals by using superior skills and efficiency to win customers at the expense of firms that are less skillful or less efficient. This conduct is part of the competitive process, which drives firms to improve their performance and develop and offer products that are more attractive to customers, and should not be …
There are two elements to s 46: • the threshold requirement –that the firm possesses a substantial degree of market power; and • the purpose or effect requirement –that the conduct of the firm has the purpose or effect of substantially lessening competition.
Substantial degree of power [23.1660] Section 46 only applies to corporations with a substantial degree of power in a market. The ACCC explains that: Market power comes from a lack of effective competition constraint. A firm with market power is able to act with a degree of freedom from competitors, potential competitors, suppliers and customers. The most observable manifestation of market power is the ability of a firm to profitably sustain prices above competitive levels. Substantial market power may also enable a firm to raise barriers to entry, profitability reduce the quality of goods or services or slow innovation.
Market power can be either that of a supplier or an acquirer of goods or services (s 46(8)) and the combined market power of related companies can be considered (s 46(3)).
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MI Pitkin, promotion manager for Cosmopolitan in the 1940s, used to tell about a circus advance man named Flanagan who dropped in at the office of a small town newspaper and inquired about the cost of a full page ad. “One hundred bucks.” “And a half-page.” “One hundred bucks.” “And a quarter- page.” “One hundred bucks.” “Your rates aren’t very elastic,” Flanagan fumed. “How on earth do you calculate them?” “That’s easy,” the editor hastened to soothe him. “Your show is due here on July 12th. I’ve got the only paper in town. And on the 13th I’ve got a bill due for exactly one hundred bucks.” P Hay, The Book of Business Anecdotes (Gramercy, 1993).
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IN CONTEXT
Market power principles [23.1670] In Pacific National (ACT) Ltd v Queensland Rail [2006] FCA 91 Jacobson J elaborated a number of principles in relation to market power:
The question is simply whether a firm with a substantial degree of market power has used that power for a purpose proscribed in the section, thereby undermining competition. The growth of a large business is merely a survival of the fittest. John D Rockefeller.
• Market power may be defined as the ability of a firm to raise prices above supply costs without taking away customers. • Market power is not confined to the ability to influence prices. It may be manifested in practices excluding competition, such as exclusive dealing or refusal to supply. • Market power also involves the capacity to act in a manner unconstrained by competitors. • The circumstances which may give rise to the absence of competitive restraint on a corporation are diverse and are not confined to matters identified in s 46(3). • The primary consideration in determining market power is whether there are barriers to entry into the relevant market. • A corporation will have a substantial degree of market power if it has a considerable or large degree of power. • Section 46(1) is not concerned with a firm moving towards possession of a substantial degree of market power but only with a firm which has already gained possession of a substantial degree of market power.
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In determining the extent of market power the court is directed to take into account the extent to which the firm is constrained by the conduct of competitors, potential competitors or by its suppliers or those to whom it supplies goods or services (s 46(3)). In Dowling v Dalgety Australia Ltd [1992] FCA 27, Lockhart J held (at 40,272) that, on the authority of Queensland